What Is a Per Diem?

What is per diem in the workplace? 

The term “per diem” is used in business in two ways: allowances and employees. 

Per diem allowances

A per diem allowance is a daily stipend that a business gives an employee to cover specific expenses incurred as part of their job. This allowance typically covers lodging, meals and incidental expenses. Occasionally, it also covers transportation. These expenses also may provide tax deductions for the business.

A per diem allowance may be given ahead of time, or employees may be reimbursed after they travel (more on this later).  

Per diem employees

A per diem employee works with a company on a daily basis at a previously agreed-upon rate. This is a worker without a consistent or permanent role with the business; they’re typically called in as needed. Their day rate and hours are usually set in advance, though they can vary. 

Examples of per diem employees include travel nurses and substitute teachers. 

How do per diem travel rates work?

The federal government sets maximum per diem rates in three categories: lodging, food and incidentals. The General Services Administration (GSA) sets the standard per diem rate for each category on the federal level each fiscal year based on local market costs. 

Certain states and cities allow higher per diem payments, but they can’t be lower than the GSA rate. A company can also opt to give its employees a higher per diem rate. 

The current standard GSA per diem rate for lodging is $107 per day, not including taxes. For meals and incidental expenses, the standard GSA per diem tier rate is $59 to $79 per day, depending on where you’re traveling. In some cases, the per diem rate may be higher if the city’s cost of living is higher than average. On its own, the standard rate for incidental expenses is $5 per day. Incidentals can include fees and tips the employee may give to hotel staff or restaurant waitstaff. 

The food per diem a person receives depends on the location and meal. The GSA sets these standard per diem rates for each meal per person: 

• $13-$18 for breakfast
• $15-$20 for lunch
• $26-$36 for dinner 

If an employee doesn’t spend the allotted amount per meal, in most cases, they can keep the additional funds without any tax implications and without having to return the money. If the business trip has multiple employees traveling together, they can combine their per diem when having a meal together to save money. 

How do you pay out per diem? 

There are three primary per diem payout options: 

1. Reimburse employees after they submit an expense report. 

The expense report reimbursement method is the most common way to pay out per diem money. With this method, employees charge all travel expenses to personal cards and submit receipts with an expense report when they return. Then, the company reimburses the employee via a separate check or includes the money in their paycheck when processing payroll.

The expense report reimbursement method is the most accurate way for companies to deliver a per diem allowance, but employees must be able to cover their expenses out of pocket before the company reimburses them.

2. Give employees an upfront allowance.

You may opt to give employees the total amount of their per diem as a single check before their trip. This saves your team the trouble of completing and processing expense reports after the trip because employees receive their per diem as a lump sum. 

A downside to this method is that if an employee must extend their business travel, it can be challenging to obtain additional funds before they return. 

3. Distribute prepaid purchasing cards.

Employers can authorize team members to use a business credit card or purchasing card for the trip. When employees spend their per diem using a credit card, their receipts go directly to the company’s accounting department. However, the downside to this method is the risk that employees will overspend their per diem, in which case they must repay the overage or have it deducted from their paycheck.

What are the benefits of paying per diem?

These are a few key benefits of having a per diem policy in the workplace:

• Flexibility for employees: A per diem allowance gives employees some flexibility in their travel accommodations and meals. They can typically choose to spend their money however they’d like on any covered expense. For instance, if an employee prefers to stay in a nicer hotel and spend less money on meals (or vice versa), they can do so by balancing their per diem spending. 
• Easier budgeting: A set per diem rate helps managers budget travel expenses. Knowing how much they must allot for each employee makes it easier to create a clear and solid business budget for any trip.
• Less paperwork: When businesses give employees a set per diem, they cut down on the paperwork they need to verify business travel expenses. If the employer opts to give employees a check or charge card as the per diem method, it reduces paperwork for employees and accountants.
• Smarter spending: Employees who are frugal and savvy with their per diem can spend less than the allotted amount and pocket the additional money. On the other hand, when employers set per diem rates, they don’t have to worry that employees will overspend. 

What are the cons of paying per diem? 

There are also a few downsides to having a per diem policy in the workplace: 

• Incorrect prediction rates: Incorrect per diem estimates or unforeseen expenses, such as needing to take a taxi if public transit is inoperable, can cause employees to exceed their per diem allowance and thus require them to cover legitimate work costs out of pocket.
• Activity restrictions: Set per diem rates can restrict employees’ activities and potentially harm business deals. For example, an employee may be less willing to pick up the cost of drinks or a meal with a client if those costs exceed the per diem and would otherwise need to be met out of pocket.
• Unequal payments: A per diem can lead to unequal employee payments based on the time they start their day. For instance, an employee who travels in the morning will have more expenses that must be covered by the per diem than an employee who starts a business trip in the evening.

How can payroll software help with reimbursements?

The best payroll software and services can streamline all per diem payout methods, including direct deposit and paper checks, while simplifying payroll, ensuring accuracy and organizing expenses for tax season. 

Consider the following top solutions:

• Paychex: Paychex is a comprehensive payroll solution with plans to suit businesses of all sizes. Read our Paychex review to learn how this service can help you manage per diem reimbursements as well as personnel tasks such as onboarding and HR administration. 
• Gusto: Gusto is an excellent payroll tool for businesses that need additional HR support on top of accurate per diem reimbursements and payroll runs. Our Gusto Payroll review details how the platform’s benefits administration tools can save you time and money.  

What are the tax implications of per diem payouts?

If a company uses the federal government rates set by the GSA for their employees’ per diem, the employee has no additional payroll tax implications. In cases where a business offers a higher rate than what the federal government set, the excess amount is considered taxable income. This affects taxes for both employees and the company.

Because of the tax implications, most companies opt to use the per diem rates the government sets. This way, they can distribute the allotted amount without worrying about tax complications later. The IRS provides per diem payment guidance for employers about handling per diem expenses on their taxes, but if you’re unsure, it’s best to consult an accountant or bookkeeper.

How do you set a per diem policy?

When creating a per diem policy, determine the following:

• Set per diem rates. Decide whether you’ll follow the standard GSA rate or set your own.
• Determine a payout method. Decide how to track and pay each employee’s per diem allowance. For example, will you provide an upfront stipend check, issue a prepaid purchasing card, or reimburse employees after they submit an expense report?
• Document your per diem policy. Like any workplace policy, per diem policies must be documented clearly and shared with your entire workforce. Ideally, you’d incorporate your per diem policy into the employee handbook. 

“For employers to communicate policies surrounding compensation effectively, they first must create an overall strategy that is implemented from top leadership all the way to an entry-level employee,” said Rick Hammell, founder and chairman of Atlas. 

In addition, business leaders must maintain an open line of communication about these policies and manage their employees’ expectations accordingly. “Make sure employees are aware of how additional pay decisions are made, and if employees have questions or concerns, leadership is available to answer those,” Hammell said.

Instituting a per diem system

Per diem can be an effective method of covering employee expenses at predetermined rates. It helps to reduce paperwork and facilitates budgeting and smarter spending. However, instituting a per diem policy is not foolproof.

Businesses that are looking to implement a per diem policy should carefully consider a traveling employee’s estimated costs, paying close attention to the location. They should also develop policies for covering unexpected costs and determine how employees will be reimbursed if they use their own money. Finally, employers should monitor set GSA rates, which are updated each fiscal year. 

Jeremy Bender contributed to this article. Source articles were conducted for a previous version of this article.