What is a Per Diem?
A Per Diem (Latin for “per day”) is a fixed daily reimbursement that a business gives to its employees who are traveling longer than a day for business purposes. Per Diem payments can be given for both lodging and meals & incidental expenses (M&IE) or only M&IE, depending on the situation and where the employee is traveling. For example, the company may have a dedicated condo for employee travel in a specific city and thus would not need to reimburse its employees for lodging there. M&IE includes any expense associated with traveling away from home that doesn’t fall into the lodging category. M&IE examples are meals, room service, luggage handlers, dry cleaning, and tips.
It is generally accepted that employee trips qualify for per diem allowances when traveling greater than 50 miles from their “tax home” (normal residence) and are traveling for more than 12 hours but less than 12 months in the same location. The standard per diem rate for 2019 is $94 for lodging and $55 for meals, though this amount may change based on the city and time of year. See the per diem link.
Taxing Per Diem Reimbursements
Per Diem allowances are tax exempt as long as they fall within the government-regulated guidelines and the employee submits an expense report to their employer. Any amount that is reimbursed to the employee for a per diem expense that is greater than the highest per diem limit set by the government is considered income. The employee is then obligated to pay tax on that amount.
How are Per Diem Amounts Decided?
On October 1, the beginning of the United States’ fiscal year, the U.S. General Services Administration (GSA) sets two amounts for per diem allowances: a standard rate for specific destination cities and a “high-low” rate that can be applied to all cities within the country. Destinations outside of the U.S. are set by the Department of Defense (DOD) or the state department, depending on the city’s location. The “high-low” method categorizes cities in the U.S. as either high-cost or low-cost and assigned a per diem amount based on their status. A list of high-cost cities is released each year; any cities not included are considered low-cost. Employers generally follow these rate guidelines when deciding how much to give their employees, but can choose any amount.
- Reduces paperwork. Because employees are not submitting receipts, employers do not need to deal with the extra related paperwork. Eliminating paperwork reduces the employee hours necessary to do this work.
- Encourages employees to make more frugal choices. When employees are given a spending limit with an out-of-pocket alternative, they are more likely to stay within the parameters. This may save the business money in the long run.
- Better for budgeting. Companies will find it easier to budget if they know the exact amount allotted to employees for business trips than to estimate how much they need to reimburse after the fact.
- Reduces accounting errors. With fewer numbers and receipts to process, fewer errors are made when processing expenses.
- Reduces paperwork. Like the business, per diem expenses save employees the time and effort of collecting receipts and submitting to their employer, particularly on work trips that may span months.
- Retain leftover allowance. Many employers consider per diem to be a bonus to their employees and any amount that is leftover after meals and incidentals can generally be kept by the employee. If you are unsure if this is the case at a certain company, consult the employer.
- Better for budgeting. Employees can submit a per diem request form before traveling to ensure they have any needed cash for the trip
- Resolves the lost receipt problem. Even the most careful employees can inadvertently misplace receipts while traveling and not have one to turn in for an expense. Per diem programs ensure the employee is properly reimbursed for the expense.
- Predictions can be incorrect. Though standard rates are set by the government, it can be tricky to really know how much will need to be spent each day. Lodging and meal prices can vary within different areas of the same city.
- May restrict employee choices. If employees are limited in their spending, they may be less likely to spend money on expenses that benefit the business. For example, picking up the bill at a client lunch looks more appealing if the employee is not worried about exceeding their per diem limit.
- Less accurate. Employees are required to keep an expense report but without receipts, there is no verification where money was spent. This affects the company’s ability to analyze employee spending, or worse, facilitates fraud.
- Possible out-of-pocket expenses. Spending over the per diem limit results in the employee paying with their own money, instead of being reimbursed by their employer. Even if the business reimburses their employee for these expenses it is considered taxable income.
- Payment inequality. Depending on what time of day employees tend to travel, some may be getting paid less than others for their time. Employees get paid ¾ of their per diem on travel days and workers that leave at, for example, 6 am are getting paid less for their time than those leaving at 5 pm.
Per Diem Alternatives
The decision to use per diem depends on what works best with the business’ structure. There are two alternatives to the per diem method that several businesses have used for decades:
- Keeping detailed expense records or using corporate credit cards. As mentioned earlier, saving receipts can be a hassle for both the employee and the business, but the reporting is more accurate.
- Using a corporate card or expense account is the most reliable way to track spending and doesn’t require the employer to reimburse their employees, but demands a level of trust. All of these methods are applied often and can be successful for various businesses.
No matter what decision an employer makes, it should reflect the needs of the company. In different phases of growth, different methods will work, including a combination of elements from more than one of these methods. Regardless, Per Diem is a much more viable option now after the new law change around non-deductible meals and entertainment. To consult with accountants that are familiar with the most up-to-date tax rules, contact Simply Counted Business Services, Inc.
About the Author
Diana is an Accredited Business Accountant/Consultant with more than 25 years of experience. She is a graduate of Ferris State University and an active member of Toastmasters International.