Per diem

Per diem

Per diem, a Latin phrase meaning "for each day," refers to a daily allowance provided to individuals, typically employees, to cover specific expenses incurred while traveling for business. This financial accounting concept falls under the broader category of business expenses. Per diem payments simplify the process of reimbursing employees for out-of-pocket costs related to lodging, meals, and incidental expenses during work-related trips, eliminating the need for detailed receipt tracking.

History and Origin

The concept of per diem has roots in historical practices of providing daily provisions or payments for travelers, particularly those on official duties. In modern times, its widespread adoption by governments and corporations aimed to streamline expense management and reduce the administrative burden associated with itemized reimbursements. The General Services Administration (GSA) in the United States, for instance, sets standardized per diem rates for federal employees, which are widely referenced and often adopted by private entities. These rates are updated annually to reflect current costs of living and market prices in various locations, with the GSA conducting market surveys and analyzing lodging, meal, and incidental expenses across the country.²⁴, ²⁵, ²⁶

Key Takeaways

• Per diem is a fixed daily allowance for business travel expenses, typically covering lodging, meals, and incidentals.
• It simplifies expense reporting by eliminating the need for employees to submit detailed receipts for covered costs.
• Per diem rates often vary by travel destination and are generally reviewed and updated annually by government bodies like the GSA.
• These payments can be non-taxable to the employee if they meet IRS "accountable plan" rules, requiring a business purpose and an accounting of expenses.
• Companies use per diem to manage travel budgets more efficiently and provide clear guidelines for employee spending.

Formula and Calculation

While there isn't a strict "formula" for calculating per diem in the same way there is for a financial metric, the amount is determined by a combination of factors, usually set by an employer or a governing body like the GSA. The calculation process involves:

1. Identifying the Destination: Per diem rates are highly location-dependent. High-cost areas will have higher rates than low-cost areas.²², ²³
2. Determining the Duration: The number of days the employee is traveling determines the total per diem amount. Partial days (e.g., departure or return days) often have a reduced per diem rate.²¹
3. Applying the Rate: The applicable per diem rate for lodging, and the separate meals and incidental expenses (M&IE) rate, are applied to the number of travel days.

For example, the GSA provides a standard lodging rate and a standard M&IE rate for most areas within the continental United States (CONUS), and specific "non-standard" rates for approximately 300 higher-cost areas.²⁰

The total per diem for a trip would be calculated as:

The Internal Revenue Service (IRS) also provides guidance on these rates for tax purposes, particularly regarding the "high-low" substantiation method, which uses a higher rate for designated high-cost localities and a lower rate for all other localities within CONUS.¹⁸, ¹⁹

Interpreting the Per Diem

Interpreting the per diem involves understanding its purpose and limitations. It's a daily stipend meant to cover reasonable travel expenses without requiring employees to track every single minor cost. For employees, the per diem represents a budget for their daily spending on accommodation and food. If their actual expenses are less than the per diem, they typically keep the difference, which can be seen as an incentive for cost-conscious travel. Conversely, if expenses exceed the per diem, the employee is usually responsible for the difference unless the company policy allows for additional reimbursement with proper documentation.

From an employer's perspective, the per diem simplifies payroll and accounting, as it reduces the volume of expense reports and receipts to process. It also helps in forecasting and managing travel budgets more effectively. The rates themselves are generally set to reflect the average cost of living and specific expenses in various locations, aiming to be fair while preventing excessive or lavish spending.¹⁶, ¹⁷

Hypothetical Example

Imagine Jane, a sales representative for Tech Solutions Inc., needs to travel from her home office in a low-cost area to New York City for a three-day business conference. Tech Solutions Inc. uses the IRS high-low per diem method.

• Day 1 (Travel to NYC): Jane departs in the morning. She is eligible for 75% of the M&IE rate for a high-cost area.
• Day 2 (Full Day in NYC): Jane attends the conference all day. She is eligible for the full lodging per diem rate and the full M&IE rate for a high-cost area.
• Day 3 (Conference & Travel Home): Jane attends the morning sessions and then travels home in the afternoon. She is eligible for 75% of the M&IE rate for a high-cost area, plus the lodging per diem for the previous night.

Let's assume the IRS high-low rates for a high-cost area are:

• Lodging: $250
• M&IE: $79

Jane's per diem calculation would be:

• Lodging: $250 (for one night, covered on Day 2)
• M&IE:
  • Day 1: ( $79 \times 0.75 = $59.25 )
  • Day 2: ( $79 )
  • Day 3: ( $79 \times 0.75 = $59.25 )
• Total M&IE: ( $59.25 + $79 + $59.25 = $197.50 )
• Total Per Diem: ( $250 + $197.50 = $447.50 )

This total of $447.50 is the amount Jane would receive from Tech Solutions Inc. to cover her accommodation, meals, and incidental expenses for the three-day trip, without needing to submit individual receipts for these items. This approach simplifies expense reporting for both Jane and her company.

Practical Applications

Per diem is a common practice across various sectors, primarily in managing corporate travel expenses. It is frequently used in:

• Business Travel: Companies provide per diem to employees on business trips to cover their daily costs, such as hotel stays, meals, and tips, streamlining the expense management process and reducing the administrative burden of processing numerous small receipts.¹⁵
• Government and Military: Government agencies, including the GSA, establish official per diem rates for federal employees traveling on official duty, which vary significantly by location to account for different costs of living.¹⁴
• Fieldwork and Consulting: Professionals engaged in fieldwork, such as consultants, auditors, or project managers who frequently travel to client sites, often receive per diem allowances. This helps manage the variable costs associated with being away from their primary tax home.¹³
• Temporary Assignments: For employees on temporary assignments away from their regular place of business, a per diem can be provided to cover living expenses in the temporary location.
• Non-Profits and Research: Academic researchers and non-profit organizations also utilize per diem for staff conducting fieldwork, attending conferences, or engaging in projects that require travel.

The IRS provides detailed guidelines on what constitutes deductible business travel expenses and how per diem rates can be used for substantiation, simplifying the tax implications for both employers and employees.¹¹, ¹²

Limitations and Criticisms

While per diem offers significant advantages in simplicity and administrative efficiency, it also has limitations and can face criticism. One primary concern is that a fixed per diem might not always accurately reflect an individual's actual expenses. In some cases, the per diem might be more than what an employee typically spends, leading to a small personal gain. Conversely, in high-cost situations or unexpected circumstances, the per diem might be insufficient, forcing the employee to cover the difference out of pocket. This can lead to employee dissatisfaction or a feeling of being undercompensated for their business travel.

Another criticism can arise regarding the tax implications. While per diem payments are generally not taxable to the employee if paid under an accountable plan that requires a business purpose and an accounting of expenses (even if only a broad accounting), payments exceeding the federal per diem rates or those made under a non-accountable plan can be considered taxable income.¹⁰ This requires careful attention to IRS regulations to avoid compliance issues. Some companies may also set per diem rates below the federal guidelines as a cost-saving measure, which, while legal, can impact employee morale. The U.S. government's per diem rules do not universally apply to private sector employers, allowing for variation in how companies manage and reimburse travel expenses.⁹

Per diem vs. Reimbursement

Per diem and reimbursement are both methods for compensating employees for business-related expenses, but they differ fundamentally in their approach and administrative overhead.

The key distinction lies in the need for detailed expense tracking. Per diem simplifies the process by providing a predetermined amount, whereas traditional reimbursement necessitates meticulous record-keeping and submission of original receipts. While per diem is popular for common travel expenses like meals and lodging, reimbursement is often used for larger, less predictable costs such as flight tickets or specific project-related expenses. Many companies use a hybrid approach, offering per diem for daily living costs and requiring reimbursement for other significant expenses.

FAQs

Q: Is per diem taxable income?
A: Generally, per diem payments are not taxable income to the employee if they are paid under an "accountable plan" that meets specific IRS rules. These rules typically require a business purpose for the expense, an accounting of the expenses (even if simplified), and the return of any excess amounts. If the per diem exceeds the federal rates or is not paid under an accountable plan, the excess or the entire amount may be taxable.⁷, ⁸

Q: What expenses does per diem typically cover?
A: Per diem usually covers lodging (hotel or accommodation costs), meals (breakfast, lunch, and dinner), and incidental expenses. Incidental expenses are minor costs like tips for hotel staff, dry cleaning, or personal phone calls while traveling. It typically does not cover transportation costs like airfare or car rentals, which are usually reimbursed separately.⁵, ⁶

Q: How are per diem rates determined?
A: In the United States, the General Services Administration (GSA) sets federal per diem rates for employees of the U.S. government. These rates are based on the average cost of lodging and meals in specific geographic locations and are updated annually. Many private companies use these federal rates as a benchmark or a starting point for their own per diem policies.³, ⁴

Q: Can a company choose not to offer per diem?
A: Yes, a company is not legally required to offer per diem unless specified by a union agreement or an individual employment contract. Employers can choose to reimburse actual expenses based on receipts instead. However, many companies opt for per diem to simplify administrative processes and provide a clear budget for employees.²

Q: Does per diem apply to international travel?
A: Federal per diem rates established by the GSA apply to travel within the continental United States (CONUS). For travel to Alaska, Hawaii, U.S. territories, and international locations, different government entities (like the Department of Defense and the Department of State) set the applicable per diem rates.¹ Private companies may have their own policies for international travel, often based on these government rates or other relevant data sources for global mobility.