When it comes to paying for business-related expenses for travel, companies have a number of options: providing employees with business credit cards, reimbursing them for actual expenses incurred using travel and expense reports or paying them “per diems.”
Per diems provide employees with a set allowance for each day spent away from home and eliminate the need to manage myriad receipts for expenses. They simplify paperwork for the business and for employees when dealing with ordinary expenditures for lodging, meals and incidentals such as tips and fees. When used as part of a comprehensive travel policy, per diems provide a simple way to ensure travel expenses are tax deductible for the business and that employees don’t get taxed on the money they are reimbursed.
What Does Per Diem Mean?
Per diem most commonly refers to a fixed daily allowance an organization provides to employees or contract workers to cover business travel expenses. The word is derived from Latin and translates to “by the day.”
The term per diem is also sometimes used to describe an employment arrangement whereby workers—such as substitute teachers, nurses or photographers—are paid a day rate for temporary or on-call work. For an employer, per diem employment frequently offers greater flexibility with regard to labor costs and scheduling.
What Does Per Diem Cover?
Per diems cover the cost of lodging, meals and incidentals for each day of business travel. Each expense has a predetermined rate, based on the average costs associated with specific locations. Under this model, a business typically pays partial per diems for the first and last day of a trip, since the employee may spend part of those days at home or at the office.
Here are two examples of per diems based on rates from the United States General Services Administration (GSA):
What Are the Per Diem Travel Rates? Who Sets Them?
The GSA publishes per diem rates every year. The government uses these rates to reimburse federal employees for work-related travel within the U.S., and they are also often adopted by the private sector. That’s because the per diem rates businesses use to reimburse employees for lodging, meals and incidentals must be equal to or less than those set by the federal government in order to be tax deductible for the business and to avoid a tax bill for employees.
The GSA rates go into effect annually on Oct. 1 and are based on the most up-to-date cost data for various cities and counties. There is a standard rate that applies to about 2,600 counties in the United States and more than 300 location-specific rates for especially expensive areas. Per diem rates vary significantly—not surprisingly, a city like New York or Los Angeles has a higher per diem rate than a smaller city or town.
Federal Per Diem Rates
Per diem rates for locations within the continental United States are available at the GSA website. Rates for Alaska, Hawaii, U.S. territories and possessions, U.S. military installations and foreign countries are available through the U.S. Defense Travel Management Office; those for foreign countries can also be found on the U.S. Department of State website.
The GSA per diem webpage and its mobile app offer an index searchable by city, state and zip code. The index is broken down into two basic categories: “Lodging Rates” and “Meals & Incidentals Expense (M&IE) Rates.” Both the standard rate and location-specific rates display month-by-month figures (e.g., the location-specific lodging rate for Chicago is $134 in March 2021 and $216 in June). The index also allows you to input specific travel dates for a specific place and receive the total per diem for the defined period of time.
Per diem rates vary significantly across states and cities. For example, the standard GSA-established rate for lodging (excluding taxes) in 2021 is $96 per night, but for the Los Angeles area, it’s $182 per night (for most months; the amount changes based on the month in which you’re traveling). The standard rate for meals is $55, but in Los Angeles, it’s usually $66.
How Does Per Diem Work?
A company’s travel guidelines should outline a per diem policy that clearly defines what is covered and the rates used for payment or reimbursement for all relevant locations.
Employees may spend up to the allowance each day, submitting daily reports with receipts for lodging, to receive the authorized per diem. They can typically pocket the difference if spending falls below the limit.
What Does Per Diem Reimbursement Mean for Taxes?
U.S. tax code allows businesses to deduct ordinary and reasonable expenses related to employee travel. This includes per diems. However, an organization must establish an “accountable plan,” per IRS guidelines, to substantiate the expenses. This simply means that the expenses are related directly to business, employees must adequately account for their expenses (by submitting a daily report) and employees must return any excess reimbursement (above government-set daily per diem amounts) within a reasonable amount of time.
It’s not necessary for employees to submit meal and incidental receipts if they receive a per diem, though the IRS does require lodging receipts. Per diems are not taxable for employees as long as the required daily reports contain the following information:
- Business purpose of the expense
- Date, time, place and amount of the expense
- Receipts for lodging
How Do Businesses Typically Pay Per Diem Rates?
Employees receiving per diems must submit reports within 60 days of travel in order to avoid tax liability. If employees don’t submit reports, the IRS considers per diem payments taxable income. Companies typically pay per diems to employees electronically or by check, after receiving employee reports. They are issued as payments separate from wages and are not subject to taxes, including Federal Insurance Contributions Act (FICA) tax.
Benefits of Per Diem
The ability to reimburse travel expenses on a per diem basis simplifies expense reporting and accounting, while allowing organizations to better predict the costs of employee travel. This saves accounting time and paperwork. When employees are allowed to keep unspent money (as long as it falls below the government’s effective per diem rates)—it serves as an incentive to keep costs low and minimize expenses for the company.