Have you ever been traveling for work and asked yourself, “Who’s paying for all this?”
Whether it’s a hotel stay, dinner at a nice restaurant, or filling up your gas tank, there are numerous expenses you can expect during a business trip.
In most cases, your company will reimburse you for travel-related expenses.
But how do you keep track of all these costs to ensure you get reimbursed the right amount?
You could track each purchase by hand, or you could keep every receipt.
But having to manage and save a big stack of receipts or take out your notebook every time you make a payment during your trip can be burdensome. It’s one extra thing you have to worry about.
This is where per diem can be beneficial.
But what does per diem mean? And how can it make handling your travel expenses easier?
We’ll explain all that and more in this article so your business trips and their travel expenses can be taken care of efficiently and effectively.
What Is Per Diem?
Per diem can be defined as a set daily allowance a company provides to employees that covers their work trip expenses.
The term derives from Latin, meaning “by the day” or “for each day.”
While per diem is not required of employers, it can be used to alleviate unnecessary paperwork for both the company and its employees for necessary travel expenses like lodging, meals, and incidental costs (tips, fees, etc.).
Businesses can also utilize per diem within their travel policy so that employees won’t be taxed on the money they’re reimbursed because per diem allows travel expenses to be tax deductible.
However, there are strict requirements and limits for when and how these payments can be made, set forth by the IRS.
Is Per Diem Taxable?
For a company that wants to ensure per diem will be tax deductible, it must prove that the expenses are business related through an “accountable plan” that follows IRS regulations.
An “accountable plan” requires that an employee submit a daily report and pay out of pocket for any expenses that exceeded the government-set per diem amounts in a timely fashion.
Each daily report must contain the following information to count as tax deductible:
- How the expense is work related
- Date, time, place, and amount of the expense
- Lodging expenses are substantiated with receipts
Employees who receive allowances under an accountable plan do not have to record these funds as income or report them on a W-2.
If an allowance paid to an employee does not meet the criteria of an accountable plan, it is instead part of a “non-accountable plan.”
Employees can keep what’s left over from their daily allowance if they don’t spend it all and don’t have to keep receipts through a non-accountable plan.
However, these funds will have to be included on a W-2 form and are susceptible to income tax.
What Does Per Diem Employment Mean?
Now that we’ve answered the question “What does per diem mean?” it’s time to answer, “What does per diem employment mean?”
A per diem employee is an employee who works a shift-based schedule, working only when the company requires them.
They’re only paid for the days they work (per diem), not by the hour or through a salary.
On a per diem basis, employees usually fill in for full-time or part-time workers who may be away on vacation or on leave while they are out on the job. Companies often hire per diem employees to fit last-minute needs.
It’s important to not get per diem employees confused with independent contractors, as per diem employees are actual “employees” and will have taxes withheld from their paychecks. Companies also must pay taxes for per diem employees, unlike contractors.
Since this type of employment is most flexible, the workers have the option of accepting work that fits best with their own schedule.
Some popular per diem occupations include:
- Substitute teachers
- Delivery drivers
- Broadcast media crew members
When Would I Receive Per Diem?
According to the IRS, whenever an employee must travel to a location that is more than 50 miles from his or her home, per diem payments apply.
Per diem rates vary based on location, with new rates going into effect on October 1st each year.
If you want to determine your trip allowances, check out this free per diem calculator by the United States General Services Administration (GSA).
Per diem payments are a way to ensure employees are not penalized financially for travel because an employee would be paying duplicate living expenses (a mortgage or rent plus an extended stay hotel, for example).
In addition to lodging and meals, other expenses that you receive per diem for include mileage, ground transportation fees, dry cleaning, WiFi, and tips to restaurant or room attendants.
Covered expenses are only those incurred by an employee while working away from home for the employer.
What Is the Method of Per Diem Payment?
Before an employee leaves on a trip, employers may issue per diem electronically or via check to ensure that they have the funds required for travel.
Other companies reimburse their employees after the trip, but with a separate check or electronic transfer that does not include taxes or FICA contributions.
It’s important to note that the IRS does not consider per diem allowances tax deductible if an employee does not submit a report within 60 days of his or her trip.
Per Diem Travel Rates: What Are They? How are they set?
Per diem travel rates represent the amount of money that can be provided to an employee based on the location of the employee’s business trip.
The government uses these rates to reimburse federal employees for travel expenses around the country.
The private sector also uses these same per diem travel rates because the travel expenses can only become tax deductible if businesses use rates that are equal to or less than the rates set by the government.
As mentioned earlier, new rates go into effect on October 1st each year.
The new rates are based on current data from cities and counties across the United States. A large handful of counties follow a standard rate of $155 ($96 lodging, $59 meals + incidental expenses) while some specific cities have their own rates.
For example, Los Angeles ($182 lodging, $66 meals + incidental expenses) has a per diem rate of $248, nearly $100 higher than the standard rate.
Benefits of Per Diem
Per diem can be beneficial to both the employee and employer for multiple reasons.
For the employee, per diem helps reduce the burden of hand-recording costs on a per-expense basis and piling up a stack of receipts during their trip.
Plus, if the unspent money falls below the rates set by the government, the employee will get to keep the leftover cash (*if their company allows). This is also good for the employer because it can motivate the employee to keep costs low.
For the employer, per diem provides a cost-effective alternative to companies who need to find labor on short notice.
It also cuts down on the amount of paperwork necessary to verify business trip expenses and allows companies to accurately forecast an employee’s travel costs.
Benefits of Per Diem Employment
Per diem employment is appealing to many workers because it allows them to work on their own schedule and set their own hours.
In addition to a strong work-life balance and flexible scheduling, there are several other benefits of becoming a per diem employee, including:
Premium pricing: Because it can be challenging for companies to quickly find extra workers, per diem employees are often paid higher hourly rates than full-time employees.
Opportunity to gain more experience: Since per diem employees may work for more than one employer at the same time, they are given different roles depending on their specialties. As a result, they may gain experience in various areas and develop multiple skillsets.
Ability to explore various options before committing: Per diem work allows you to work with a variety of companies and figure out what you like and don’t like. If you find a company you enjoy working with, you can continue working or explore the possibility of becoming full-time. If you don’t enjoy a company, you can move on to the next, no strings attached.
While per diem employment can be beneficial, there are also some cons that come with it.
Standard employee benefits, such as healthcare coverage, sick and vacation time, do not apply to per diem employees.
Most employers do not provide fringe benefits to these staff members since they only work on a day-to-day basis.
In some instances, however, businesses may offer healthcare coverage to per diem employees if their plan provider allows it.
Per diem staffers usually receive annual reviews (with pay increases, if needed) that ensure the ongoing relationship remains mutually beneficial. It can be an invaluable tool for ensuring the worker is satisfied with the arrangement and performing the work correctly.
Having to keep track of every purchase during a business trip is a hassle. It’s one extra thing you have to worry about and leaves you with a pocket full of receipts.
But per diem solves this problem.
What does per diem mean? Per diem means that an employee receives a set allowance each day to cover for their travel expenses (hotels, meals, gas, etc.)
It eliminates the manual tracking of payments and the annoying paperwork.
Per diem can be beneficial for both the employee and the employer because it allows for both accurate forecasting of expenses and flexible scheduling.
If you’d like to know more about per diem, or have additional questions about tracking business expenses, reach out to us here at Insight Global for more help.