Per Diem

What is per diem?

The term "per diem" is derived from Latin and translates to "per day" or "for each day." Per diem is the daily amount given to employees by their employers to cover business travel expenses.

Employers provide employees with a certain sum of money to cover daily living costs, such as accommodation, food, and incidentals. A per diem may only be used to pay for meals and incidental expenditures.

Many times, workers who often travel for business anticipate receiving pay while away from the office. This payment serves to defray the expense of traveling for work-related purposes.

Employees like per diem because it allows them to travel for work without having to pay for it themselves. On the other hand, it is not a compulsion for employers to provide per diem to their staff.

What does per diem cover?

Expenses often covered by a per-diem arrangement include:

• Lodging
• Meals
• Incidental expenses (tips, fees, dry cleaning)

How Does Per Diem Work?

The use of per diem is an alternative to the actual expense reimbursement approach. Employers pay employees on a per diem basis rather than the exact amount spent on a trip (actual expenditure). 

Employers might offer per diem in advance before employees travel for work purposes, or they can also provide per diem after.

Employers are still required to collect expenditure reports even when they are just providing employees with a predetermined per diem rate as opposed to actual compensation. As opposed to when businesses compensate employees using the actual expenditure approach, less information is required on the expense reports.

Within 60 days of utilizing their per diem, employees are obliged to submit an expenditure report and hand it over to management.

How to determine per diem rates?

Per diem rates can be calculated in two distinct ways.

1. Standard Per Diem Rate Method

The first method entails calculating your rates in accordance with the per diem allowances standardized by the government of your nation. For instance, GSA regulations in the United States' continental territory (CONUS) or HMRC regulations in the United Kingdom (UK).

You may adopt this simple, "one-size-fits-all" method with little to no administrative hassle. All you have to do is study the rates and put them into practice. Adopting uniform rates, however, could be simple, but it frequently falls short of what employees demand, is rigid, and lacks flexibility.

      2.  Company-Determined Rates

Another way is for the corporate administration to decide what per diem fees to provide for traveling staff. Usually, historical travel spending data is used to compute these rates. Although this method does provide some flexibility, it is far more expensive and labor-intensive. Additionally, there is a need for data that is not always readily available.

What are Per Diem Travel Rates? Who sets them?

The GSA publishes per diem rates each year. The government pays federal employees who travel inside the country on official business using these rates, which are widely followed by the private sector.

This is owing to the need that per diem rates used by businesses to reimburse workers for lodging, meals, and incidentals be equal to or lower than those specified by the federal government in order for them to be tax deductible for the firm and to prevent a tax bill for the employees.

How is per diem paid to employees?

The corporation may choose from a number of different methods for paying per diems to employees, including:

• Cash In Hand: The per diem payment is given in advance to the employee to be used as needed.
• Corporate Credit Cards: These can have restrictions and be monitored to ensure that no employees misuse them.
• Private Spend: If it's a longer trip, the employee pays for it out of pocket and gets paid when they get back, or more often, like on the last day of the month.

Is per diem taxable?

If an employee omits or fails to include information on an expense report, per diem is taxed. If you provide the employee with a flat sum, it is likewise taxed. If you provide an employee more than the allowed per diem amount, the extra is taxed.

Employers often do not subject their employees to additional tax obligations when they pay employees at or below the federal government per diem rates. However, it does call for expense reports to be submitted within 60 days.

Companies that charge more than the government's per diem rates must report the extra money as taxable income.

What does an expense report need to include?

The report must include the following information: 

• The business objective of the trip
• The date and location of the trip
• Hotel receipts (if using the meals-only per diem rate)

The employee must submit the expenditure report to the employer in a timely manner (60 days). If any of these conditions are not satisfied, the payment is taxable to the employee.

Benefits Of Per Diem Payments

Guidelines for per diem payments are beneficial to both the company and the employee. It can assist businesses in creating an upfront budget for employee business costs, enabling careful financial planning.

When traveling on company business, per diem allowances provide employees with some freedom and confidence. They ease planning for business trips, lower expenditure unpredictability, and minimize the administrative load placed on both the employee and the company.

Conclusion

Paying per diems to traveling employees, management, and finance teams is a great method to ease the administrative load of covering travel costs.

A closer look reveals just how beneficial per diem rates are to firms in terms of tax and paperwork, as well as how they enable flexible travel arrangements for staff. Because costs differ depending on where an employee is in the world, per diem rates change depending on whether they are traveling domestically or overseas.