Per Diem Tracking for Construction Subcontractors

Per diem tracking means recording, for every traveling worker, what daily allowance you paid, for which dates, at which job location and against which project, and keeping the paperwork that proves the trip was for business. Done well, it keeps the allowance tax-free for your crew and keeps the cost on the right job. Done badly, it turns into taxable wages and a job cost report nobody trusts. This guide covers the IRS rules that matter, what a construction per diem policy should say, the fields to track, and the records to keep.

TL;DR

• Per diem is an allowance for lodging, meals and incidental expenses while traveling, paid in place of reimbursing actual costs, according to IRS guidance.
• It stays outside wages only if it does not exceed the applicable federal rate and the employee reports the trip’s business purpose, dates and place.
• Track every payment by employee, project, location and travel date, so the allowance lands in job cost and your policy can be audited.
• Write the policy once: who qualifies, which rate source you use, how partial days work, and who approves.
• Never relabel part of base pay as per diem. The IRS treats that as a violation that makes every payment taxable.

Table of Contents

• What per diem means on a subcontractor’s payroll
• Per diem or actual expenses: choosing the method
• Where the rates come from
• When per diem is tax-free and when it becomes wages
• What a construction per diem policy should cover
• How to track per diem by employee, project, location and date
• Records to keep for support and job costing
• Common mistakes to avoid
• Our perspective: treat per diem as job data, not an office chore
• Put your field records to work
• Setting up in four steps
• FAQ
• Sources

What per diem means on a subcontractor’s payroll

The IRS defines per diem as an allowance paid to employees for lodging, meals and incidental expenses incurred while traveling, in lieu of paying their actual travel expenses. That definition matters for construction because it separates two things crews often blur together.

The first is true travel per diem: a pipefitter from your home shop works on a hospital job three hours away and you pay a daily allowance so he can cover a hotel and meals. The second is a daily payment that is really compensation, such as a flat extra amount added to every paycheck regardless of travel. Only the first can be tax-free. The second is wages, and calling it per diem does not change that.

In practice, subcontractors use per diem when:

• A crew travels to a job outside the normal commuting area.
• A project runs long enough that workers stay near the site during the workweek.
• A specialty trade (controls, fire protection, low voltage, insulation) sends a few key people to many different sites.

If you pay actual receipts instead, you are using actual expense reimbursement, which has its own tracking burden. Per diem is popular because it replaces a pile of receipts with a daily rate. It does not replace the need for records, as covered below.

Per diem or actual expenses: choosing the method

The IRS FAQ says per diem may use a combined lodging-and-meals rate or a meals-only rate. An employer may use either method for employee travel. A self-employed person, such as a sole-proprietor owner, may use the per diem method only for meal costs.

Here is how the choice usually plays out for a sub:

One detail worth putting in your policy: the IRS FAQ says lodging receipts are required when you use the meals-only rate. If you tell the crew “meals only, no receipts,” you are missing the lodging proof the rule expects.

Where the rates come from

Most employers use the federal rates as their ceiling. GSA establishes per diem reimbursement rates for federal agencies’ official travel within the continental U.S., and it publishes them by destination. According to the GSA per diem FAQ, GSA sets destination-specific rates for the 48 contiguous states and Washington, D.C., while the Department of Defense sets rates for Alaska, Hawaii and U.S. territories and possessions. The rate generally follows the location of the work activity, not the home office.

Two practical consequences for a subcontractor:

1. The rate depends on the job site’s location and the date. A job in a major metro and a job in a rural county can have very different lodging rates, and federal rates reset on a fiscal-year schedule. The GSA bulletin for FY 2027 covers October 1, 2026 through September 30, 2027. Look up the rate at the start of each project and again when a new fiscal year begins.
2. A project that moves across counties may change rates. If your crew relocates to a different site mid-job, the location on your tracking record needs to change too.

GSA explains that its rates rest on average daily rate data from local lodging properties, so they reflect what rooms actually cost in that market. That is a good argument to give your crew when they ask why the allowance differs between two cities.

If you use federal rules as a template for partial days, note that federal employees receive 75 percent of the total meals and incidental expense rate for the temporary duty location on the first and last day of travel. That is a federal rule for federal employees, but many employers adopt the same 75 percent split because it is easy to defend. The same GSA FAQ also notes that when lodging is unavailable at the temporary duty location, an agency may approve up to 300% of the per diem rate for the place where lodging is obtained. Private employers do not have to copy that, but it shows the kind of exception your policy should name instead of leaving to guesswork.

When per diem is tax-free and when it becomes wages

This is the part that costs subs real money when it goes wrong. The IRS FAQ lays out the logic:

• Payments generally stay outside employee wages when they do not exceed the applicable federal rate and the employee provides the required expense report.
• Payments become taxable wages when no report is filed, when required details are missing, when your policy does not require substantiation at all, or when the payment is above the applicable rate.

The IRS also states that any amount paid above the applicable GSA federal rate must be treated as taxable wages, subject to income and employment taxes. Only the excess is affected, not the whole payment, though a missing report can taint everything.

What the employee has to report

Per diem is a travel allowance, and the IRS says the employee must file an expense report with the employer within a reasonable period, set at 60 days, including the trip’s business purpose, date and place. Read the IRS per diem FAQ for the exact substantiation language. The three data points, purpose, date and place, are the backbone of your tracking sheet.

The wage recharacterization trap

A tempting shortcut on a tight labor market is to lower someone’s hourly rate and make up the difference with a daily “per diem.” The IRS has said in an information letter that rebranding a portion of base pay as per diem violates the accountable plan rules and makes all the payments taxable. If a worker would receive the same amount whether or not he traveled, it is not per diem.

Because tax situations differ, have your CPA or payroll provider confirm how your plan is set up. Do that before the first payment goes out, not after an audit letter arrives.

What a construction per diem policy should cover

A written policy is the difference between a defensible practice and a handshake deal on each job. It does not need to be long. One page is usually enough. Cover these points.

Eligibility. Who gets per diem: field employees traveling beyond a defined distance from the shop or their regular reporting location. Define the distance in miles or by county, and say whether foremen, supervisors and project managers are treated the same.

Rate source. Name the source, for example the GSA rate for the job-site location on the first day of work, and say when it is rechecked. Pick one rule and apply it to everyone.

Method. State whether you pay combined lodging and meals, or meals only with lodging paid directly or proven by receipts.

Partial days. Decide how travel days are handled. Using 75 percent of the meals rate for the first and last day mirrors the federal approach and is simple to explain.

Days covered. Are weekends paid when the crew stays on site? What about days lost to weather? What about days when the worker is on the payroll but not traveling, such as a sick day at the hotel? Write the answer down.

Approval. Who approves the trip before it starts and who signs off on the report afterward. Small shops often assign both to the project manager, with the owner or office manager reviewing monthly.

Substantiation deadline. Tie your deadline to the IRS 60-day window, but most subs set it tighter, such as the end of the next pay period, because memory fades and reports pile up.

Exceptions. Describe what happens when lodging costs exceed the rate, or when a job is in a remote area. Require pre-approval and document it.

Consequences. State that unsubstantiated amounts will be run through payroll as taxable wages. That sentence alone gets reports turned in faster.

How to track per diem by employee, project, location and date

Here the work becomes practical. The goal is a single record where every per diem payment can be sorted four ways: by worker, by project, by job-site location and by travel date. If you can answer “what did we pay in per diem on the school job in March?” in a minute, your tracking works.

The fields every entry needs

A worked example

This example uses made-up numbers purely to show the arithmetic. Say your policy sets a combined rate of $150 per day for a job-site location, with 75 percent paid on the first and last day. A worker travels Monday to Friday.

• Monday (first day): $150 × 75% = $112.50
• Tuesday to Thursday: 3 × $150 = $450
• Friday (last day): $150 × 75% = $112.50
• Total: $675

Your entry records the job-site location, the five dates, the rate and its source, the purpose (installation work on the named project), and the $675 charged to that project’s cost code. If the same worker then moves to a second job in a different county the next Monday, a new entry begins with that county’s rate.

To keep the sum honest, the days claimed should match the days the worker actually logged hours at that site. This is where time tracking and per diem meet: a worker who reports per diem for five days but has hours on the job for three needs a conversation. Our guide to tracking labor hours on job sites explains how to capture hours by project and date from the field, which gives you the evidence your per diem log checks against.

Keeping it from becoming a spreadsheet nobody updates

Spreadsheets work for a crew of five. They break down when you have three active projects, two crews traveling and a bookkeeper updating a file from texts. The weak points are predictable: missing dates, rates looked up once and never updated, and per diem that never reaches job cost. If your crew already logs time in the field, build per diem on the same record, by worker, project and date, instead of in a separate file. Read more on construction time tracking methods if you are setting that foundation up.

Records to keep for support and job costing

The IRS asks for a business purpose, date and place for each trip. For a subcontractor, a practical file for each traveling worker and project includes:

1. The written policy, with the version in force on the dates in question.
2. The rate lookup: a screenshot or printout of the GSA rate for the job-site location and travel dates.
3. The expense report the employee filed, with purpose, dates and place, and the date it was submitted.
4. Lodging receipts when you use a meals-only rate.
5. Time records showing the worker was at that site on those days.
6. Approval evidence: the signed or time-stamped OK from the project manager.
7. Payroll reconciliation: which pay period carried the payment, and any portion run as taxable wages.
8. Job cost allocation: the cost code and project the amount was charged to.

The second-to-last item is where many owners get surprised. Per diem is a real cost of the job. If it sits in general overhead, your estimate for the next out-of-town bid will be too low. If you charge it to the project, you can see what travel actually adds. That feeds directly into project budget tracking, and a more accurate bid next time.

For how long to retain the files, ask your CPA. Retention periods depend on your payroll and tax situation, and a professional should set that number for you.

Common mistakes to avoid

• Paying one flat rate everywhere. Locations differ, and a flat rate above the local federal rate creates taxable excess in the cheaper markets.
• Skipping the report. No report means taxable wages under the IRS FAQ, whatever the amount.
• Not tying per diem to hours. Paying for days with no time logged at the site invites questions.
• Letting the rate go stale. Federal rates change by fiscal year, so a job that spans October may need a new rate.
• Mixing per diem with wages. If the payment does not depend on travel, it is pay.
• Burying it in overhead. You lose the data you need to price distant work.

Our perspective: treat per diem as job data, not an office chore

We build software for subcontractors, and the pattern we see is consistent: per diem goes wrong at the handoff between the field and the office. A foreman knows where the crew slept and which days they worked. The office knows the rate and the payroll rules. When those two never meet in the same record, someone retypes a text message into a spreadsheet three weeks later.

Our view is that anything that costs money on a job belongs with that job’s labor data, captured once, by the person who knows what happened, and visible to the office the same day. That is why Won2Build Hub puts time and labor tracking, change orders, bidding and takeoff behind one login, so numbers move between tools instead of being rekeyed. Per diem is a payroll and tax matter your CPA should structure, but the evidence behind it, who was where and on which days, is field data.

The practical advice we give: keep the policy short, set the rate source in writing, and make the foreman’s daily record the thing that everything else checks against.

— Jen Reese

Put your field records to work

If your crew’s hours already live in a system that records worker, project and date, per diem checks become simple comparisons instead of detective work. Time Budge is our labor tracking and job cost tool for subcontractors, priced at $199 per month per company plus $2 per month per active field worker, as published on our pricing page. It syncs field entries to the office in real time and supports per-project reporting, with a bilingual interface for mixed crews.

If you want to see how the pieces fit, Won2Build Hub gives you one login across Time Budge, CO Hub, Bid Track and Takeoff, so labor data and bid data stay connected.

Setting up in four steps

1. Draft the one-page policy using the checklist above and have your CPA or payroll provider review it.
2. Create the tracking record with the fields in the table, in whatever system you use.
3. Run a pilot on one project with one crew for a few weeks, and compare per diem claims to logged hours weekly. Our post on running a short time tracking pilot shows how to keep a pilot small and useful.
4. Review at fiscal-year change and at every new project location, updating the rate and the record.

FAQ

Is per diem a reimbursable expense?

Yes, when it is paid for business travel under a plan that requires the employee to report the trip. The IRS describes per diem as an allowance paid in place of actual lodging, meals and incidental expenses. If the payment exceeds the applicable rate or no report is filed, the amount is treated as taxable wages.

Which per diem rate should a construction subcontractor use?

Most employers use the federal rate for the job-site location and travel dates as their ceiling. GSA sets rates for the contiguous states and Washington, D.C., and the Department of Defense sets them for Alaska, Hawaii and territories. Look up the rate for each project location, and recheck when a new fiscal year starts.

How long does a worker have to turn in a per diem expense report?

The IRS guidance refers to a reasonable period of 60 days, and the report must include the business purpose, date and place of the trip. Many contractors set a shorter internal deadline, such as the next pay period, so details are still fresh. Put the deadline in your written policy.

Can I pay part of a worker’s hourly pay as per diem to save on payroll taxes?

No. The IRS has stated that relabeling base pay as per diem violates the accountable plan rules and makes all the payments taxable. Per diem must reimburse travel costs, not replace wages. Ask your CPA to review your setup before you pay it.

Sources

• IRS per diem FAQ and answers (Topical Index)
• IRS per diem FAQ (substantiation and taxable excess)
• IRS information letter INFO 2009-0119
• GSA per diem frequently asked questions
• GSA per diem bulletin FTR 27-01

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