Per diem is a Latin phrase that translates to “for each day” and describes a fixed daily allowance that a company offers an employee to cover business travel expenses.
In some instances, per diem describes an employment arrangement whereby workers are paid a daily rate for temporary or on-call work. For example, substitute teachers or nurses on-call.
What is per diem?
A per diem arrangement covers employee travel expenses while on a business trip. The allowance covers lodging, meals, gas, and other incidental expenses.
There is no legal requirement to pay a per diem allowance for business expenses, but reimbursement is a good business practice, and it improves the employer-employee relationship.
What are per diem rates?
Per diem rates are a fixed amount of money paid to employees daily to cover expenses when traveling for a business purpose. The money can be paid upfront or calculated and paid on the last day of travel.
Paying per diem rates for business trips is an effective way to manage employee expenses. It saves a lot of time, removing the need for a detailed expense report and collection of receipts. The company’s travel policy should clearly outline the per diem arrangement.
How to calculate per diem
The formula to calculate per diem payments is easy and straightforward, using the following steps.
- Determine the company per diem rates (these rates can be guided by federal government rates)
- Confirm the number of travel days (and nights) that are eligible for per diem expenses
- Multiply the per diem rate by the number of travel days
For example, imagine that a medical representative is traveling for in-person meetings to connect with a hospital that is opening, sell medical supplies, and train hospital staff to use them.
The exercise involves three days on the road, including two nights at a hotel. If the company budgets $150 per night at a hotel and $50 per day for travel expenses, then the per diem rate will be calculated as follows:
($150 x 2 nights) + ($50 x 3 days) = $450
In the US the company can also be guided by the per diem amount paid by federal agencies that use the U.S. General Services Administration (GSA) per diem calculator. The GSA calculates new per diem rates every fiscal year for federal employees, ensuring that they get a fair reimbursement based on changes in lodging rates, cost of living, and the rising cost of meals.
Simply fill in the details of the business trip to determine the reimbursement rate.
Take note that rates for Alaska, Hawaii, and U.S. Territories and possessions are set by the Department of Defense, while foreign per diem rates are set by the department of state.
Is per diem per day or night?
Depending on the specific expense, per diem is calculated by day and night.
- Per diem per day — Meals, transportation, and incidental expenses
- Per diem per night — Hotel expenses (calculated by the number of reserved nights)
What are the tax implications of per diem?
While per diem is a common tax-free perk in the United States, there are a few instances where employer and employee finances are involved. As with all business financial exchanges, there are rules stipulated by the U.S. government and the Internal Revenue Service (IRS).
Is per diem taxable?
Per diem is not considered taxable income unless it exceeds the maximum federal per diem rate. Even then, the reimbursement is not taxed as normal income.
Sometimes, the per diem payment falls into an employee’s taxable wages. For example, if an employee fails to file an expense report timeously, the employee is paid a fixed amount for business expenses, or the employer’s per diem payment is over the standard rate (stipulated by federal guidelines).
Can employees write off per diem?
Employees may qualify for per diem tax deductions when using GSA per diem rates. The IRS outlines strict guidelines for when a business can write off per diem payments.
While the U.S. tax code permits businesses to deduct reasonable expenses related to employee travel, an organization must establish an “accountable plan” to validate these expenses.
Per diem removes the need to submit daily reports of expenses and receipts. However, certain information needs to be provided, such as business purposes, dates, and receipts for lodging.
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Whether a small business or a global enterprise, it’s important to reimburse employees for business expenses to boost morale and encourage a healthy working relationship.
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