What are per diems? Definition and how per diem rates work

There are a few options available for paying your employees for business-related travel expenses: you can reimburse them for actual expenses incurred and submitted through an expense report, you can supply employees with business credit cards, or you can pay them per diem.  

The per diem option provides employees with a fixed daily allowance to cover their travel costs and eliminates the need to manage high volumes of receipts required for expense claims. It saves accounting time and paperwork for the business and for employees when dealing with expenses. It also allows the business to better predict the costs of employee travel.  

When used as part of a comprehensive travel policy, per diem reimbursement is a simple way to ensure travel expenses are tax deductible for the business and that employees are not taxed on the money they are reimbursed.  

In this article, we will cover: 

• What does per diem cover? Benefits of per diems 
• Federal per diem rates  
• How do businesses pay per diem rates? How is per diem taxed 
• Per diems for the self-employed 
• Types of per diem payments 
• What is a per diem job? 
• Advantages of a per diem job 
• What are the differences between a per diem and part-time job? 
• Final thoughts 
• Per diem FAQs 

What does per diem cover?  

Per diem reimbursement covers the cost of meals, lodgings and any other travel incidentals such as parking fees for each day of business travel. Each expense has a predetermined rate as further explained below, based on the average costs associated with specific locations. Typically, a business pays a partial per diem rate for the first and last day of a trip, as the employee may spend part of those days at the office or at home.  

Companies need to provide travel guidelines for their employees, containing a per diem policy clearly defining what is covered, and the rates used for all relevant locations.  

Employees must submit daily reports to receive the reimbursement, and can spend up to their daily allowance limit. Employees can usually keep the difference if they spend under their limit, providing a valuable incentive to keep costs low and minimize expenses for the company.  

Benefits of per diems 

Per diem offers several benefits for both employees and employers: 

1. Simplified Expense management 

Instead of keeping track of individual receipts for every meal and incidental expense, per diem offers a fixed daily allowance to cover costs. This time and admin by reducing expense reporting. 

2. Cost Control and budgeting  

Predetermined daily limits for travel expenses helps businesses control costs by providing a clear framework for reimbursable expenses.  

3. Tax benefits  

For employees, per diem payments are often non-taxable if they meet the IRS guidelines for accountable plans, reducing their taxable income. For employers, per diem payments are generally tax-deductible as a business expense, providing potential tax savings. 

4. Consistency and standardization 

Per diem rates provide a consistent and standardized approach to reimbursing travel expenses. Regardless of the location or duration of the trip, employees receive the same daily allowance (based on the two types of per diem payment shared below). This avoids discrepancies over reimbursement amounts and ensures fairness among employees. 

5. Flexibility for employees  

Employees get the freedom to decide how to allocate the daily allowance between meals, lodging, and incidentals, as long as the total amount remains within the per diem rate. This flexibility allows employees to adapt to their specific needs and preferences during travel. 

6. Time and productivity 

Per diem saves time for employees by allowing them to focus more on their work and productivity during business trips, while employers can allocate resources to more strategic activities rather than expense management. 

7. Incentivizing cost-conscious behavior 

A fixed daily allowance motivates employees to make cost-conscious decisions, such as choosing reasonably priced meals and accommodation. 

Federal per diem rates  

The United States General Services Administration (GSA) publishes per diem rates every year for locations within the continental United States. Rates for Alaska, Hawaii, U.S. territories, U.S. military installations and foreign countries are available through the United States Defense Travel Management Office.  

Although the government uses these rates to reimburse federal employees for work-related travel, they are also often adopted by the private sector. That’s because businesses want per diem payments to be tax deductible and not be subject to income tax for employees, which means their rates cannot be higher than those set by the federal government.  

The GSA rates are calculated annually and go into effect on October 1st, based on the most up-to-date cost data for various cities and counties. The two types of rate categories are: “Lodging Rates” and “Meals & Incidentals Expense Rates.” These are further broken down into standard and location-specific rates, and are displayed by month (e.g., the location-specific lodging rate for Boston is $185 in February 2022 and $264 in July). The index also has a travel tool which calculates the total per diem for your specified travel dates and location.  

Per diem rates take into account the significant difference in living costs across states and cities. For example, the standard rate for lodging in 2022 is $96 per night, but for New York City, it ranges between $159 and $286 across the year. The rate for meals is usually $79 in New York City, whereas the standard rate is only $59.  

How do businesses pay per diem rates?  

Companies can make these payments to employees either electronically or by check, and they should be issued separately from wages. Per diem reimbursements are not subject to taxes, including Federal Insurance Contributions Act (FICA) tax, however the IRS requires employees to submit their reports within 60 days of travel, otherwise the payments will be considered taxable income.  

How is per diem taxed?  

Employee travel expenses, including per diem reimbursements, are allowable business deductions provided they are backed up with an “accountable plan”. The IRS guidelines require expenses are business related, are adequately accounted for by a daily report submitted by employees, and any amounts exceeding the GSA set rates are returned by the employee within a reasonable time frame.  

Per diem payments are not taxable for employees provided the required daily reports contain the following information: Business purpose of the expense, date, time, place and amount of the expense, and receipts for lodging. Employees don’t need to submit meal or incidental receipts with the report.  

Per diems for the self-employed 

Self-employed people can also use per diems to manage their travel expenses. This can be useful if you find yourself frequently attending conferences, meeting clients, or conducting site visits.  

Instead of being paid by an employer, you simply claim per diem as a deductible business expense. This means you can deduct these payments from your taxable income, reducing your overall tax liability. 

Per diem rates should be set in line with The General Services Administration (GSA) and you should keep track of your travel dates, destinations, and the purpose of each trip. Document your expenses for meals, lodging, and incidental costs. 

While per diem eliminates the need for detailed receipts, it’s still best to retain receipts for larger expenses or situations where additional documentation may be required. 

Types of per diem payments 

There are two types of per diem payments: high-low and regular. High-low per diems are used when an employee travels to a location with a high cost of living. Regular per diems are used for all other travel. 

This allows businesses to place destinations in one of two categories, instead of having to set a per diem rate for each specific location. They do this based on factors such as regional cost-of-living data, average expenses in different areas, and internal policies.  

This approach makes the reimbursement process much quicker and allows for more standardization. 

What is a per diem job?  

A per diem job describes a contractor role or work completed on an as-needed basis. Per diem employees are paid a day rate, and the hours often vary from week to week. Since they aren’t regular, full-time staff, per diem employees don’t receive benefits like healthcare, retirement plans, or paid time off.  

This is a common type of role in the healthcare and education industries. Typically, schools pay substitute teachers at a per diem rate, which means they pay by work days rather than by hours worked. The substitute teacher may work for one day or multiple days depending on the needs of the school and the substitute’s availability.  

In the healthcare industry, a travel nurse is a per diem role, as travel nurses typically take short term contracts with hospitals requiring extra coverage. Hospitals or clinics pay these shifts at a per diem rate, which averages out to a higher salary than a typical nurse’s salary. Travel nurses might work with a staffing agency who can offer them contracts in different hospitals across the country.  

Advantages of a per diem job    

Per diem roles obviously help companies fill gaps in coverage, but there are also many benefits for a per diem employee as well. Some employee benefits include:  

• Higher salary: Per diem jobs offer higher rates because the roles generally do not include benefits, also employers sometimes offer premium pay for shifts around holidays or other busy periods to incentivize employees to take these shifts.  

• Flexible schedule: A per diem employee can choose the number of shifts they take per week, which is especially helpful for students and others balancing responsibilities outside of work. A per diem employee also has no obligation to an employer after they complete their contract, allowing for time off between contracts.  

• Gaining new experience: Employees can expand their skill set with each new role. Many workplaces use different systems, so they will have the opportunity to learn new technology, plus they will gain confidence interacting with new groups of people in new environments.  

• Travel: Per diem jobs also allow employees to experience new locations, and can help them test out a new work place before making a commitment to a permanent role.  

What are the differences between a per diem and part-time job?  

A part-time employee works a set number of hours in a pay period, generally fewer than 30 hours per week, and receives benefits based on how many hours he or she works.  

On the other hand, a per diem employee’s work hours will vary from week to week depending on the employer’s need and how many shifts the employee wishes to take.  

A per diem role pays by the day and is usually not eligible for employer benefits, therefore the per diem rate is generally higher to compensate for lack of benefits.  

Final thoughts  

Every employer wants a happy and engaged team, and two important components are building streamlined processes and job flexibility. So, consider whether introducing one or both types of per diem could help take your business to the next level.  

Per diem FAQs 

Are per diem payments taxable?  

Per diem payments can be taxable or non-taxable depending on the purpose of travel and the governing tax regulations. For business-related travel, per diem payments are often non-taxable if they meet the IRS guidelines for accountable plans. 

What expenses does per diem cover?  

Per diem typically covers expenses related to meals, lodging, and incidental costs incurred during travel. It provides a standardized daily allowance to cover these expenses without requiring detailed receipts for each individual expense. 

Who is eligible for per diem?  

This varies depending on the organization or governing body. Generally, employees who are required to travel for business purposes or people working on specific projects away from their regular workplace may be eligible. 

Can per diem rates change over time?  

Yes, they can change due to factors such as inflation, changes in travel costs, or updates to government regulations. Always stay informed about the latest per diem rates applicable to your travel destinations. 

How do I claim per diem expenses?  

You usually need to maintain accurate records of your travel, including dates, destinations, and the purpose of the trip. Some organizations may require staff to submit expense reports or use specific forms for reimbursement.  

Are there per diem rates for international travel?  

Yes. When traveling internationally, per diem rates may vary based on the country and city you visit, considering factors like exchange rates and local costs. 

Can per diem be combined with other travel expenses?  

Yes. It can often be combined with other expenses such as transportation costs (e.g. airfare, taxi fares) and business-related expenses (e.g. conference registration fees).