What Does Per Diem Mean, and What Are Per Diem Rates?

What Does Per Diem Mean?

Per diem, from the Latin for by the day, refers to daily allowances paid to employees to cover costs incurred while on a business trip. Business expenses that are covered typically include accommodation, food, and other incidental expenses such as fees and tips for services.

Per diem can also refer to a compensation system in which an employee is paid per day worked, as opposed to receiving a salary that pays bi-monthly.

Understanding Per Diems

Per diem payments are useful for employees whose jobs require extensive traveling. Such travel can rack up annual business expenses for accommodations, meals, travel, and so on. Companies have different per diem policies to cover these expenses:

• Company credit cards: Some companies issue credit cards to their employees. They use the cards to pay business expenses directly while on the job and without having to pay any expense out of pocket.
• Full or partial expense coverage: Some companies cover employee expenses in full while others only offer per diem payments for certain expenses—specifically, 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 receive their wages by the day or by the quantity of work done. Rather than full-time jobs, 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 Oct. 1 each year. The standard rate applies to approximately 2600 U.S. counties. Non-standard, location-specific rates apply to over 300 high-cost areas.

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.

Per Diems Greater Than the Federal Rate

Per diem payments that are greater than the standard government rate 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. Failure to file a business expense report with the employer within 60 days generally results in a tax on the full per diem disbursement.

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 include the following information:

• 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 IRS does require lodging receipts.

Non taxable payments appear separately from taxable income on Form W-2.

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, though in cases where they aren't, it's still a good idea keep them.

Per Diem Rates for 2023

As mentioned previously, on Oct. 1 of every year, new per diem rates are set by the GSA. For 2023, the standard lodging rate will increase from 2022's $96 to $98.

Current non-standard areas per diem rates, which apply to over 300 areas and are typically higher than the standard rate, will be at or above 2022 rates for lodging.

The rates for the meals and incidentals per diem tiers will remain unchanged from 2022's $59-$79. The standard rate will also remain unchanged at $59.

Types of Per Diem Payments

Companies handle per diem payments differently. As noted above, 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.

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.

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 employees. They may include the costs of a laundry service, internet use, room service, tips for servers, and more.

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. This is an optional rate used to calculate the deductible costs of operating a vehicle for business purposes.

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 much 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 more easily and in advance of future expenses.
• Per diems reduce or eliminate the need for employees to keep and manage receipts.
• Per diems can reduce other kinds of 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. (However, they'd owe tax on that excess.)

The Bottom Line

A per diem is a daily allowance given to employees by a company so that the employee can cover certain expenses while traveling for business. These expenses include lodging, meals, and incidentals. Sometimes, companies will 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 U.S. Government Services Administration. That's 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.