What is Per Diem? Definition and How it Works

Per diem payments allow organizations to reimburse their traveling employees for expenses they incur on the road. It also allows workers to take jobs with more flexibility.?

Employees who regularly travel for work often expect their company to provide compensation while on the road. This compensation offsets the costs of travel expenses while conducting company business. Sometimes, companies provide employees with business credit cards to cover these costs. A company may also reimburse employees who file expense reports with receipts for purchases made during the trip.

A final option for companies includes paying those employees “per diems .”

A per diem provides employees with a set allowance for each day they travel. It eliminates the need to keep receipts and simplifies paperwork. Typical expenditures paid as part of a per diem arrangement include:

• Lodging
• Meals
• Incidental expenses (tips, fees)

Beyond simplifying reimbursements, per diems offer two other benefits: They ensure travel expenses are tax deductible for the business and that employees do not pay taxes on money they receive as reimbursements.

How Does Per Diem Work?

Per diems usually take the form of fixed daily allowances the company provides to employees or contractors. The word “per diem” has Latin roots: it translates to “by the day.”

Per diems sometimes describe a particular employment arrangement. In these cases, workers like substitute teachers and travel nurses receive a day rate for their temporary or on-call work. One of the benefits of this arrangement for employers is that they enjoy flexibility when it comes to labor costs and schedules.

Types of Per Diem Payments

Per diem policies often differ by organization. Some organizations may choose coverage for lodging alone, while others may pay for meals. In this case, a partial per diem might pay $75 per day for meals but nothing for lodging or incidental expenses. The employee would handle those costs. Other companies may write checks to the employee that are separate from their regular income.

Out-of-Pocket Expenses

If employees must pay for out-of-pocket expenses independently, companies require them to submit claims for reimbursement. If such claims meet the standard for approval, the company will reimburse them. This is a time-consuming process because it requires the review of claims and receipts, approving the requests, and issuing payment. Ordinary out-of-pocket expenses that receive reimbursement include:

• Parking
• Airfare
• Car rental
• Lodging
• Meals

Fixed Rates

Companies implementing fixed per diem for business expenses pay the employee a fixed amount each day. Consider a sales consultant who travels to another city for a week. Their per diem is $200 per day, broken down as follows:

• $100 for lodging
• $50 for food
• $50 for incidental costs like tips, internet usage, laundry or room service

In addition, companies may reimburse employees who use their vehicles on business trips according to the mileage reimbursement rate the IRS provides .

Benefits of Per Diem Jobs

Why would someone take a per diem job instead of more permanent work? In some situations, per diem work offers flexibility and benefits that a traditional salaried or hourly role would not. Travel nursing is one example of a per diem role that provides plenty of perks, including:

• Flexible scheduling: While per diem nursing jobs do not always guarantee hours, they can allow nurses and other per diem workers to dictate the schedule they want.
• Variety of specializations available: Some nurses who do not want to specialize in one area can sample various departments and nursing jobs.
• Increased pay: Per diem nurses often earn more than regular staff nurses. While this income may not be as consistent weekly, the pay may outpace traditional hourly rates. Some travel nurses earn significantly more while they are away in other states.
• Control over benefits: Instead of benefits through an employer, per diem nurses may receive health insurance benefits through their spouses. They may also purchase separate health insurance not tied to their employment.

For employers, per diem jobs offer tangible benefits. Per diem payments have the following benefits:

• They help companies budget effectively.
• They reduce the need for employees to keep receipts.
• They streamline the process of tax deduction.
• They help reduce paperwork.

What Are the Per Diem Travel Rates?

Companies pay per diem rates above an hourly or salaried rate, but the amount a person receives depends on many factors. These include:

• Location: Per diem rates vary depending on where a person lives and where they are traveling to. Rural locations (Montana, Nebraska and Missouri, for example) often have lower per diem rates than urban ones, such as New York City. To find location-specific M&IE breakdowns, the General Services Administration provides a helpful tool .
• Length of trip: Companies and government agencies calculate per diem amounts as daily rates, but longer trips often end up with lower rates. For trips longer than 30 days, a person may only expect to receive 75 percent of the normal rate. Even longer excursions, such as those that last 180 days or more, can lead to sharper reductions.
• Type of incurred costs (lodging vs. meals and incidentals): Calculating the per diem rate involves using two categories: lodging and meals and incidentals. Both amounts weigh the average cost of living in an area, but a traveler must usually return leftover funds at the end of their trip. Other funds, like those meant for miscellaneous parking and dining charges, may remain with the employee. These amounts are typically subject to income taxes.

Lodging covers hotels, Airbnbs or any place an employee stays while traveling. The IRS does allow employers to combine lodging with meals and expenses. Meals and incidentals, meanwhile, include meals, room service, laundry, dry cleaning and any other fees or tips for services.

How to File an Expense Report

Filing an expense report is pretty simple, but it does require keeping track of appropriate paperwork. Keep all receipts from a business trip and compile them along with the following information:

• Dates of travel and times of arrival: Winter travel is usually cheaper than summer travel. Most employers advise or plan trips during these months to reduce costs.
• Location of travel: Cost of living varies by location. Per diem rates depend on this cost of living. This information shifts yearly based on federal tax regulations, so pay close attention to it.
• Amount of each charge: Split checks properly on all business trips to allocate personal expenses. Any remaining charges over the federal or state-mandated per diem rates are the responsibility of the person filing the expense report.
• Purpose of the business trip: Most companies do not allow employees to travel and expense charges without prior permission, but there may be exceptions.?

What is the Difference Between Per Diem and Part-Time?

Unlike per diem work, part-time employment typically guarantees hours based on a revolving schedule. Part-time employees often work fewer hours than their full-time counterparts. Per diem workers typically substitute for vacations, sick days or other reasons for facility short staffing.

Are Per Diem Payments Taxable?

When companies use the federal government’s per diem rates (or pay less than that), their employees usually do not face any further tax implications . But it does require filing expense reports within 60 days.

For companies that offer higher rates than the government’s per diem rates, the excess amount is taxable income.

Types of Per Diem Jobs

The most common per diem jobs are in the medical field. These jobs include nursing, hospice and pediatrics. Other per diem roles can include day laborers for construction and landscaping .

Federal Per Diem Rates for 2023

Each year, the General Services Administration establishes per diem rates for Federal agencies. These rates include lodging allowance and money for meals and incidentals. The standard per diem rate for the continental United States is $157 . Some areas have higher per diem rates than the standard amount.

Final Thoughts on Per Diem Pay

Per diem pay can be compelling reason for full-time workers to leave their jobs. Still, it is also valuable for organizations to streamline their accounting processes. Anyone who travels for their job must understand how their company’s per diem pay policies will impact their reimbursements. This includes filing the proper paperwork and reporting to ensure they meet the tax obligations.

Top Takeaways

• Per diem work allows companies to reimburse workers who travel for expenses they incur on the road.
• Per diem work pays workers such as nurses, substitute teachers and construction laborers for a whole day of work versus an hourly rate.
• The GSA sets per diem rates for Federal employees each year, starting in October.
• Per diem payments are taxable if they exceed the government’s per diem rates.

(Reporting by NPD)