What Are Per Diem Payments?
Per diem, latin for "per day," is daily allowance paid to employees to cover costs incurred while on a business trip. Business expenses typically include accommodation, transportation, food, and any other incidental expense.
Per diem can also refer to a structural compensation system in which an employee is paid by the day, as opposed to per hour or per month.
Per Diem Payments Explained
Per diem payments are useful for some job roles, such as consulting, that require extensive traveling. These employees may rack up hundreds of thousands of dollars in business expenses annually. Firms have various ways of covering business expenses of their employees. Some companies pay for business expense immediately by giving each traveling employee a company credit card to be used while conducting business. Others require the employee to cover costs out-of-pocket, and then submit claims for these out-of-pocket business expenses to be reimbursed at a later date if approved. Still other companies pay their employees a fixed daily amount to cover all or part of the costs of business travel, a policy known as per diem.
A business which implements a fixed per diem method for business expenses will usually pay the employee a fixed amount per day. For example, a per diem payment for an IT consultant working for the week in another city could be $200 per day: $100 for accommodation, $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, etc. If an employee uses his personal car on a business trip, they will be reimbursed according to the IRS mileage reimbursement rate, which is an optional rate used to calculate the deductible costs of operating a vehicle for business purposes.
Each company handles per diem payments differently. Per diem payments may be to 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 be $100 to cover meals only - lodging expenses and incidentals will be 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. Other companies issue credit cards to the employee to cover these expenses.
Companies with a per diem payment policy for business expenses use as a guideline the federal per diem rate, which varies according to state. The federal government sets these standard rates annually for domestic and international travel, effective October 1st each year. To access the federal per diem rates, visit the U.S. General Services Administration (GSA) website and key in the city or zip code of interest in the box provided. The rates set by the U.S. government are based on the cost of living of the city, however, a company may set its rates higher or lower than the standard rate.
Per diem payments are not part of the 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. The payments are usually counted as nontaxable income to employees and will 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, and receipts for expenses covered out-of-pocket.
Per diem payments that are 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 will result in tax payment on the full per diem disbursement.
Self-employed individuals can only use a per-diem rate for the cost of meals. Like employees, self-employed persons must keep a record of expense reports showing the date, location, and purpose of business trip.
Can You Keep the Money?
Companies that use per diem 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 employees 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 to the HR department.
Furthermore, employees can keep the money that is unspent. This could serve as an incentive for thrift spending on the part of employees who would like to save some money.
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 per diem payment schedule.