Per Diem is the daily allowance the employer may pay their employees to cover the costs they incur while traveling for business. The phrase means "for each day" in Latin.
This phrase can sometimes also mean the compensation system where an employee is paid per day worked instead of receiving a monthly or bi-monthly salary payment.
However, it is most frequently used to refer to the daily allowance that covers employee business travel expenses.
Per diem generally covers accommodation, food, travel-related expenses like fees or service tips, and other business expenses while the employee travels for work.
Per diem payment may cover full or partial expenses. This payment may only be for specific expenses like lodging, meals, and incidentals.
How Does Business Travel Per Diem Work?
A business travel per diem may include other expenses outside of travel costs like lodging and accommodation.
While no per diem is considered mandatory legally, it is a good business practice to reimburse employees for all legitimate business travel-related expenses.
This reimbursement can be done before or after the trip is over. If it is paid after the trip, the employee will need to submit all their travel-related receipts, which work as proof of incurrence.
If no prior arrangement has been made and the employee had to make out-of-pocket expenses, they will have to make claims. Once the claim is proven with receipts, they can get reimbursed for the money they spent.
Companies can offer per diem through company credit cards or cash. They might impose fixed daily rates beyond which an employee cannot spend.
There might also be set rules on what they can use their per diem on, making it only cover specific business travel-related expenses like food, lodging, conveyance, etc.
Federal Rate of Per Diem
The United States General Services Administration sets Federal Per Diem for government employees who travel to work.
Most companies use the Federal Per Diem Rate to guide their business travel expense coverage policies.
The Federal standard rates for domestic and international travel for work are set each year on 1st October every year. These rates are based on the cost of living of an institution's base.
A standard rate applies to about 2600 counties in the United States. However, specific rates apply to around 300 high-cost locations.
The Federal Foreign Per Diem Rates for government employees traveling abroad vary based on location. You can find the federal rates anywhere if you put the location on the U.S. Department of State website.
When is Per Diem Taxable?
A Per Diem Payment is considered the employee's taxable income if the payment made by the employer is higher than the standard federal rate.
Only the excess amount paid will be considered taxable income in such cases. This extra amount often acts as an incentive awarded to employees.
According to IRS Publication 463, Chapter 6, this can also happen when the employer pays a fixed amount for business expenses without asking the employees to issue an expense report or if the employee needs to file the expense report within an acceptable amount of time.
How to Calculate Per Diem for Business Travel?
You can find a city's Federal per diem rates on the GSA website. You can use that to determine how much reimbursement your employee will need per day and multiply it by the number of days spent per employee.
While Per Diem is counted per day, only lodging is counted per night.
Let's say an employee will be traveling to Baton Rouge, Louisiana, for five days, including the first and last day. The Federal payment Per Diem would be:
Lodging per night:$106
Total Lodging for the trip (4 nights): $424
(b) Meals & Incidentals:
First and last day:$51.75
The lodging will be calculated for only four days as the employee will leave on the fifth day. On a five-day trip, there would be three days of full meals which would cost $207. The total amount for the first and last day would be $103.5. So, the total payment for meals would be $310.5.
So, the total expense for five days for a business trip to Baton Rouge, Louisiana, for one employee, according to Federal standards of per diem, including meals, lodging, and incidentals, would be $734.5.
What Do Employers Need to Know about Per Diem?
While employers are not required to pay Per Diem, it is a good business practice as it helps make budgeting easier.
If businesses pay the Per Diem, the employees won't have to pay it. If they had to pay their travel expenses for business travels, it could be difficult and demotivating for them. It will have an impact on their quality of work.
If an employer plans to pay for an employee's business trip, making the payment per diem is much more efficient than the out-of-pocket expenditure system. It saves time from going through receipts and dealing with extra paperwork, simplifying the process for everyone.
Per Diem payments can streamline the tax-deduction process for businesses, as they are tax deductible. However, meals are subjected to a 50% limit, as seen in IRS Publication 535, Chapter 11.
Under two conditions, an employer can only report per diem payments as taxable wages on an employee's wages and tax form.
If the employee fails to return leftover money after a trip, and if the company's per diem allowance is higher than the standard Federal rate, the employer can report it on the W2 form.