What Does Per Diem Mean?

What is Per Diem?

If you were to define per diem, the term originates from the Latin words per (meaning “for each”) and diem (meaning “day”). 

In the business context, it refers to a daily allowance given to employees for travel-related expenses and is often used in per diem employment to structure pay. 

This can include several areas, including lodging costs, meals, and incidentals like transportation or tips.

There is a common question that employers have - Does the company have to pay per diem? The simple answer is yes. 

When companies implement a per diem for employees, they usually set fixed rates for each type of expense and allow employees to manage their budgets on the go. 

This simplifies the reimbursement process while ensuring employees are fairly compensated for their travel expenses without requiring extensive receipts.

Per Diem vs Traditional Expense Reimbursement

Per diem and traditional expense reimbursement are two different ways to manage travel expenses.

How Does Per Diem Pay Work in Business

Businesses implement per diem as a structured allowance for employees traveling for work. 

Companies set daily rates based on location and expense type, and employees get fixed amounts for meals, lodging, and incidentals. 

This helps in: 

• No out-of-pocket costs: Employees get the allowance upfront and don’t have to pay out of pocket and wait for reimbursement.
• Simplified process: Employers have less administrative work as per diem, which eliminates the need to review individual receipts and manage complex claims.

Types of Expenses Covered by Per Diem

Per diem payments directly increase payroll costs due to the additional income and taxes. 

However, by simplifying expense tracking and reducing the need for detailed expense reports, per diem systems can reduce administrative overhead costs related to payroll.

Following is the list of per diem expenses: 

• Hotel or temporary accommodation costs
• Daily allowance for breakfast, lunch, and dinner
• Laundry services
• Tips for hotel staff and service providers
• Transportation costs (e.g. taxis, rideshares)
• Parking fees

When Per Diem Doesn’t Apply

If you are wondering - Does per diem include transportation? The answer is yes. 

Per diem covers many travel expenses but not all. 

Here are some examples:

• Mileage: Per diem basis doesn’t cover personal vehicle use for business travel. Instead, you will need to submit a separate mileage reimbursement.
• Personal expenses: Per diem does not cover expenses not related to business activities, such as entertainment or personal purchases.‍
• Airfare and transportation: Flights, trains, or rental cars usually fall outside per diem and must be reimbursed traditionally.

Calculating Per Diem 

Per diem is calculated by determining fixed daily rates by location and expense type. 

Employers can use the formula to understand how do companies have to pay per diem. 

Per diem = Meals + Lodging + Incidentals

Here’s an example of per diem workers rates by category:

GSA Per Diem Rates

The General Services Administration (GSA) sets federal per diem rates for employees traveling within the US. 

These rates vary significantly depending on the cost of living, including factors like average hotel prices, food costs, and transportation expenses.

For most areas within the continental US (CONUS), a standard per diem rate applies. 

These rates help you understand what is standard per diem meal allowance, travel expenses and others. 

However, around 300 specific locations, known as non-standard areas (NSAs), have their rates. 

These NSAs typically cover major cities or primary destinations and their surrounding counties. 

Each year, the upcoming federal government fiscal year rates are usually announced in mid-August, giving businesses and employees time to prepare for any changes.

Per Diem Rates by Location

The cost of living varies significantly across different regions of the United States and internationally.  

This is why per diem rates are adjusted to reflect the local food, lodging, and transportation costs. 

For example, per diem rates in New York City are likely to be higher than those in rural Iowa due to higher living costs.

Impact on businesses

While not mandatory, private companies often use GSA per diem rates as a reference point when setting their policies. 

These rates provide a reasonable starting point for establishing a fair and consistent system for reimbursing employees for travel expenses.

Benefits of Per Diem

Using per diem rates has benefits for both employers and employees. 

These include:

• Less administrative work: It simplifies the expense process by eliminating receipt tracking and individual reimbursements.
• Predictable budgeting: The per diem contract gives employers a clear view of travel costs so they can better budget and not be surprised by expenses.
• Employee satisfaction: It offers employees autonomy over their allowances, which makes them happier while traveling for business.
• Financial control: It allows employers to control travel expenses at par with company policies and budgets.
• Faster approval process: It reduces time and effort for expense approval, and shortens the reimbursement cycle.

Reduced Paperwork for Employers

Per diem simplifies the expense reporting process for employers by eliminating the need for extensive documentation. 

Less paperwork means less administrative work and fewer errors in complex reports. It also saves time and resources for the company.

Financial Control for Employers

Now, what does per diem mean for employers? 

A per diem policy gives employers more control over travel expenses so they can plan better. 

Here are the benefits:

• Predictable costs: Fixed daily allowances for meals and lodging means you can forecast travel expenses more accurately.
• Budget alignment: Per diem rates imply spending in line with your company budget with no surprises.‍
• More accountability: Employees know the rules and expectations of being more responsible when traveling.

Per Diem Tax Implications

Understanding the tax implications of per diem payments is important for employers and employees. 

Generally, per diem allowances are non-taxable if they are within the GSA limits. 

So, if businesses stick to the GSA rates for meals and lodging, employees will not have to pay extra taxes.

However, if per diem payments exceed the GSA rates, the excess is taxable income for employees. 

This can mean unexpected tax liabilities and complicated tax reporting for both parties. 

Employers should monitor per diem allowances carefully to ensure they are within GSA limits to protect their finances and employees’ tax situation. 

For more on navigating taxes in a remote work environment, check out Skuad’s guide here.

Avoiding Taxable Income

To avoid tax issues with per diem payments, stick to GSA rates and accurate expense reporting. Here are the steps to comply:

• Use GSA rates: Always use current GSA rates for meals and lodging in different locations to set per diem allowances.
• Document expenses: Ask employees to submit detailed expense reports relating to expenses incurred during business trips to understand the per diem split.
• Limit per diem amounts: Don’t exceed GSA-approved limits to avoid tax.
• Educate employees: Train employees on compliance requirements so they know the importance of accurate reporting.‍
• Regular audits: Regularly audit expense reports to ensure policy compliance and spot discrepancies.

Setting a Per Diem Policy for Your Business

Setting a per diem cash policy balances business needs with compliance and employee happiness. 

Here are some practicals:

• Understand what expenses are covered (meals, lodging, transportation).
• Research local per diem rates based on the cost of living.
• Be tax compliant to avoid liabilities.
• Communicate the policy to employees.
• Review and update the policy regularly to reflect cost changes or business needs.

Considerations for Global Employees

When you have a global workforce, you must understand that expense standards differ by region. 

What does per diem mean in the global workforce? Here are the considerations:

• Local regulations and tax guidelines
• Cost of living differences across regions
• Currency exchange rates impact expenses
• Fair and consistent application of per diem rates

FAQs

1. What does per diem mean for a job?

Per diem is a daily allowance for work-related expenses like meals, lodging, or travel during business trips. Whether you’re looking for Per Diem definition, Per Diem allowance meaning, or what is meant by Per Diem - they all mean the same thing.

2. Is per diem pay good?

Yes, per diem pay (per diem rate meaning) is great as it gives you flexibility and covers necessary expenses without affecting your regular salary.

3. How is per diem paid out?

Per diem is paid upfront or after the trip, based on company policy. As a result, there is no need to submit receipts for each expense.

4. How is per diem calculated?

Per diem is calculated based on government or company rates, which vary by location and type of expenses.

5. Is per diem taxed?

Per diem money is not taxed if it is within IRS or local guidelines, but excess is taxed.