What is Per Diem Expense & How is Per Diem Rate Calculated?

When employees have travel-related business expenses, you might choose to cover these costs. One way to do this is by providing per diem pay. 

Per diem is a Latin term meaning “for each day.” It refers to a daily allowance given to employees while they are on business trips. Employers provide per diem allowances to reimburse employees for their out-of-pocket expenses like travel, lodging, and food incurred while working. 

This guide will explain per diem pay, its benefits for both employers and employees and how it varies between countries.

What is Per Diem?

Per diem is a daily allowance provided to employees to cover expenses incurred during business travel or work-related activities. This allowance typically includes lodging, meals, and incidental costs. By offering per diem, employers aim to ensure that employees are adequately compensated for their expenses and can focus on their work without financial burden while traveling for business purposes. Also, it simplifies the reimbursement process by eliminating the need for employees to submit receipts for each expense.

Per diem rates vary by location and are often set by government agencies or organizations to reflect the average cost of living and travel expenses in that area. Additionally, per diem can provide employees greater flexibility and autonomy in managing travel expenses. However, administrators need to establish clear guidelines and policies regarding per diem to ensure fair and consistent treatment of employees.

What does Per Diem Cover?

Per diem is a daily allowance employees receive during business trips to cover various expenses. Typically, per diem expenses include:

• Meals: Meals encompass expenses for breakfast, lunch, dinner, and snacks or coffee breaks. 
• Lodging: Lodging includes hotel rooms, short-term rentals, or other accommodations required during the trip, along with taxes or fees like resort charges. 
• Incidentals. Incidentals may cover transportation to and from the workplace, parking fees, and laundry services.

However, certain costs are typically not reimbursed through per diem payments. Personal items, such as toiletries, clothing, and entertainment, are generally excluded as they are unrelated to work duties. Similarly, non-work-related activities like sightseeing or personal hobbies are not covered by per diem. Additionally, if an employee’s spending is considered excessive or unreasonable, employers may choose to refuse reimbursement for some or all of the associated expenses.

How does Per Diem Work?

Per diem, a common practice in business travel simplifies expense management for both employers and employees. Here’s a breakdown of how it operates:

1. Per Diem Policy is Established by Employer

Employers establish a per diem policy that outlines the daily allowance provided to employees for travel-related expenses. This expense policy typically includes the per diem rates for different locations, which are based on factors like cost of living and industry standards. Employers also define what expenses are covered under per diem, such as meals, lodging, and incidentals.

Moreover, Different governments have their own approved per diem allowance benchmarks, which set caps or limits on factors like maximum lodging costs, cost of living range, and travel regulations. However, individual cases can be exempted and evaluated based on typical costs.

2. Per Diem Expense Report Submitted by Employee

When employees incur expenses during business travel, they keep track of these expenses and submit an expense report to their employer. As the per diem expenses have a fixed rate for any business travel expenses, employees generally don’t need to fill out extensive reports. The expense report includes details such as the date, time, and location of the expense, as well as the amount spent and the business purpose of the expense. 

3. Per Diem Expense Reimbursement Done by Employer: 

Upon receiving the expense report, the employer reviews the expenses to ensure they comply with the per diem policy. If the expenses are deemed eligible, the employer reimburses the employee for the expenses up to the per diem rate. 

Reimbursement can be done through various methods, such as direct deposit, payroll deduction, or issuing a check. Any expenses that exceed the per diem rate may require additional approval or documentation before reimbursement.

How are Per Diem Rates Calculated?

Per diem rates are influenced by various factors, including government regulations, company policies, cost of living differences, and industry norms. Understanding how these factors impact per diem rates can help organizations establish fair and effective policies.

1. Government Rates
One common method is to adhere to government-set per diem rates, such as those established by the General Services Administration (GSA) in the United States or the Homeland Revenue and Customs (HMRC) in the UK. These standardized rates provide a simple, uniform approach to per diem, but they may not always meet the specific needs of employees and can be inflexible.

2. Per Cost of Living Based Rates
Per diem rates often reflect the cost of living in different locations. Employees traveling to expensive cities like New York may receive higher per diem rates than those traveling to more affordable areas like Oklahoma. This adjustment ensures that employees are adequately reimbursed for their expenses based on the location of their business travel.

3. Industry Rates
Certain industries have established per diem rates based on the typical expenses incurred by employees. Researching industry standards can help organizations determine appropriate per diem rates that align with the expectations of their workforce.

4. Company Rates
Some organizations prefer to set their own per diem rates based on internal considerations, such as historical travel expense data. While this approach offers flexibility, it can be more complex to administer and may require additional resources for data analysis and rate setting.

Benefits of Per Diem

Benefit for Employers

1. Streamlined Expense Tracking: Providing a fixed per diem rate simplifies expense tracking and management, eliminating the need to review individual receipts.

2. Cost Control and Compliance: Setting per diem rates helps control costs, reduce tax burdens, and ensure compliance with regulations by establishing a fixed daily allowance.

3. Talent Attraction and Retention: Offering competitive per diem rates can make a company more appealing to potential employees and help retain current staff.

4. Reduced Administrative Burden: Using per diem rates can reduce paperwork and the time spent processing expense reports, freeing up resources for other tasks.

Benefit for Employees

1. Financial Predictability: Knowing the fixed per diem rate allows employees to plan their spending effectively while traveling.

2. Flexibility: Per diem rates offer employees the flexibility to allocate their daily spending as they see fit, enhancing their travel experience.

3. Reduced Documentation: Per diem rates minimize the need for employees to keep and submit detailed receipts and expense reports.

4. Potential Tax Advantages: In some cases, per diem payments may be considered non-taxable income, offering potential tax advantages based on applicable tax laws and circumstances.

Closing Thoughts

Understanding per diem and its various aspects is crucial for both employers and employees involved in business travel. While per diem payments can simplify expense tracking and provide financial predictability for employees, they also offer spend control advantages for employers. 

Leveraging automation solutions such as Peakflo Travel & Expense Management can further streamline the entire travel and expense process. Peakflo not only assists in setting up policies but also provides control over employee submissions, approvals, and reimbursements for per diem and other expenses. It’s a one-stop shop where organizations can effectively manage their travel expenses, ensure compliance, and provide a seamless experience for employees.

FAQ

Are Per Diem Payments Taxable?

Per diem payments can be taxable or non-taxable, depending on the purpose of travel and tax regulations. Generally, for business-related travel, per diem payments are non-taxable if they adhere to government guidelines for accountable plans.

Is Per Diem Tax Deductible for Employers?

Per diem allowance qualifies as a tax deduction for employers. Companies can potentially recover up to 50% of per diem expenses spent on meals and incidentals, with accommodation costs fully deductible within standardized limits. To claim these deductions, employers must maintain proper expense reports for submission during tax filing.

Who Is Eligible for Per Diem?

Eligibility for per diem varies depending on the organization or governing body. Generally, employees required to travel for business purposes or those working on specific projects away from their usual workplace may qualify.

Can Per Diem Rates Change Over Time?

Yes, per diem rates can change due to factors like inflation, fluctuations in travel costs, or updates to government regulations. It’s essential to stay informed about the latest per diem rates applicable to your travel destinations.