How to Set Up Per Diem in QuickBooks Desktop

Setting up a per diem system in QuickBooks Desktop can feel tricky because the software doesn't have a dedicated "per diem" button. The good news is that you can create an efficient, compliant system using its existing tools. This guide will walk you through the two best methods for handling per diem, explaining when to use each and how to configure them step by step.

First, a Quick Primer on Per Diem Rules

Before jumping into QuickBooks Desktop, it's vital to get the accounting and tax rules right. Per diem payments are daily allowances paid to employees to cover lodging, meals, and incidental expenses they incur while traveling for business. The key to keeping them non-taxable to the employee and deductible for the business is operating under an accountable plan.

An accountable plan is an IRS requirement for reimbursements, and it has three main rules:

1. There must be a clear business connection for the expense.
2. The employee must provide substantiation (an expense report showing the date, location, and business purpose of the travel) in a reasonable timeframe.
3. The employee must return any per diem payments that exceed the substantiated expenses.

As long as your payments don't exceed the federal rates set by the General Services Administration (GSA), and you follow accountable plan rules, the reimbursement is non-taxable. If you pay more than the federal rates, the excess is considered taxable income and must be reported on the employee’s W-2. The methods below show you how to handle both situations correctly.

Method 1: Using Expense Accounts and Items (The Non-Payroll Method)

This approach is best if you want to keep per diem payments separate from regular payroll runs. It's straightforward and excellent for tracking but requires you to manually manage the taxable portion of any excess payments.

This works well for:

• Companies that don't use QuickBooks Payroll.
• One-off reimbursements or reimbursement schedules that don't align with payroll dates.
• Simple per diem policies where you rarely pay more than the GSA rates.

Step 1: Create Per Diem Expense Accounts

First, set up specific accounts to cleanly track your per diem costs. This makes your financial reports much easier to read.

1. Navigate to the Lists menu and select Chart of Accounts.
2. Click the Account button in the bottom left corner and choose New.
3. Select Expense as the account type and click Continue.
4. Create a parent account. In the Account Name field, type something like "Travel Expenses." You don't need to fill out much else here. Click Save & New.
5. Now, create a subaccount. In the Account Name field, enter "Per Diem Costs." Check the box for Subaccount of: and select "Travel Expenses" from the dropdown.
6. Click Save & Close. You now have a dedicated place on your Profit & Loss statement to see all per diem expenses. You could add more subaccounts for lodging, meals, etc., if you need more granular tracking.

Step 2: Create a Per Diem "Item"

In QuickBooks, "Items" are what you use on invoices, bills, and checks to link the transaction to your accounts. You’ll need an item for per diem payments.

1. Navigate to the Lists menu and select Item List.
2. Click the Item button in the bottom left corner and choose New.
3. For the Type, select Other Charge.
4. In the Item Name/Number field, enter "Per Diem Rate."
5. Leave the Amount or % field blank, since the per diem rate will change based on location and days.
6. In the Account dropdown, choose the "Per Diem Costs" expense account you created in the previous step. This is the crucial link.
7. Click OK to save the item.

Step 3: Pay the Employee Using a Check

Now you can put it all together to pay an employee.

1. Go to the Banking menu and select Write Checks.
2. In the Pay to the Order of field, select the employee's name.
3. Important: Click the Items tab (located just above the memo line section). Do NOT use the Expenses tab.
4. In the first line under the Item column, select your "Per Diem Rate" item.
5. In the Qty column, enter the number of days the employee traveled.
6. In the Rate column, enter the daily per diem rate (e.g., 64 for M&IE, 157 for full per diem, etc., per the GSA tables).
7. QuickBooks will automatically calculate the total amount.
8. Use the Memo field to record key details for your records, such as "Per Diem: Austin, TX trip, 10/24-10/26." This supports your accountable plan documentation.
9. Click Save & Close.

Method 2: Using Payroll Items (The Accountable Plan Method)

This is the preferred method for any business operating under a formal accountable plan and using QuickBooks Desktop Payroll. It correctly adds non-taxable reimbursements to an employee's payslip for easy direct deposit, and it properly handles the taxable portion of any excess amounts automatically.

Note: This method requires an active QuickBooks Desktop Payroll subscription.

Step 1: Create a Non-Taxable Per Diem Payroll Item

This payroll item will be used for standard, compliant per diem payments that don't count as wages.

1. From the top menu, go to Lists > Payroll Item List.
2. Click the Payroll Item button at the bottom and select New.
3. Select Custom Setup and click Next.
4. Choose Addition as the payroll item type and click Next.
5. Enter a name for the item, such as "Per Diem (Non-Taxable)," and click Next.
6. On the next screen, select the expense account where you want to track these payments. You can use the "Per Diem Costs" account we created in Method 1. Click Next.
7. For the Tax Tracking Type, choose None. This is the key step that tells QuickBooks the item is a non-taxable reimbursement. It won’t be included in any tax calculations or added to W-2 boxes. Click Next.
8. In the Taxes window, ensure no tax boxes are checked. Click Next.
9. In the Calculate based on quantity window, you can leave it as "Neither." Click Next.
10. On the final screen for Gross vs. Net pay, you can usually click Finish, as per diem doesn't typically affect these calculations.

Step 2: Create a Taxable Per Diem Payroll Item (Optional but Recommended)

If you ever pay employees more than the GSA rates, you legally need to treat the excess as taxable wages. Creating a separate payroll item makes this simple to manage.

1. Follow the exact same steps above to create another Addition payroll item.
2. Name this one "Per Diem (Taxable Excess)."
3. On the Tax Tracking Type screen, choose Compensation. This tells QuickBooks to treat this addition just like regular wages—subject it to income taxes, Social Security, and Medicare, and include it in Box 1 of the employee’s W-2.
4. Continue through the remaining screens and click Finish.

Step 3: Add Per Diem to the Employee's Paycheck

Now you’re ready to add the per diem payments to an employee's regular payroll.

1. Go to Employees > Pay Employees and start a scheduled payroll run.
2. Select the employee you need to pay and click Open Paycheck Detail.
3. In the Other Payroll Items section, find your newly created payroll item, "Per Diem (Non-Taxable)."
4. In the Rate column for that item, enter the total non-taxable amount to be reimbursed (e.g., $64/day * 3 days = $192).
5. If you paid more than the federal rate, add a new line and select the "Per Diem (Taxable Excess)" item. In the Rate column, enter only the excess amount. QuickBooks will automatically calculate taxes on this portion.
6. Confirm the amounts are correct and click Save & Close to return to the main payroll window.

Best Practices for Managing Per Diem

No matter which method you choose, a few simple practices will keep you compliant and organized.

• Always Require Substantiation: A per diem payment doesn't eliminate the need for an expense report. Employees must still submit a report detailing the date, location, and business purpose of their travel to satisfy the "accountable plan" rules.
• Have a Clear Written Policy: Create a short, clear policy that explains your company's per diem rates (e.g., "We follow federal GSA rates"), what expenses per diem is intended to cover, and how employees should request reimbursement. This prevents confusion and disputes.
• Review Year-End Totals: Before finalizing your W-2s, run a Payroll Summary report and filter it to include your per diem payroll items. Double-check that taxable and non-taxable amounts have been categorized correctly all year.
• Know Your GSA Rates: The GSA updates per diem rates annually (and sometimes more frequently for certain localities). Bookmark the GSA Per Diem Rates website to ensure you're using the correct amounts.

Final Thoughts

Properly setting up per diem in QuickBooks Desktop comes down to choosing the method that fits your workflow— a simple check via the Items list for non-payroll users, or integrated payroll items for those with accountable plans. Both provide the tracking you need to stay compliant and accurately reflect expenses on your books.

Sorting through agency rules for accountable plans, deductibility, or the latest GSA rates can divert time from more strategic client work. When you're managing complex client questions on policy or tax treatment, we built Feather AI to deliver quick, citation-backed answers from authoritative IRS sources, so you get the guidance you need in seconds, not hours.