Employers have a variety of options when it comes to paying their employees for business-related expenses. One of those options is per diem pay, which represents coverage of travel expenses, including lodging, meals, transportation, and incidental expenses.
This article teaches you everything you need to know about per diem pay, from its meaning to tax implications and benefits. We’ll also walk you through how Payscale helps companies like yours to navigate compensation complexities.
What does per diem mean and how does it work?
The Latin term “per diem” means “for each day.” In a business setting, per diem has two meanings. The most common definition of per diem is payments to employees—via a company credit card, full or partial reimbursement, or a fixed rate—that cover business travel-related expenses. Many companies rely on the government’s fixed per diem rate when calculating per diem payouts.
Per diem also refers to a system of daily compensation. In other words, when employees are paid for each day they work rather than bi-monthly, they receive per diem pay. Per diem employees are often hired for short periods of time and offered shifts at a daily rate when required. In this article, we’ll focus on the former definition: coverage of travel expenses.
How does per diem work? What per diem pay covers and how it’s paid varies from company to company. Per diem payments usually include lodging rates and meals and incidental expenses (M&IE) such as newspaper delivery or laundry services. Per diem isn’t applicable for transportation expenses unless an employee uses their own vehicle on a business trip, in which case the company may elect to honor the Internal Revenue Service’s (IRS) mileage reimbursement rate.
Calculating and distributing per diem also depends on the expenses that employees incur. If an employee receives free meals while on a work trip, their company likely only reimburses lodging and incidental expenses (not meals) through per diem.
Employees must submit an expense report within 60 days of using their per diem payment, even if the per diem rate is fixed. Expense reports include the date, time, and location of the expenses; the amount of total expenses; and the purpose of the trip in the context of business.
3 types of per diem payments
An organization’s management of per diem payments varies based on different factors. Here are three types of per diem payments:
1. Fixed rates
A fixed per diem rate is a predetermined amount for each day of business expenses. Location, seasonal prices, and industry standards all factor into that amount. Most companies distribute fixed-rate per diem payments by issuing their employee a company credit card or paying them in advance per day (which appears on employees’ pay stubs).
For example, a per diem payment for a communications manager working abroad for two weeks sometimes equals $300 per day: $200 for accommodations, $50 for food, and $50 for incidental expenses, including internet use and a foreign sim card.
The key benefit of a fixed rate per diem is that it guarantees employees maximum flexibility. Whether an employee receives their fixed rate per diem payment upfront or in the form of a commercial credit card, they are able to spend freely using their own discretion, oftentimes without having to document their spending.
2. Partial payments
Some companies utilize partial per diem payments as opposed to reimbursing their employees in full. After all, per diem itself is optional, so it’s up to businesses to decide what expenses to cover, if any.
Other companies use partial per diem with another form of per diem to account for non-working hours during travel. For instance, a company might issue partial per diem for the first and last days of a long business trip since employees often work reduced hours on those days due to travel.
Imagine your employee is attending a one-day seminar in a nearby city. Because the trip is short in duration and close in proximity, your company might choose to cover just meals and leave the cost of transportation up to the employee. That’s partial per diem in a nutshell.
3. Out-of-pocket expenses
Companies that enforce out-of-pocket expenses per diem require employees to pay for expenses upfront and later submit claims for reimbursement. Once an employee submits a claim for coverage of out-of-pocket expenses, their employer approves or rejects the claim. If the claim receives approval, reimbursement follows.
For example, if a company’s administrative assistant travels to another state for work, they must collect receipts documenting their spending on food, lodging, and incidentals. After the business trip, they submit their receipts and a claim to their employer. The company then reviews each expense, decides whether or not to approve the claim, and issues a per diem payment accordingly.
The downside of the out-of-pocket expenses method is that it eats up more time than other types of per diem. Not only do employees spend working hours gathering and submitting documentation of expenses, but businesses end up investing more time in reviewing claims. On the other hand, this approach offers more discretion to the employer, which is especially useful in case of unusual expenses.
Federal per diem rates
The standard per diem rate for employees of the federal government is set by the U.S. General Services Administration (GSA). The continental United States’ “CONUS Rates” are a general rate that applies to approximately 2,600 U.S. counties, and many private companies use it to inform their per diem policies.
The GSA also sets non-standard, location-based rates for federal employees, which vary from state to state, county to county, and so on. These specific rates apply to around 300 areas with high costs of living. Some per diem rates are higher or lower than others because the GSA considers the cost of living in a city or county to determine federal rates fairly. For example, the Department of Defense (DoD) sets rates for Hawaii, Alaska, and U.S. territories and possessions.
An important factor that distinguishes non-federal per diem rates from one standard rate to the next is whether they are greater than or equal to existing federal rates. If a company’s per diem allowance rate is greater than the government’s, employees are either taxed on the excess amount or able to return that excess to the company.
Now, are you wondering, “Is per diem taxable?” If a business’ per diem is equal to or less than the federal rate, it isn’t taxable, but the employee must submit a business expense report as well as receipts for out-of-pocket business travel expenses to their employer within 60 days of their last day of travel.
Federal per diem for self-employed people
Per diem also comes in handy for self-employed people looking to stay on top of their travel expenses. Those who regularly attend conferences, meetings with clients, or site visits benefit most.
For self-employed workers, per diem has several unique advantages. Primarily, self-employed people are able to claim per diem as a deductible business expense from their taxable income rather than a form of income, which in turn reduces their tax liability. Additionally, per diem eliminates the need for detailed receipts, although collecting receipts for larger expenses is still a smart idea.
If you are a self-employed worker, there are certain requirements that you follow when using per diem. First, be sure that your rates align with the GSA’s. Then, keep track of travel dates, destinations, and the objectives and agendas of your trips. Finally, remember to document expenses for meals, lodging, and incidental costs.
Is per diem pay taxable?
The IRS sets guidelines on what types of per diem reimbursements are taxable. Here’s a brief overview of what distinguishes taxable per diem from non-taxable.
Per diem payments are eligible for deduction (non-taxable) as long as they are business-related and accounted for in employees’ daily reports. Daily reports must include an explanation of how the expense relates to business objectives; the date, time, place, and amount of the expense; and a receipt if the expense is related to lodging.
As a basic rule of thumb, per diem payments are taxable if the amount exceeds the GSA’s federal rate (unless the employee returns the excess amount to their employer). For example, if an employee receives $100 for one day of per diem, but the federal rate is $80, they either pay taxes on the difference ($20) or return it. Per diems are also taxable if an employee neglects to file an expense report with their employer.
How can per diem pay benefit your organization and employees?
Per diem payments carry potential benefits both for an organization and its employees. Overall, per diem reimbursements cut down on needless bureaucracy, involved bookkeeping, and encouraged tax savings, efficiency, and freedom and fairness for employees. Consider the following information when deciding whether to implement a per diem in your company:
Per diem benefits for your organization
- Per diems make it easier for companies to budget ahead of time for future expenses
- Per diems reduce the need for paperwork, especially if you already reimburse employees for travel expenses
- Per diems simplify the tax-deduction process
- They provide potential tax savings because they are classified as deductible business expenses
- They reduce the need to report on expenses in great detail
- They standardize reimbursement, helping companies to avoid discrepancies and inconsistencies and promote fairness in the workplace
Per diem job benefits for employees
- Per diem jobs save employees time and energy on reporting expenses by minimizing paperwork and reducing or eliminating the need to gather receipts
- Per diem jobs provide tax savings for employees by reducing their taxable income
- They permit employees to keep excess per diem (as long as they pay taxes on it)
- They grant employees additional flexibility regarding spending, enabling them to meet their personal needs and preferences better while traveling
Mastering per diem pay and payroll with Payscale
While it might seem difficult, understanding how per diem payments work for payroll is super important for businesses. The first step is identifying who is an employee and who is an independent contractor, which goes beyond the frequency of pay.
All employees, even those who receive per diem, obtain a W-2 and have taxes withheld. Even some independent contractors receive per diem if they are considered by their company to be employees. Employment rules such as overtime pay, retroactive pay, and state-wide minimum wage still apply to per diem jobs.
Payscale’s proven solutions assist businesses with navigating the intricate world of payroll and paying per diem. For instance, Payscale’s total rewards statements help companies break down their compensation and benefits, including per diem payments, for employees. Transparent, productive pay communications build trust among employees and increases retention.
Another of Payscale’s solutions that help companies effectively handle per diem pay and payroll is our Geo Differentials Engine, which offers insight into market pay trends and helps companies to build a location-based pay strategy—particularly useful for determining non-standardized per diem rates.