Per Diem Pay for Construction Workers: What Contractors Need to Know

Per diem is one of the most common payments in construction and one of the most misunderstood. Trade contractors routinely send crews to jobsites that are hours from home, and per diem covers lodging, meals, and incidental expenses while those workers are traveling. When paid correctly under IRS rules, per diem is tax-free for the worker and deductible for the contractor. When paid incorrectly, the full amount becomes taxable wages, and the contractor is on the hook for back taxes, penalties, and potential issues on certified payroll reports.

Construction payroll adds layers that most industries never deal with: prevailing wage interactions, multi-state tax obligations, and certified payroll reporting that demands precise classification of every dollar paid to a worker.

What Per Diem Covers and When Workers Qualify

Per diem in construction is a daily allowance paid to workers who travel away from their tax home for work, covering lodging, meals, and incidental expenses without requiring individual receipts. Not every traveling worker qualifies for tax-free per diem, and the distinction matters for both the contractor and the worker.

The Tax Home and Temporary Work Location Rule

The IRS defines a worker's tax home as the general area where they regularly work, not necessarily where they live. Per diem is tax-free only when the worker travels to a temporary work location, and the IRS considers a location temporary only if the assignment is realistically expected to last one year or less. Once an assignment is expected to exceed one year, the jobsite becomes the worker's new tax home and per diem payments become taxable wages.

For contractors staffing long-duration projects, the one-year threshold requires active monitoring. A project initially expected to run eight months may extend through change orders or delays, and if the expected duration crosses one year, per diem status changes from that point forward.

When Per Diem Becomes Taxable

Several situations cause per diem to lose its tax-free status, and each one creates a reporting obligation for the contractor's payroll team:

• The worker's assignment at a single location is expected to last more than one year

• Per diem payments exceed the applicable federal rate for that location

• The contractor does not maintain an accountable plan that meets IRS requirements

• The worker fails to substantiate the time, place, and business purpose of the travel

• Excess per diem amounts are not returned within a reasonable timeframe

When any of these conditions apply, the per diem must be included in gross wages and is subject to federal income tax withholding, Social Security, and Medicare taxes. For contractors running construction payroll across multiple projects, catching these situations before payroll processing prevents retroactive corrections.

IRS Per Diem Rates and Accountable Plan Requirements

The IRS publishes updated per diem rates annually. Payments at or below federal rates are deemed substantiated for the amount, meaning the worker does not need to provide receipts for individual expenses.

Current Federal Per Diem Rates

IRS Notice 2026-60, effective October 1, 2026 through September 30, 2027, sets the following high-low simplified rates for the continental United States:

• High-cost localities: $329 per day ($86 for meals and incidental expenses)

• All other localities: $230 per day ($74 for meals and incidental expenses)

• Incidental expenses only: $5 per day

A locality qualifies as high-cost when its federal per diem rate is $280 or more. The list changes each year and includes seasonal designations, so contractors should verify whether each jobsite location falls in the high-cost category for the relevant travel dates.

What an Accountable Plan Requires

Tax-free per diem treatment depends entirely on the contractor maintaining an accountable plan that meets three IRS requirements:

• Business connection. The per diem must reimburse expenses that would be deductible as business travel expenses.

• Substantiation. The worker must account for the time, place, and business purpose of the travel. When per diem is paid at or below federal rates, the amount is deemed substantiated, but the time, place, and purpose still require documentation.

• Return of excess. Any per diem paid above the substantiated amount must be returned within a reasonable timeframe.

The IRS safe harbor timelines are advances within 30 days, substantiation within 60 days, and return of excess within 120 days. Contractors who pay per diem without meeting all three requirements risk having the entire payment reclassified as taxable wages.

How Per Diem Interacts With Prevailing Wage and Certified Payroll

Per diem compliance gets more complex on Davis-Bacon covered projects, where every dollar paid to a worker must be classified correctly on the WH-347. The interaction between per diem and prevailing wage rules is one of the most common sources of reporting errors on federally funded work.

Per Diem Cannot Be Credited Toward Fringe Benefits

The DOL's Wage and Hour Division is clear on this point: per diem, travel, and subsistence payments generally cannot be credited toward the prevailing wage fringe benefit obligation. According to DOL Fact Sheet 66E, taking fringe benefit credit for travel and per diem expenses is a listed compliance violation.

Per diem reimburses the worker for travel expenses. Fringe benefits compensate the worker for performing the work itself. Counting one as the other would require the worker to fund travel out of compensation owed for labor. Contractors who mistakenly credit per diem toward the fringe obligation on certified payroll reports risk back-wage orders and potential debarment from federal contracts.

Reporting Per Diem on Certified Payroll

When per diem meets accountable plan requirements and stays at or below federal rates, the payment is not included in gross wages on the WH-347. When per diem is taxable, the taxable portion must be included in gross wages. Omitting taxable per diem from the WH-347 is a wage underreporting issue that can trigger enforcement action. Accurate payroll reporting on prevailing wage projects requires knowing the per diem status of every payment before certified payroll is generated.

Where Per Diem Tracking Breaks Down for Contractors

Per diem rules are consistent, but applying them across a construction business with crews on multiple projects in different states creates tracking challenges that compound over time.

Multi-State Crews and Varying Rates

Federal per diem rates vary by locality. A crew working in Manhattan falls under high-cost rates, while the same crew dispatched to a rural project in upstate New York does not. When multi-state payroll is already tracking different state income tax rules, adding location-specific per diem rates to the same pay run requires precise project-level data.

State tax treatment of per diem also varies. Some states follow federal accountable plan rules, while others have their own thresholds or documentation requirements.

Missing Documentation That Triggers Reclassification

The most common per diem compliance failure is not paying the wrong rate but missing documentation. A field crew that logs hours at the jobsite but does not record travel dates, locations, and business purpose leaves the contractor without the substantiation the accountable plan requires.

When documentation is incomplete, the IRS can reclassify the entire per diem payment as taxable wages, retroactively. The contractor owes back taxes and penalties on every affected payroll period, and for firms managing per diem across multiple projects, the exposure multiplies quickly.

Build Per Diem Into Your Payroll Workflow

Per diem is a standard part of compensating construction crews who travel for work. Applying the rules consistently across multiple projects, states, and wage determinations requires payroll systems that handle the complexity without manual workarounds.

Trayd processes per diem alongside wages and benefits in the same payroll run, applying the correct federal rates by project location and flagging payments that exceed accountable plan thresholds before payroll processing. Certified payroll output reflects the correct classification of every per diem payment, so the numbers on the WH-347 match the actual payroll records behind them.

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Frequently Asked Questions

Is per diem taxable for construction workers?

Per diem is tax-free when paid under an accountable plan at or below federal rates to workers traveling away from their tax home to a temporary work location. When any of those conditions are not met, the payment becomes taxable wages subject to federal income tax, Social Security, and Medicare.

What are the current IRS per diem rates for construction travel?

For the period October 1, 2026 through September 30, 2027 (IRS Notice 2026-60), the high-low simplified rates are $329 per day in high-cost localities and $230 per day in all other continental U.S. locations. Meals and incidental expenses are $86 and $74 respectively.

Can per diem be counted toward prevailing wage fringe benefits?

No. The DOL considers per diem a reimbursement for travel expenses, not a fringe benefit. Crediting per diem toward the fringe benefit obligation on Davis-Bacon projects is a listed compliance violation that can trigger back-wage orders.

How long can a construction worker receive tax-free per diem at one location?

The IRS considers a work location temporary only if the assignment is realistically expected to last one year or less. Once the expected duration exceeds one year, the location becomes the worker's tax home and per diem for that location becomes taxable.

What documentation is required for tax-free per diem?

Workers must substantiate the time, place, and business purpose of their travel. When per diem is paid at or below federal rates, the amount itself is deemed substantiated, but the other elements still require documentation. Missing records can cause the entire per diem payment to be reclassified as taxable wages.

Does per diem need to be reported on certified payroll?

Tax-free per diem that meets accountable plan requirements is not included in gross wages on the WH-347. Taxable per diem, whether from exceeding federal rates or failing substantiation rules, must be included in gross wages. Omitting taxable per diem from certified payroll is a wage underreporting violation.