We have recently had a considerable number of inquiries concerning "per diem" expense allowances. Essentially, per diem and expense reimbursement plans fall into two categories:
A reimbursement or other expense allowance arrangement is an arrangement that:
. . . provides advances, allowances or reimbursements only for business expenses allowable as itemized deductions that are paid or incurred by the employee in connection with his services as an employee;
. . . requires the employee to substantiate each expense to the payor under the applicable substantiation rules; and
. . . requires the employee to return to the payor, within a reasonable time, any amount paid under the arrangement in excess of the expenses substantiated.
If the arrangement meets all of the above requirements, all amounts paid under it are treated as paid under an accountable plan. If the arrangement does not satisfy one or more of these requirements, the payments are treated as made under a nonaccountable plan.
If IRS determines that there has been a pattern of abuse in an employer's reimbursement or other expense allowance arrangement, all payments under the arrangement will be treated as if made under a nonaccountable plan.
If a payor pays a per diem allowance in lieu of reimbursing actual expenses for lodging, meal and incidental expenses incurred or to be incurred by an employee for away-from-home travel, the amount of the expenses that is considered substantiated for each calendar day (or partial day, see is the lesser of:
Per diem rates are available for every city in the US and many foreign cities, and show the maximum amount considered "reasonable" and "substantiated" for that area.
Therefore an hourly component of the remuneration to an employee (or self employed contractor or corporation) would not be taxable nor includable on a W-2 or other information slip as long as it is for reimbursement of business expenses, and is below the IRS approved per diem rate for the city in question.