Per Diem: A Guide to Understanding Reimbursements and Rate

Per diem is a type of allowance or compensation that companies provide to their employees and it plays an important role in simplifying expense management for businesses. Companies mostly provide per diem payments as allowances or reimbursements to help cover essential expenses for business travel. They also provide it to employees who cover shifts on a temporary basis.

Having a comprehensive understanding of the concept of ‘per diem’ not only helps ensure financial transparency but also helps improve employee satisfaction and productivity.

To help you understand it better, this guide will walk you through the basics of per diem allowance, who qualifies for this allowance, the latest per diem rates, and how to calculate it. 

What Does Per Diem Mean? 

Per diem is a Latin term that literally translates to ‘per day’ or ‘by the day’. It refers to the daily allowance that an employer pays to their employees to cover their business expenses, including meals, accommodations, travel, etc. It’s also popularly used in compensation systems where employees get paid per day instead of weekly or monthly.

This way, the meaning of per diem is commonly interpreted in two ways: 

• Per Diem for Business Travel: When employees travel for business, whether internationally or locally, employers cover their costs by providing a per diem allowance.
• Per Diem Employment: A compensation system in which workers receive daily or per day wages.

Note: While the per diem employment system is prevalent, per diem is more commonly known as a business travel allowance. Going forward, for all purposes in this blog, we’ll be discussing per diem in the context of business travel allowance.

Per Diem Reimbursements: Business and Travel

Per diem for business travel is a fixed daily allowance for traveling employees. It covers expenses related to their meals, accommodation, mileage, and other incidentals (also known as M&IE).

Business travel is growing in the United States, which directly reflects increased expenses. When employees travel for business, companies need to ensure that their daily expenses are taken care of. However, they have to track these expenses to ensure that the company limit isn’t exceeded. That’s where per diem payment helps.

An employee can receive per diem payment at the beginning of the trip in the form of credit cards/checks or claim reimbursements for the expenses incurred during the trip.

Companies put per diem policies in place to avoid all the hassles of handling receipts and cutting down on admin work, lowering their tax burdens in the process.

Who Receives Per Diem?

Employees receive this allowance for traveling to different cities and even for international travel. Employers can also provide per diem allowances to contractors and freelancers if they have to travel for work purposes.

Apart from private sector employees, this allowance is provided to federal government employees as well as self-employed individuals or sole proprietors. Let’s have a look at how it is set for each of these categories:

Per Diem for Federal Government Employees

Federal government employees are protected under the 5 U.S.C. § 5702 law. The law authorizes the Administrator of the U.S. General Services Administration (GSA) to establish a system to reimburse federal employees for lodging, meals, and other incidentals in case of official travel. The law protects federal employees by helping reimburse them fairly for travel expenses.

It governs how GSA sets the per diem rates in the present day and aids in establishing locality-based rates for the expenses to be incurred, which are subject to a reporting obligation to Congress.

Rates for Federal Employees

The per diem scheme for federal employees provides a “standard rate” that applies to about 85% of the counties in the U.S. Below are the two cases of per diem rates applicable for federal employees:

Level 1: If and when a Federal agency, on behalf of its employees, feels that the standard rate of a particular area is inadequate to cover the costs of travel as intended by law. 

In such cases, according to GSA’s policy, a study will be conducted on the locality to determine whether to treat the area under study as a “non-standard”. If a change is required after carrying out the study, it’ll be implemented appropriately. There are processes set in place by the GSA to annually review and update both standard and non-standard areas.

Level 2: This comes into play if and when it’s found that the per diem is either less or equal to the standard rate set by the GSA. Here, the cost of travel is not considered a part of the Federal employee’s earnings and isn’t deemed taxable. It must be noted though, that Federal employees must still have to provide a business expense report to their employer to verify their expenses.

The employee must file this report with the employer within 60 days from the last day of the trip and provide the following information:

1. Purpose of expense as related to the business travel
2. Place, date, time, and amount of the expenses incurred
3. Lodging receipts
4. Receipts for out-of-pocket expenses

Note: If Federal employees receive a per diem allowance, they don’t have to submit meal and incidental receipts.

Per Diem for Private Employees

Many privately-held businesses pay per diem employees at the rates set by the GSA, but they can choose to pay above the standard rate. For instance, business travel policies differ from company to company, and they can choose to reimburse various non-standard expenses, such as room service, entertainment, etc., as part of the allowance.

Per Diem for Self-Employed

Per diem policies work differently for self-employed individuals or sole proprietors. In this case, the only reimbursement that the individual can claim is for meals. Yet, it does not hinder them from managing their expenses effectively when traveling for work.

Self-employed persons, although not entitled to a per diem allowance in the conventional sense, can claim legitimate business travel expenses for tax deductions, which reduces their taxable income and thus potentially decreases their overall tax liability.

For self-employed people who conduct business away from their regular area of work, the expenses for lodging, meals, transportation, and other incidentals can be tax-deductible.

Tax Calculation

The expenses are calculated as deductions on their tax returns instead of a fixed per diem payment. This must, however, meet the criteria set by tax authorities, which are as follows:

1. All expenses made during the trip must be connected to the individual’s line of work. 
2. All receipts and records of the expenses incurred during the business trip must be available in case an audit is performed to substantiate the deductions.
3. All expenses made must be essential for conducting the business.
4. Expenses shall be tax-deductible based on the trip’s duration as well as the location a self-employed individual travels to. Expenses incurred during an overnight business trip are more likely to be tax deductible.

The self-employed can deduct these expenses by either claiming the actual expenses or using the standard mileage rate set by the IRS. The standard per-mile rate takes into consideration expenses made for gas, car repairs, and other vehicle expenses.

How Do Employers Pay Per Diem?

Per diem is paid as per policies and rates that differ for every company. Generally, per diem rates are divided into 3 main types which are:

1. Fixed per diem rates
2. Partial per diem rates
3. Out-of-pocket per diem rates

Let’s dive deeper to understand what each type is all about.

Fixed Per Diem Rates

As the name suggests, it’s a predetermined amount that’s based on aspects like industry standards, location, and the time of year. These rates allow employees to spend within the allowance limit given by the company. 

This eliminates their requirement to submit receipts or documentation for every payment. Companies cover fixed per diem rates via prepayment to the employee or through a corporate credit card.

Partial Per Diem Rates

When companies offer a partial per diem allowance, they cover a part of the daily expenses, while the employee pays the rest. Companies apply this type of per diem payment for longer business trips when employees spend only part of their day in the office.

Out-Of-Pocket Per Diem Rates

The per diem payment requires employees to pay for all expenses during a business trip. Then, they get reimbursed for it by submitting receipts to their employer. 

This type of payment is more complicated owing to the paperwork and recordkeeping involved. This payment is useful for companies when they have to gauge an employee’s expenses in case these don’t fit their standard rates.

Different Types of Per Diem Allowances

There are three types of per diem allowances. Let’s define each one of them in detail.

Government Per Diem

These are standard rates established by the US GSA and meant for federal employees. However, other businesses use them as well.

Corporate Per Diem

This is the allowance that businesses issue to their employees. These rates could be higher or lower than the federal rates based on the requirements of a business.

International Per Diem

These rates are allowances that businesses give to employees who are traveling outside of the United States. Employers adjust international per diem rates accordingly to account for cost differences in various countries.

Who Qualifies for Per Diem?

If an employee works for a corporation or a federal agency and has to travel for business purposes that require them to stay overnight, then they qualify for a per diem. Other than that, individuals hired to fill job roles for full or part-time employees on their leave days are also eligible for per diem allowance.

Generally, the rates are based on specific circumstances, government regulations, and company policies.

Did You Know? Per diem employees are entitled to receive overtime pay and the minimum wage.

Per Diem Rates for 2024

On October 1, 2023, the IRS published an annual update of per diem rates, applicable for employees who travel for business on or after this date. The new rates specifically include expenses incurred in the following areas:

1. The special transportation industry M&IE
2. Deductions only for incidental expenses
3. List of high-cost localities and their rates for the high-low substantiation method

Let’s have a look at each one of them in detail:

The Special Transportation Industry M&IE

As per the annual update by the IRS, the M&IE allowance for employees in the transportation industry has been set at $69 for any locality they travel to in the Continental United States (CONUS). If the employee travels anywhere outside the CONUS, the allowance is set at $74.

The rates for M&IE include expenses related to room service, all meals, dry cleaning, laundry, and fees and tips for persons like food servers and luggage handlers.

Deductions for Incidental Expenses Only

Irrespective of the location for business travel, the incidental expenses rate is still $5 per day. These expenses include expenses paid at the employee’s place of stay, also comprising fees and tips paid towards the hotel staff.

Rates for the High-Low Substantiation Method

The IRS adopts the high-low substantiation method to ensure that employees who travel for business receive fair compensation. This is especially important because business travel can take you to both low- and high-cost cities. Hence, the IRS per diem rates include high and low compensation numbers.

These rates fixed by the IRS for the high-low substantiation method are set at $309 for travel to any high-cost location and $214 for locations within the CONUS.

According to the new annual update for 2023-2024, New York City, Boston, and San Francisco have made it to the list of high-cost-of-living areas. 

For more details on the rates and lists, you can visit the General Services Administration (GSA) website and use GSA’s Per Diem Calculator to check the rates based on city, travel dates, and fiscal year.

How to Calculate Per Diem Allowance

For per diem calculation, it’s necessary to determine appropriate rates, understand the various components, and comply with applicable legislation.

Factors to Be Considered

Let’s take a look at some of the factors that need to be considered when calculating per diem.

Purpose of the Travel

Organizations and government agencies set the per diem rules and rates based on the purpose of travel.

Travel Location

Due to the differences in the cost of living, the location traveled to plays an important role in the calculation of the per diem rate. You need to know where the individual is going to travel to calculate the per diem accurately.

Travel Components

The following components are usually considered for calculating per diem during business travel:

1. Accommodation: This includes hotel charges that may be an absolute rate or the actual cost up to a certain limit set by the company.
2. Meals: Depending on the time of day, this can be divided into breakfast, lunch, and dinner. Gratuities and taxes are often part of these rates.
3. Incidental expenses: Minor expenses such as tips, transportation between the hotel and the place of work, and other miscellaneous costs can be covered here.

Standard Rates

Industry associations, official government websites, and company policies usually provide the rates allotted for employees. The United States General Services Administration routinely sets rates for government per diem allowances, which are adjusted annually.

Calculating the Per Diem

While calculating per diem, the number of days spent in business travel for a particular location is multiplied by the rates applicable. Here’s how it’s done: 

1. Multiply the accommodation rates by the number of days or nights spent at a particular location during official travel in case a flat rate is used. In case of actual costs, sum up the daily lodging expenses.
2. Daily meal allowances are calculated for each meal by summing them up. Organizations might sometimes apply a percentage breakdown for the total daily meal allowance for each meal.
3. A flat daily rate is usually used to calculate incidentals. The incidental rates are summed up for the duration of the travel.
4. The total per diem is calculated by summing the costs for lodging, meals, and incidentals for each day.

Adjustments and Regulations to Be Considered For instance, employers can modify per diem rates to calculate partial travel days. This could be either 75% or 50% of the total amount paid for full travel days. Other than that, some organizations might reduce the rates for weekends and holidays. Depending on the country and the nature of the trip, the payments may be taxable or nontaxable. It’s always best to consult a tax professional to understand the tax implications. Also, there may be specific per diem policies in different sectors and organizations. Rather than use per diem rates, some could reimburse the actual costs.

Benefits of Setting Per Diem Rates

Per diem rates can offer many benefits to both employers and employees. Let’s have a look at these:

Benefits for Employers

• A fixed rate streamlines expense tracking since there’s no requirement for reviewing individual receipts separately.
• It can help employers reduce their tax burden, control costs, and ensure compliance.
• Since the rates are often competitive, they attract highly skilled employees while retaining existing staff.
• Fixed per diem rates help reduce administrative workload, which gives the employer more time to attend to other important tasks.
• Employees can submit a more detailed expense report with a fixed rate since it eliminates the need for tracking receipts. 

Benefits for Employees

• With a fixed rate, employees have a clear understanding of their finances, which can aid them in spending more wisely. 
• Employees can plan their daily spending as is best suited for them, thus leading to a more pleasant travel experience.
• Such payments are beneficial for employees since they may be considered non-taxable based on specific circumstances and applicable tax laws.
• Higher incentive rates due to last-minute requirements to fill in gaps for part-time or full-time employees who might be on leave, especially during the holidays. 
• Employees who work per diem have more flexibility in choosing whether to accept a certain job offer. 
• Working per diem gives individuals the opportunity to explore different careers since they get to work in different environments and roles.
• The employment type does not hinder other activities that they’re doing since there are no predefined schedules. They can keep their license active and functioning while working for backup services as a per diem employee.

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Bottom Line

To conclude, we’ve discussed what’s the meaning of a per diem job and per diem for business travel. Understanding this makes it easy to see that per diem policies play a key role in simplifying expense management for businesses and staff. These daily allowances are a straightforward and convenient way to cover essential travel expenses during work-related journeys, avoiding the need for detailed expense reporting.

Such policies offer simplicity while helping comply with the rules and tax implications set by the GSA. A valuable tool for controlling costs and fair compensation, per diem has the right combination of flexibility and practicality when dealing with the financial aspects of business travel.