Per diem definition and meaning
Per diem is an allowance that employers provide to their employees to cover job-related travel expenses, such as lodging and meals. The term ‘per diem’ is Latin for ‘for each day,’ indicating that the allowance is designated for daily expenses.
More about what per diem is
Employers who require their employees to travel for business purposes often seek to compensate them for the associated expenses. One way to do this is by providing a per diem.
Though per diem payments are not required by federal law, it can be a good business practice for companies that need their employees to travel for reasons other than the normal commute to and from work.
Employers can give per diem payments upfront (such as in the form of cash or via a company credit card), or they can reimburse employees after the travel is complete. They also have the flexibility to use per diems to cover all or a portion of the employee’s travel expenses.
While private employers can determine their own per diem rates, federal agencies adhere to specific guidelines:
- The US General Services Administration (GSA) sets per diem rates for travel within the continental US, which includes the 48 contiguous states and the District of Columbia.
- The US Department of Defense defines per diem rates for travel to non-foreign locations outside the continental US, such as Alaska, Hawaii, and US territories.
- For international travel, the US Department of State establishes the per diem rates.
- Additionally, the Internal Revenue Service (IRS) recognizes the GSA per diem rates as the federal threshold for non-taxable per diems.
Private employers are not bound by federal per diem rates; they can choose to pay more or less than the prescribed amount.
What is per diem used for?
Per diem is an allowance meant to cover daily expenses incurred during business travel. Typically, this includes
- Lodging, such as stays in hotels, inns, resorts, and homestays
- Meals, including breakfast, lunch, and dinner
- Incidental expenses that can include laundry, dry cleaning, tips for service staff, and other miscellaneous costs
It’s important to understand that per diem doesn’t cover transportation expenses. For mileage reimbursement, you can refer to the IRS’ mileage rate.
Is per diem taxable?
According to the IRS, per diem becomes taxable under any of the following circumstances:
- The employee fails to file an expense report with their employer. For the per diem to be non-taxable, they must be able to substantiate their travel expenses with a report. Otherwise, the amount becomes taxable.
- The employee’s expense report lacks essential details, such as date, place, time, amount, and reason for the expense.
- The employee receives a flat per diem amount and isn’t mandated to provide an expense report.
- The per diem amount surpasses the standard federal rate.
If the per diem amount is taxable, it should be incorporated into the employee’s gross wages for payroll tax withholding. Additionally, the taxable amount needs to be detailed on the employee’s Form W-2.
What goes in the expense report?
In their expense report, the employee should state the following:
- The business reason for the trip.
- The destination of the business trip.
- The date of the expense.
- Receipts for relevant out-of-pocket expenses.
The employee is required to submit this report to their employer within 60 days of completing the business trip. Failure to meet any of these criteria may result in the employee being taxed on the per diem payment.
Calculating per diem
Figuring per diem is a straightforward process:
- Decide whether to use your company’s own per diem rates or the GSA’s (federal) rate.
- Identify the number of days eligible for per diem, be it through upfront payment or reimbursement.
- Multiply the chosen per diem rate by the respective number of business travel days.
Additional factors to consider when determining per diem
- The GSA’s per diem rates change depending on the location.
- Use the rate corresponding to the location where the employee stays overnight.
- For the first and last day of the employee’s trip, only pay ¾ of the standard rate. For the remaining days, use the full rate.
- A singular per diem rate can encompass the combined expenses of lodging, meals, and incidental costs.
- To find the federal per diem rates for various US cities, visit the GSA’s website. Enter the fiscal year and either your state and city or zip code. The system will display the lodging rate as well as the combined meals and incidentals (M&IE) rates. Select the appropriate rate(s) as needed.
Keep in mind, employers can typically deduct most of their per diem payments as business expenses on their federal tax returns.
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