- A per diem reimbursement is when a business gives a daily stipend or allowance to an employee to cover expenses, usually during travel.
- The federal government sets per diem rates for a company in relation to lodging, food and incidentals.
- If a company uses the government’s per diem rates, the employee has no other tax implications, but if the company gives more, the excess amount is taxable income.
- This article is for business owners who want to understand how to create a per diem policy, set per diem rates and properly handle per diem reimbursements.
While many have heard the Latin phrase “per diem” (which means “by the day”), not everyone has a thorough understanding of what it is and how a per diem is used in business. To add to the confusion, the term can be used in multiple ways. From reimbursements to a type of employee, here is a comprehensive guide to per diem in the workplace.
What is per diem in the workplace?
There are two ways the term “per diem” is used in business: reimbursements and employees.
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A per diem reimbursement is when a business gives a daily stipend or allowance to an employee to cover certain expenses incurred as part of their job. This allowance typically covers lodging, meals and incidental expenses. Occasionally, it will also cover the means of travel itself. All of these expenses may be considered at least partially tax deductible for the business.
A per diem policy gives employees some flexibility in their travel accommodations and meals, as they can typically choose to spend their money however they’d like on any covered expense. For instance, if an employee prefers to stay in a nicer hotel and spend less money on meals (or vice versa), they can do so by balancing their per diem spending. The benefit for employers is the ability to manage travel expenses and know that they won’t have to reimburse employees for more than the set per diem amount.
A per diem employee, on the other hand, is an employee who works with a company on a daily basis at a previously agreed-upon rate. This is a worker who does not have a consistent or permanent role with the business and is typically called in as needed. Their day rate and hours are usually set in advance, though they can vary.
Examples of a per diem employee include travel nurses and substitute teachers. Other industries that operate around the clock or have production increases may also use per diem employees when approaching or during a busy season.
How to handle per diem reimbursements
A business provides a per diem for its employees when they’re traveling so that they don’t have to incur personal expenses while on the clock. The per diem covers an employee’s meals and lodging while they’re conducting business offsite. Most often, an employee will receive per diem reimbursements for their forecasted expenses of lodging, food and incidentals while traveling on a business trip.
Employees can receive their per diem in various ways, including via a corporate credit card, through an expense report or as a check given before the trip. In most cases, an employee receives per diem reimbursement after their trip and once they file an expense report. However, in some cases, the total per diem may be given to an employee upfront before the trip based on the number of days they’ll be traveling.
How per diem travel rates work
The federal government sets maximum per diem rates for a company in three categories: lodging, food, and incidentals. The General Services Administration (GSA) sets the standard per diem rate for each category on the federal level each fiscal year based on local market costs.
Certain states and cities can allow higher per diem payments, but they can’t be set lower than the GSA rate. A company can also opt to give its employees a higher per diem if this fits its budget.
The current standard GSA per diem rate for lodging is $96 per day, not including any taxes. For meals and incidental expenses (M&IE), the standard GSA per diem tier rate is $55 to $76 per day, depending on where you’re traveling. In some cases, the per diem rate may be higher if the city’s cost of living is higher than the average. On its own, the standard rate for incidental expenses is $5 per day. Incidentals can include fees and tips the employee may give to hotel staff or restaurant waitstaff.
The food per diem a person receives depends on their location and the meal. The GSA sets these standard per diem rates for each type of meal per person:
- $13 for breakfast
- $14 for lunch
- $23 for dinner
If an employee doesn’t spend the allotted amount per meal, in most cases, they can keep the additional funds without any tax implications and without having to return the money. If the business trip has multiple employees traveling together, they can combine their per diem when having a meal together to save money.
Did you know? If an employee’s first or last day of travel consumes only part of the day, the GSA allows them to receive a portion of the per diem payment. Under most circumstances, this is 75% of the standard per diem, assuming the employee won’t need the total per diem for their meals and incidentals.
What are the benefits of paying per diem?
These are a few key benefits of a per diem policy in the workplace:
- Easier budgeting. A set per diem rate helps managers budget travel expenses. Knowing how much they have to allot for each employee makes it easier to create a clear and solid budget for any business trip.
- Less paperwork. When businesses give employees a set per diem, they cut down on the paperwork they need to verify business travel expenses. If the employer opts to give employees a check or charge card as the per diem method, then both the employee and the accountant have to deal with very little paperwork.
- Smarter spending. Employees who are frugal and savvy with their per diem can spend less than the allotted amount and pocket the additional money. On the other hand, when employers set per diem rates, they don’t have to worry about employees overspending.
How do you pay out per diem?
Businesses have a few options when it comes to managing employee expense reimbursements for per diem spending:
Give employees an upfront allowance.
You may opt to give employees the total amount of their per diem as a single check before their trip. This saves your team the trouble of completing and processing expense reports after the trip, and the employee receives their per diem as a lump sum.
A downside to this method is that if an employee has to extend their business travels, it can be difficult to obtain additional funds before they return.
Give them prepaid purchasing cards.
Another way for employers to give a per diem is by authorizing the employee to use a corporate credit card or purchasing card (P-card) for the trip. Giving an employee a charge card allows them to make their per diem purchases and have the receipts go directly to the company’s accounting department. But the downside of this method is the risk of an employee overspending on the card. This would begin a process where the employee has to either pay back the amount they spent over their per diem or have the overage taken out of their paycheck.
Tip: If your company needs help with receipt tracking, check out our reviews of the best receipt-tracking tools. Using desktop software or mobile apps, receipt-tracking tools digitize documentation and ensure easy reimbursement and accurate taxation.
Reimburse employees after they submit an expense report.
The third way to pay out per diem reimbursements is the most common. Companies have their employees fill out an expense report after their trip. An employee will put all of their expenses on personal cards and then submit their receipts with an expense report after they travel. The company will then reimburse the employee via a separate check or include the money in the employee’s paycheck the next time it processes payroll.
The expense report reimbursement method is the most accurate way for companies to deliver a per diem allowance; however, employees must be able to cover their expenses out of pocket before the company reimburses them.
Tip: Employees who travel frequently may benefit from expense trackers, making it easy to log and organize expenses, scan and categorize receipts, and much more.
How payroll software can help with reimbursements
No matter how you choose to reimburse employees, payroll software can make it easier to manage. We’ve done extensive research on the best payroll software providers for businesses, and we recommend reading our Paychex review for larger businesses, our Intuit QuickBooks payroll review for small businesses, and our Gusto payroll review for businesses that need additional HR services.
Each of these software packages, along with the others we’ve reviewed, makes it easy to account for employee reimbursements and issue them via direct deposit, paper check or another payment method. Depending on the software, it can also help you track these expenses come tax season.
FYI: Some online payroll services have built-in expense-reporting tools and ways for employees to manage expenses via self-service portal. Learn more about how to choose a payroll software provider.
What are the tax implications of per diem reimbursements?
If a company uses the federal government rates set by the GSA for their employees’ per diems, the employee has no additional payroll tax implications. In cases where a business offers a higher rate than what the federal government set, the excess amount is considered taxable income. This affects both the employee’s taxes and the company’s taxes.
Because of the tax implications, most companies opt to use the per diem rates the government sets. This way, they can distribute the allotted amount without having to worry about any tax complications later. The IRS provides per diem payment guidance for employers about handling per diem expenses on their taxes, but if you’re unsure, it’s best to consult with an accountant or financial professional.
How to set a per diem policy
If you are offering a per diem to your employees, you should first determine whether you will follow the standard GSA rate or set your own. Then, decide how you will track and pay out each employee’s per diem allowance, whether it’s delivering an upfront stipend check, issuing a prepaid purchasing card or reimbursing employees via an expense report.
Like any workplace policy, per diem policies must be documented clearly and shared with your entire workforce. Ideally, you’d incorporate your per diem policy in the employee handbook.
“For employers to communicate policies surrounding compensation effectively, they first must create an overall strategy that is implemented from top leadership all the way to an entry-level employee,” said Rick Hammell, CEO and founder of Elements Global Services, a PEO company.
Hammell also advises business leaders to maintain an open line of communication about these policies and manage their employees’ expectations accordingly.
“Make sure employees are aware of how additional pay decisions are made, and if employees have questions or concerns, leadership is available to answer those,” he told Business News Daily.