In our rapidly evolving business landscape, work-related travel is frequently necessary for employees. This can, however, lead to escalating expenses for both the individual and the company. To alleviate these costs, numerous businesses have adopted per diem policies.
But what is per diem, and how can it benefit your organization? This quick guide sheds light on per diem, its operation, and the merits of integrating a per diem policy into your workplace.
What Does Per Diem Mean?
The phrase “per diem” originates from Latin, signifying “per day.” Within the framework of business travels, per diem denotes a daily stipend provided to employees to defray their travel expenditures, which include meals, lodging, and incidental costs.
Usually, this allowance is granted over and above the reimbursement of transportation expenses, such as airline tickets or vehicle mileage.
How Does Per Diem Work?
Typically, per diem is segmented into two sections:
- Meals and incidentals cover costs such as food, drinks, and gratuities for service personnel.
- Lodging encompasses expenditures related to accommodations, like hotel rooms or temporary rental properties.
For instance, an IT consultant assigned to a week-long project in a different city could receive a per diem stipend of $200 daily, with $100 intended for accommodations, $50 for meals, and $50 for non-itemized, discretionary (miscellaneous) costs, which could include charges like laundry services, internet access, room service, gratuities for service personnel, among others.
Each section has its daily cap set by the employer or the General Services Administration (GSA) for public sector employees. In addition, companies may issue a per diem allowance before the employee’s travel. This can benefit the latter, enabling them to plan their expenses more effectively.
In some scenarios, temp workers positioned to work in a different city or region might also qualify for per diem allowances. Here, the rates may be adjusted to account for living costs in the worker’s temporary location.
Remote employees may also be entitled to per diem allowances when commuting to the office or another work site. This can help mitigate the cost of transportation, accommodation, and meals during travel.
How to Determine Per Diem Rates
Calculating per diem rates can be intricate, considering many variables, including the employee’s role, travel destination, and length of stay. In the US, numerous organizations refer to the per diem rates set by the GSA as a benchmark for defining their own per diem policies.
It annually updates per diem rates for various locations within the country. For example, major cities such as Los Angeles, New York, and Chicago usually have higher per diem rates because the cost of goods and services is typically more elevated in these locations compared to non-metropolitan areas.
Additionally, rates for accommodation may change monthly due to supply-demand dynamics. For instance, the highest per diem rates for accommodation in New York are often witnessed during the fall season, which sees an influx of tourists and business travelers.
These rates are revised yearly and are implemented starting October 1st, marking the beginning of the federal government’s fiscal year. To determine per diem rates for your employees, you can start with the GSA’s rates and modify them as required based on your organization’s unique needs and policies. Then, you can do your calculations by heading to the GSA site.
Some companies may also prefer to formulate their own per diem rates, considering factors like the average cost of living in the destination, the employee’s role, and the purpose of the trip. This can ensure the rates suit your business travel budgets and are equitable for all employees.
Per Diem Rates for 2023
As previously noted, the GSA updates per diem rates annually on October 1st. In 2023, the standard lodging rate will rise from $96 in 2022 to $98.
The non-standard areas per diem rates, applicable to over 300 regions and generally surpassing the standard rate, will be equal to or greater than last year's rates for lodging.
The per diem tiers for meals and incidentals will maintain the 2022 rates, ranging from $59 to $79. The standard rate for meals and incidentals will also remain static at $59.
Quick Tip: To determine your government per diem rate, go to the GSA's Travel Resources Per Diem Look-Up page. Enter your travel destination, dates, and year. Then click Search.
Tax Implications of Per Diem Reimbursements
In the US, the tax implications for companies providing per diem to employees typically depend on whether the per diem is for:
Meals and Incidental Expenses (M&IE)
- Non-accountable Plan: If you provide per diem for M&IE without requiring your employees to account for their actual expenses, the per diem amount may be considered taxable income for them. In such cases, you must include the per diem payments in their wages, subject to income tax withholding and payroll taxes.
- Accountable Plan: If you establish an accountable plan for per diem, your employees must substantiate their M&IE expenses. In this case, the per diem payments are typically not included in their taxable income. As a result, you do need to withhold income taxes or pay payroll taxes on the per diem amounts.
Lodging Expenses
- Taxable Compensation: Payments or reimbursements made by your organization for lodging expenses are generally considered taxable compensation for employees. You must include the lodging payments in their wages and withhold income taxes accordingly. Payroll taxes may also apply.
How is Per Diem Calculated in the Workplace?
Companies adopt different strategies for managing per diem payments. For example, they may issue credit cards, cover complete or partial expenses, or provide fixed daily rates. They may also necessitate employees to initially pay for expenses from their pockets and then submit for reimbursement. If you want to go this way, make sure you disclose this policy in your company’s onboarding checklist for your employees to remember.
Per diem payments can fully or partially address business costs. For example, companies may employ a per diem rate to cover both accommodation and meals or use a per diem rate exclusively for meals.
For example, a partial per diem might assign $100 for meals while requiring out-of-pocket payment for accommodation expenses and incidentals. Some organizations issue employee checks for per diem payments to differentiate them from regular income.
How to Prevent Misuse of the Accountable Plan?
An accountable plan in the context of per diem refers to a structured reimbursement arrangement companies use to compensate their employees for business-related expenses incurred while traveling or working away from their usual place of business.
The accountable plan enables employees to receive tax-free reimbursements for qualifying expenses, such as meals, lodging, transportation, and incidental expenses, without the need to report them as taxable income.
Employers must follow three key rules for per diem to be included in the accountable plan. Only upon satisfying these rules does it qualify as an accountable plan:
- The employee’s expenses must be business-related.
- The employee must provide sufficient expense reports for the trip and submit them to the employer within a “reasonable period.”
- According to the rules, the employee must return any excess travel allowance received for the business trip to the employer.
The IRS states that the definition of a “reasonable period” may vary depending on the company and the purpose of the employee’s business trip. However, they have outlined certain actions that should be taken within a reasonable time. These include:
- The employee should receive an advance 30 days before the business trip.
- The employee should provide details of the expenses incurred or paid within 60 days after the business trip.
- The employee should return any excess reimbursement from the employer within 120 days after it was incurred.
- The company should provide a quarterly statement asking the employees to return or account for any outstanding advances, and the employee must respond within 120 days of receiving it.
Advantages of Per Diem
- Better expense management: Foremost, by offering a fixed daily allowance for travel costs, your employees can plan their expenses better and circumvent overspending. This also removes the necessity for them to retain and submit receipts for every expense, which can be laborious and time-consuming.
- Fair compensation for travel expenses: With per diem, you can ensure uniform reimbursement for all employees, regardless of their personal spending habits. This helps decrease disparities in reimbursement and foster a more equitable work environment.
- Lowered risk of fraudulent expense claims: Employees are less likely to exaggerate their expenses or submit fraudulent reimbursement claims when given daily allowance before the travel. This can safeguard your organization’s financial health and uphold the credibility of your expense management process.
Disadvantages of Per Diem
While per diem payments can simplify the process of expense reimbursement, there are reasons why both companies and employees might prefer actual cost reimbursement instead.
- Per diem cannot account for all travel expenses: Per diem rates may not fully cover the expenses incurred during business travel. Employees might have to bear additional out-of-pocket costs for any costs exceeding the defined per diem limit.
- Per Diem rates vary based on locations: Per diem may not be the most economical approach because rates are determined based on the travel location. Given that each employee’s travel requirements differ, companies risk over or under-compensating employees, as the actual costs will seldom match the per diem amount exactly.
- Non-compliance can lead to penalties: Companies also need to ensure their per diem rates align with tax regulations and are reasonable according to industry standards. Non-compliance could lead to hefty penalties or fines imposed by tax authorities.
Tips for Managing Per Diem Expenses
Administering per diem can be challenging, particularly in expansive organizations with numerous employees undertaking work-related travel. Here are a few tips to help you manage this more efficiently:
1. Develop Transparent Policies
Ensuring that your per diem policy is explicitly articulated and disseminated among all employees creates a foundation of understanding and compliance. The policy should define the purpose and scope of per diem, specifying what types of expenses are eligible for reimbursement.
It should also establish maximum per diem rates for different locations or categories of travel, note factors such as cost of living and travel duration. By providing employees with this information upfront, they will clearly understand the reimbursement process and the limits within which they can spend.
2. Implement an Expense Management Software
See what Te Wu, CEO of PMO Advisory, had to say:
An expense monitoring application like this will be helpful for keeping tabs on business-related outlays like meals and transportation. Information such as the date, the vendor, the amount, and more can be easily compiled to present a full picture of an employee's per diem spending. Accountants and finance teams can save time and effort with an expense management application, as well as lessen the risk of errors that occur with manual tracking and reporting.
An expense management software like Fyle can automate and simplify various aspects of managing per diem expenses. For example, your employees can easily submit their expenses electronically, eliminating the need for manual paperwork and minimizing the chances of errors or lost receipts.
It comes with automated expense tracking, categorization, and receipt scanning features. This allows for seamless reconciliation and reimbursement processes, reducing administrative burdens.
Additionally, with Fyle’s mobile app, employees can capture and submit receipts on the go, increasing convenience and efficiency.
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3. Audit Expenses Regularly
Systematically examine submitted expenses to ensure they align with budgetary constraints and adhere to your organizational policies. By conducting these audits, you can identify potential issues or discrepancies early on and take appropriate measures to rectify them.
Auditing per diem expenses helps maintain financial control, prevents overspending, and promotes accountability. It also allows you to analyze expense trends and patterns, identifying areas where cost-saving measures can be implemented or where your employees may require additional guidance or training.
4. Train Staff
Equipping employees with adequate training to document and submit their per diem expenses accurately is vital for efficient management. Providing proactive training ensures that they understand the per diem policy and know how to comply with it.
Training sessions should ideally cover topics such as the purpose of per diem expenses, eligible expenses, proper documentation requirements, and submission procedures. They should also be educated on any specific tools or software used to manage per diem expenses.
Per Diem: Not an Alternative to Salary
Per diem payments, being non-taxable, might prompt some to consider opting for a lower salary with per diem instead of a higher salary without per diem. The answer is decidedly “no.” Per diem policies should not be structured in such a way that they serve to reclassify what ought to be wages as something different—in this instance, per diem.
This is because it is designed not as an additional compensation but as an expense reimbursement. The underlying assumption is that individuals traveling for work will incur daily costs for meals and incidentals. These costs are not intended to serve as an incentive for employees but rather to ensure they maintain a safe and healthy standard of living while traveling for work.
Is Per Diem the Same as a Stipend?
The daily allowance paid to an employee by an employer to cover their expenses while on a business trip or assignment is known as a per diem.
The fixed amount of money paid by an employer to an employee regularly is called a stipend. It can be paid weekly or monthly, or as a one-off payment for a specific project or task.
FAQs
What Is the Maximum Per Diem Allowed?
The maximum per diem allowed for travel within the Continental United States (CONUS) is $74 per day for travel to any high-cost locality and $64 for any other locality.
The maximum per diem allowed for travel outside of CONUS can vary depending on the location.
Source: 2022-2023 IRS Special Per Diem Rates
Is Per Diem Reported to the IRS?
Yes, per diem is reported to the IRS on Form 2106. However, per diem that is paid within the established federal per diem rates is not considered taxable income.
Do I Need to Save My Receipts If I Receive Per Diem?
It is always a good idea to keep receipts in case there is any question about your expenses. Here are some reasons to do so:
- Your employer may require receipts for all expenses, regardless of whether they are reimbursed through per diem or actual expense reimbursement.
- You may need to claim expenses that exceed the per diem amount.
- You may be audited by the IRS.
We know how messy manual receipt keeping can become. Fyle's receipt scanner is a receipt-keeping dream come true. Just take a pic, and Fyle automatically sorts it into your expense system. Say goodbye to messy receipts!
Over To You
Per diem policies are a valuable tool for managing business travel expenses and ensuring that your employees are fairly compensated for their expenses.
By defining per diem in the workplace, understanding how it works, and establishing clear policies and processes for managing per diem expenses, you can simplify your expense management process and promote a fairer workplace.
