What Does Per Diem Mean?
A per diem, from the Latin for “by the day,” is a daily allowance paid to an employee to cover costs incurred while on a business trip. Covered business expenses typically include accommodation, food, and incidental expenses such as fees and tips for services.
The term per diem can also refer to a compensation system in which an employee is paid per day worked as opposed to receiving a weekly salary.
Many companies and their employees prefer a flat per diem to the more burdensome requirement for submitting itemized expense accounts.
Key Takeaways
- Per diems are daily allowances for the costs of business travel.
- Per diems cover business expenses for accommodations, meals, and incidentals.
- Companies may provide a company credit card, full or partial expense coverage, or fixed daily rates.
- Most firms use the standard rates set by the federal government as a guideline for their per diems.
- Per diem payment also refers to compensation received by workers who are paid for days worked.
Understanding Per Diems
Each company sets its own rates for per diem payments, which reimburse employees whose jobs require traveling.
- Company credit cards: Some companies issue business credit cards to their employees. They use the cards to pay business expenses directly while on the job and without having to pay any expenses out of pocket.
- Full or partial expense coverage: Some companies cover employee expenses in full, while others set limits for certain expenses, such as lodging, food, and incidentals.
- Fixed amounts: Many corporations provide their employees with a specific fixed daily rate. Employees are expected to cover all or part of their costs with this per diem.
Per diem also refers to a per-day compensation received by some workers. They get their wages by the day or the quantity of work done, rather than being paid a regular salary for a full-time job. These types of workers are usually on temporary or short-term contracts. For example, travel nurses and substitute teachers are paid per diem.
Per Diems for Government Employees
Per diems for federal government employees who travel for work are set by the U.S. General Services Administration (GSA). Companies use this federal per diem rate as a guideline for their own per diem policies.
Standard rates for both domestic and international travel go into effect on October 1st of each year. The standard rate applies to approximately 2,600 U.S. counties. Nonstandard, location-specific rates apply to 302 high-cost areas.12
Rates set by the government are based on the cost of living in a company’s city. That’s why it sets rates for certain locations higher or lower than the standard rate.1
Per Diems Greater Than the Federal Rate
Per diem payments that are above the standard government rates require the employee to pay tax on the excess amount. They may opt to return any excess amount above the government rate to the company.
The excess payout is included in Box 12 of Form W-2.3 Failure to file a business expense report with the employer within 60 days generally results in a tax on the full per diem disbursement.4
Per Diems Equal to the Federal Rate
If the per diem is equal to or less than the federal per diem rate, it isn't considered part of an employee’s wages and isn’t taxable. However, employees must submit a business expense report to their employer to substantiate their expenses.
The required report must be submitted to the employer within 60 days of the conclusion of the trip and include the following information:2
- Business purpose of the expense
- Date, time, place, and amount of the expense
- Receipts for lodging
The report should also be accompanied by receipts for out-of-pocket expenses. It’s not necessary for employees to submit meal and incidental receipts if they receive a per diem, though the Internal Revenue Service (IRS) requires lodging receipts.4
Nontaxable payments appear separately from taxable income on Form W-2.
Employees are required to pay taxes on any amount over the federal government’s standard per diem rate that they don’t return.
Per Diems for the Self-Employed
Self-employed individuals can only use a per diem for the cost of meals. Like other employees, self-employed persons must keep a record of expense reports that substantiate the date, location, and purpose of the business trip. Receipts may also be required in some cases. It’s still a good idea to keep them in case.2
Per Diem Rates for 2024
As mentioned previously, new per diem rates are set by the GSA every year and are released on October 1st.
For 2024 the standard lodging rate increased from 2023’s $98 to $107. Current nonstandard areas' per diem rates, which apply to 302 areas and are typically higher than the standard rate, are at or above 2023 rates for lodging.
Rates for the meals and incidental expenses (M&IE) per diem tiers remain unchanged from 2023’s $59 to $79. The standard M&IE rate also remains unchanged at $59.1
To calculate your per diem based on government rates, visit the GSA’s Travel Resources Per Diem Look-Up page.5 Enter your travel destination, dates, and year, then click “Search” for the results.
Types of Per Diem Payments
Every company handles per diem payments differently. They may issue credit cards, cover full or partial expenses, or offer fixed daily rates. They may require employees to cover expenses out of pocket and then request reimbursement. Some companies pay the per diem by check as an indication that it is separate from the employee’s income.
Per diem payments may cover business expenses fully or partially. Companies may use a per diem rate for lodging and meals or a per diem rate to cover meals only. A partial per diem, for example, may provide $100 to cover meals only, while lodging expenses and incidentals are to be paid out of pocket.
Fixed Rates
A business that implements a fixed per diem method usually pays the employee a fixed amount per day. For example, a per diem payment for an information technology (IT) consultant working for the week in another city could be $200 per day: $100 for accommodations, $50 for food, and $50 for incidental costs.
Incidental expenses are costs that are not specifically identified but are at the discretion of employees. They may include the costs of laundry service, internet use, room service, tips, and more.
If an employee uses a personal car on a business trip, they will be reimbursed according to the IRS mileage reimbursement rate. This is an optional rate used to calculate the deductible costs of operating a vehicle for business purposes. For 2024, the rate is 67 cents per mile, up 1.5 cents from 2023.6
Out-of-Pocket Expenses
When employees are required to pay for their expenses themselves, companies usually require them to submit claims. If claims are approved for such out-of-pocket expenses, firms then reimburse their employees.
This method is more time-consuming than a per diem, as it requires staff to review claims and receipts, approve or decline reimbursement requests, and issue payments to employees.
Benefits of Per Diem Payments
Companies and employees can benefit from per diem allowances.
- Per diems can help companies budget future expenses more accurately.
- Per diems reduce or eliminate the need for reviewing and managing receipts.
- Per diems reduce paperwork to a minimum for both companies and employees.
- They streamline the tax-deduction process for businesses when used for travel.
- They ensure that employees don’t get taxed on allowances that serve as reimbursements.
- Employees can keep excess amounts of per diems that they don’t spend (although they will owe tax on that excess.)
What Qualifies for Per Diem Payment?
Per diems cover expenses related to business travel, including lodging, meals, and incidentals such as service-related fees and tips.
Why Do Companies Pay Per Diem?
Paying a per diem rate is an easier and more cost-efficient way to reimburse employees for travel costs. Both the employer and the employee are spared the chores of accounting for every penny spent.
Many companies prefer to pay certain workers, such as travel nurses and substitute teachers, a per diem rate because it is less burdensome than adding them to the regular payroll system
What Are the Benefits of Per Diems?
Per diem payments cover certain travel expenses for employees that must be reimbursed in some way. They can simplify and even eliminate expense paperwork for both employees and companies. They are tax deductible for a business and are not considered income for an employee.
The Bottom Line
A per diem is a daily allowance given to employees by a company to pay for certain expenses while traveling for business. These expenses include lodging, meals, and incidentals. Companies will sometimes issue a credit card to employees to pay their per diem expenses.
A company’s per diem rate is often the same as that set by the GSA. This is because a higher company per diem rate would require the employee to pay tax on the amount that exceeds the government rate (unless they return it to the company). Per diems can be an efficient and effective way for both companies and employees to manage travel expenses.
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