Per Diem Payments

What Are Per Diem Payments?

Per diem payments are daily allowances paid to employees to cover costs incurred while on a business trip. Business expenses typically include accommodation, transportation, food, and any other incidental expenses. Per diem — the Latin term for "per day" — can also refer to a structural compensation system in which an employee is paid per day, as opposed to per hour or per month.

Understanding Per Diem Payments

Per diem payments are useful for some job roles that require extensive traveling, causing employees to rack up annual business expenses such as accommodations, meals, travel, and so on. Companies have different systems in place in order to cover these expenses:

Per diem payment also refers to the structure of compensation received by some workers. Workers on a per diem structure receive their wages by the day or by the quantity of work done. These types of workers are usually on temporary or short-term contracts, as opposed to full-time jobs. Healthcare workers and substitute teachers are examples of workers on the per diem payment schedule.

Special Considerations

Per diems for most federal government employees are set by the U.S. General Services Administration (GSA). Companies with a per diem payment policy for business expenses use this federal per diem rate as a guideline. Standard rates for both domestic and international travel go into effect on Oct. 1 each year. Although the rates set by the U.S. government are based on the cost of living in a company's city, it may set its rates higher or lower than the standard rate.

Per diem payments greater than the standard rate require that the employee pays tax on the excess amount. The excess payout is included in Box 12 of Form W-2. Failure to file a business expense report with the employer within 60 days generally results in a tax payment on the full per diem disbursement.

Employees are required to pay taxes on any amount over the standard per diem rate.

Per diem payments are not part of an employee’s wages if the payment is equal to or less than the federal per diem rate and the employee gives a business expense report to his or her employer. Payments are usually counted as nontaxable income to employees and show separately from taxable income on Form W-2. The business expense report must be submitted to the employer within 60 days of the conclusion of the trip and should detail the purpose of the trip, date, and location, along with receipts for expenses covered out-of-pocket.

Per Diems for Self-Employed Individuals

Self-employed individuals can only use a per diem rate for the cost of meals. Like other employees, self-employed persons must keep a record of expense reports showing the date, location, and purpose of the business trip. Keeping receipts may also be required, though in cases where they aren't, it's still a good idea to hold onto them.

Types of Per Diem Payments

Companies handle per diem payments differently. As noted above, they may issue credit cards, cover full or partial expenses, offer fixed rates, or require employees to cover expenses out of pocket for reimbursement at a later date.

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 total $100 to cover meals only, while lodging expenses and incidentals are paid out-of-pocket. Some companies make per diem payments by making out checks to the employee as an indication that it is separate from the employee’s income.

Fixed Rates

A business that implements a fixed per diem method for business expenses 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 determined at the discretion of the employees. Incidental costs may include costs of transportation, laundry service, internet, room service, tips for servers, and so forth. If an employee uses his personal car on a business trip, they will be reimbursed according to the Internal Revenue Service (IRS) mileage reimbursement rate — an optional rate used to calculate the deductible costs of operating a vehicle for business purposes.

Out-of-Pocket Expenses

In cases wherein employees are required to pay for their expenses upfront and on their own, companies usually require them to submit claims. If claims are approved for out-of-pocket expenses, firms issue their employees reimbursement for the business expenses. This method is much more time-consuming, 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 that use upfront per diem payments and/or company credit cards save employees the time and hassle of keeping and filing receipts. If the payment has been covered per diem and the cost is below the per diem amount, the payment is approved without the need for documentation. If the employee's allocated meal cost is $100 per day, any amount spent equal to or below $100 for food per day does not need business receipts. However, the employee spends above this amount on food, receipts will need to be filed with his or her human resources (HR) department.

What happens to any money in excess? Employees can keep the money that is unspent. This could serve as an incentive for thrift spending on the part of employees who like to save some money.