Per Diem Pay: Everything You Need to Know
FY21 Per Diem Rates Now Available
As an employer, you’re likely used to covering costs incurred by employees for business travel expenses. Typically, meals and lodging fall under this umbrella, but incidental expenses, like dry cleaning and tips for services, can also be included. However, simply setting an amount an employee can spend each day isn’t advisable, as there are nuances surrounding what is covered, payments, tax considerations, and structuring. Further, the cost of food and lodging is more expensive in some destinations compared to others.
If you’re new to offering a per diem, or just looking to brush up your knowledge base as you adjust your corporate policies, this post is for you. It will cover what exactly per diem means, how per diem works, payments, rates, tax impacts, benefits, and more.
What Does Per Diem Mean?
Quite simply, per diem is a Latin term for “per day”. In the business world, per diem typically refers to one of two scenarios. For companies, a per diem is an allowance employees are paid to cover costs incurred while traveling for business.
However, per diem can also reference a compensation structure where per diem workers are paid an hourly rate on a daily basis, or based on the quantity of work completed. Typically, this structure is not leveraged for full-time jobs or full-time employees. Many per diem positions do not receive benefits like health insurance or vacation time. Part-time substitute teachers are a prime example of per diem employees.
What Does Per Diem Cover?
The IRS outlines business expenses that qualify for per diem allowance. This includes lodging, meals, laundry, room service, and tips for baggage handlers and waitstaff at restaurants. It is important to stay within the IRS categories for per diem as there are tax implications. Further, keep in mind that transportation, such as airfare, mileage, or train tickets, can’t be reimbursed as a per diem. Those items should be bucketed in a travel/transportation category.
What are Per Diem Payments?
For the purposes of this write-up, we’ll focus on the per diem payments provided when an employee travels. As we mentioned above, a per diem refers to a daily allowance to cover work-related expenses while on the road, such as meals, lodging, or incidentals.
Calculating Per Diems – Destination and Date Considerations
Let’s look at a scenario where Company XYZ sends their employee, Aaron, to an industry conference to learn new skills and best practices. On the trip, Aaron will have expenses, such as his hotel room and daily meals. Company XYZ will need to provide Aaron with an amount he can spend per day for food and lodging and there are several ways that this rate can be determined:
- Option A: Manually calculate Aaron’s per diem based on the specific destination to which he is traveling and leveraging the U.S. General Services Administration’s (GSA) rates.
- Option B: Using the high-low substantiation method from the Internal Revenue Service (IRS) that outlines rates for the U.S. delineated by high cost and low cost areas.
- Option C: Take the guesswork and manual calculations out of the equation and use a managed travel platform to calculate the trip budget based on destination and dates.
If Company XYZ leverages a managed travel platform, such as TravelBank, Aaron’s trip budget would be calculated in advance based on travel dates and destination. Destination and dates are important when calculating rates, as some cities are more expensive than others, and have increased rates depending on dates.
For instance, San Francisco is incredibly expensive to travel to during Dreamforce, the annual Salesforce conference. As you determine lodging costs and meals, you will save a lot of time and review cycles knowing what to anticipate up front vs. being surprised by sky-high rates. Want to see what we’re talking about? Check out our Travelator estimation tool to run a few different scenarios that would apply to your business.
Is Per Diem Taxable?
The tax parameters surrounding per diems are a frequent question from employers. Per diem reimbursements are not considered taxable income provided the payment issued to the employee is equal to or less than the federal per diem rate.
Further, your company is allowed to set its own per diem; however, it is advisable to consider federal guidelines as well. The government publishes updated per diem rates each fiscal year, typically in October.
It is essential to keep accurate records of your per diem payments to employees, because if the rate surpasses the approved maximum set by the IRS, it can fall subject to scrutiny come tax time.
Employee expense reports must include the dates and destination, business purpose, receipts, and if they are only being paid for meals and incidentals versus lodging as well. If a per diem payment is beyond the standard rate, then the employer must report the payment as income and it is then subject to tax. We recommend covering per diem and expense reporting documentation requirements in your corporate travel policy to ensure that there is no confusion and expectations are clear.
What are the Federal Per Diem Rates?
Understanding the per diem rates that the IRS references is important from a tax perspective as the money paid by an employer to an employee can be mistaken for remuneration, which is subject to income taxes.
The IRS leverages the per diem rates set forth by three government agencies each year, including: the General Services Administration, Department of State, and the Department of Defense. The rates are set for the continental U.S. and broken down by city, state, and zip code. The GSA provides a per diem calculator to determine allowances based on destination.
How is Per Diem Paid?
As an employer, you can make the decision to issue flat rate per diem checks prior to an employee leaving on a business trip, providing the funds necessary while on the road. You can also choose to provide a travel reimbursement upon their return. This payment will need to be outside of regular payroll as it will not be taxed. If your employees have access to, or are issued a corporate card, then this will not be an issue as business expenses will be charged and they will only need to provide appropriate documentation.
The Benefits of Per Diem Payments
One of the biggest benefits of the per diem reimbursement structure is that it drastically reduces paperwork for both the company and the employee. Next you will find a quick breakdown of the various perks for both the employer and employees.
On the business side, your company will have an easier time budget forecasting if it has pre-set costs for meal and lodging in the cities employees travel to the most. Further, your finance team will have a far easier time cutting a check for a set amount versus reconciling line items in expense reports.
Less paperwork. Paperwork is reduced since employees are not submitting receipts and finance teams are not stuck with a mountain of reports. It will also reduce the amount of time traveling employees and your accounting department spends on paperwork.
Better spending decisions. By giving your employees a specific amount of money, they are likely to make better spending decisions and spend the company money as if it were their own.
Budget forecasting. Your finance team will find it far easier to anticipate travel spend if there is an exact amount allocated to employees for business trips instead of having to estimate potential reimbursement amounts down the road.
Less room for human error. Less receipts means less to process, which will result in fewer accounting errors.
Less paperwork. Similar to the business side of the house, employees save time under a per diem structure as they do not have to collect and submit receipts and deal with tedious reporting.
Keep the change. If an employee spends wisely and doesn’t spend the full per diem, most companies allow them to keep the remaining amount.
Easier to budget. A per diem structure allows employees to submit request forms prior to their business travel, ensuring that they have the cash needed for their trip.
No receipt, no problem. Keeping track of receipts is a pain. If your company uses a per diem program, then employees don’t need to worry about being reimbursed properly for these daily expenses incurred on the road.
Per Diem Wrap-Up
Your business travel program should be as streamlined and frictionless as possible for your finance team and employees alike. A per diem structure can absolutely serve as a great way to define travel expense budgets for the daily expenditures aside from flights and hotels.