A lot of these are scams that work out for the benefit of the agency more so than for you. As a traveler you are only entitled to this benefit if you have a permanent tax home. If you do then read on.
There are 2 ways that they will do this. one is that they will only tax part of your income and the other is that they will give you an extra allowance on a daily basis that is tax free. The government sets a varying rate on how much you can deduct at the end of the year depending on the cost of living in the area where you are living. Many agencies only add this extra money to the days that you work and not your days off. The government allows the deduction for every day that you are away from your tax home. So if you are working 3 days out of 7 you are missing 4 days that you could deduct at the end of the year. hope you follow.
The other thing that they will do is offer to only tax part of your income. for exampl example they tell you they will only tax a percentage of the hourly rate which we will say is 30.o0 hour. Say they only tax 15 dollars of that 30. According to the government you are only making 15 dollars an hour. Now its true that you may increase your takehome pay at that moment but consider that if you work overtime at time and a half you will only make time and a half over a 15.00 hour salary not 30. because of the lower salary the agency doesnt' pay as much into social security, disability, etc. but you have to realize that your long term social security benefit will be affected since social security at retirement is based on earnings. the other thing to consider is that if you get injured on the job your disability payment which is usually a percentage of your salary will be based on that 15.00 hour. the verdict is also not out with the irs as to whether this is even a legal way to get paid and could make you more of a red flag for the IRS. You can still claim all these deductions and because the per diem deductible may well exceed your standard deduction you will find that all your other deductions that you are able to claim will have more value. sorry this is so long and i hope it makes sense. I would strongly recommend a tax advisor. One agency that I have spoken to and who will be doing my taxes next year is http://kobaly.com/
kobaly. I called and spoke with them they were extremely helpful and friendly. they also specialize in travelers so they will be able to do the best for you as far as maximizing your deductions. and no I don't work for them I just called them last week with some of the same questions that you have as I am preparing to do my first travel assignment. Very nice people, and very helpful.