Decoding per diem: a comprehensive guide for businesses

Per diem – the quick definition ⬇️

Employees traveling for work is an everyday activity in any business. They often require reimbursement for expenses like travel, meals, lodging, and incidentals. The most common method of reimbursement is per diem. 

Ok, let’s go back for a quick history lesson🎓 Derived from Latin, per diem means “per day” and describes a fixed daily allowance covering business expenses incurred while traveling, such as meals, lodging, travel, and incidentals. 

Depending on the location, industry standards, and the nature of travel, reimbursement rates may vary from one organization to another

Let’s dive in further.🤿

Popular approaches

There are two popular approaches to per diem payments: 

• Per Diem Payments: Daily allowances for employees traveling for business.
• Per Diem Employment: Payments to part-time workers per day instead of hourly rates or fixed salaries. 

Benefits of per diem

Per diem payment is favored across industries due to the several benefits it offers:

• Expense Management: Simplifies expense management, budgeting, reporting, and reimbursement processes for both employers and employees.
• Fairness and Consistency: A standardized approach ensures fairness and consistency in expense reimbursement and prevents disparities in reimbursement amounts.
• Compliance and Transparency: Government-specified or industry-standard rates help ensure compliance with applicable tax laws and regulations.
• Efficiency: Improves efficiency by reducing administrative burdens associated with expense management.
• Flexibility: Employees can manage and allocate their daily allowance while traveling.

Per diem employment

In per diem employment, businesses pay part-time workers on a per-day rate. This is common in industries like hospitality and healthcare. 

These workers might be designated as employees or contractors, and employers are required to adhere to the relevant payroll rules and minimum wage laws. Part-time workers are also eligible for per diem payments for business travel. 

Prevailing per diem rates

Per diem rates vary widely based on industry standards, location, cost of living, job requirements, and government regulations. The General Services Administration (GSA) has defined a standard rate of $166, which includes $107 for lodging and $59 for meals and incidental expenses (M&IE).

According to the IRS-defined high-low per diem rates, the standard rate for areas with a higher cost of living is $309, comprising $235 for lodging and $74 M&IE, whereas for lower-cost areas, $214, including $150 for lodging and $64 for M&IE.

Business-defined rates

Organizations across industries, including those in the service, healthcare, and restaurant industries, may use the GSA or IRS-defined rates as guidance to reimburse their employees or part-time workers. 

However, they can also choose to define their reimbursement rates. One method is to define a total per diem amount, subtract the standard meals and incidentals rates, and consider the remaining amount as lodging per diem. Another method is to allocate 60% of the per diem amount for lodging and 40% for meals and incidentals.

When defining their reimbursement rates, businesses must also consider their tax liabilities. Generally, per diem payments are not taxable, as they are not considered wages; and when per diem payments are equal to or less than federal rates and adequately accounted for. That said, there are certain occasions when per diem payments are taxable. These are when an employee receives a set per diem amount without needing to submit an expense report or fails to file expense reports within 60 days of travel. 

Challenges of using per diem

Although per diem offers a practical solution for managing travel expenses, it comes with its own set of challenges: 

• Cost Control: Accurately reflecting living costs and traveling in different locations.
• Maintaining Fairness: Determining equitable per diem rates, especially in diverse work environments.
• Administrative Burden: Tracking expenses, processing reimbursement requests, and ensuring compliance with tax regulations and company policies.
• Compliance Risks: Penalties, audits, or legal liabilities for failing to adhere to applicable tax rules or documentation requirements.
• Employee Satisfaction: Dissatisfaction with per diem allowances if they do not reflect living costs or have limitations on eligible business expenses.
• Dynamic Work Environments: Complexities arising from remote work and virtual collaboration.

Stop thinking about per diem with Fingercheck

Fingercheck can help businesses of all sizes streamline per diem processes for enhanced efficiency and accuracy in expense management. Using automated per diem calculation based on predefined rates and employee travel details, Fingercheck can simplify allowance determination, save time, and reduce errors. Let’s chat!

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Fingercheck and any related entities do not offer tax, accounting, or legal advice. This content is designed for informational purposes only and should not be considered a source of tax, legal, or accounting advice. It is recommended that you consult your tax, legal, and accounting advisors before undertaking any related activities or transactions.