What does per diem mean?

What does per diem mean? 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.

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.

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.

For more information on per diems, see the GSA’s Frequently Asked Questions and IRS Publication 1542.