What is per diem? Well, at its most basic, it’s a Latin phrase meaning, “for each day.” But at a practical level, what does per diem mean when paying employees?
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There are two main approaches to applying the use of per diem rates:
- As daily allowances for employees traveling for business.
- As payment for short-term workers who are paid a daily rate for their work, rather than an hourly rate or a salary.
Let’s take a look at the meaning of per diem in both these contexts.
How do I pay a per diem for traveling employees?
One way you can reimburse your employees for business travel expenses is through per diems. Examples of items the IRS deems eligible for a per diem include:
- Laundry, dry cleaning, and pressing of clothes
- Room service
- Fees and tips for service providers, including baggage handlers and food servers
Note that per diems don’t include transportation to and from each location. As a business owner, you can either make travel arrangements for your employees, or you can let employees book their own travel and then reimburse them.
You may also choose to make travel arrangements for your employees that include transportation to the location as well as lodging. In this case, you can offer a Meals and Incidentals Expenses per diem, which includes everything in the list above except for lodging.
You can provide the employee with the per diem up front, perhaps by giving the employee cash or assigning them a company credit card. Some companies also allow the employee to keep any amount they don’t spend. Or, you can reimburse your employee when they return.
What are the per diem rates?
You can set your own per diem rates, but the government also has its recommendations based on where your employee travels. You can use a rate that includes all IRS-eligible costs or only compensate for meals and incidentals.
There are two methods of calculating per diem rates.
If you want to plan based on a specific city or state, you can use the GSA’s handy per diem tool. You should use the rates for the place where your employee will be staying overnight.
If you want to make things easier and get rid of the need to keep track of individual city rates, you can use the high-low substantiation method instead. The IRS releases new rates each year for the continental United States: one for high-cost areas and one for all other areas.
For example, the 2020-2021 rates are:
|High-cost areas||All other areas|
|Total per diem||$292||$198|
|Meals & incidentals only per diem||$71||$60|
You can find out which places are considered high-cost each year via that year’s IRS bulletin (see Section 5).
If your employee is traveling to Alaska, Hawaii, or a U.S. territory, look at the per diem rates set by the U.S. General Services Administration. For travel outside of the U.S., the State Department sets the per diem rates.
Lastly, if you’re in the transportation industry, there’s a separate set of Meals and Incidentals Expenses rates for you (see Section 3).
Per diems on the first and last days of travel are 75% of the total daily allowance.
What if I pay less than the federal per diem rate?
You also don’t have to compensate your employees at the federal rate.
If you choose to pay less, the IRS offers two choices for setting your per diems:
- Take your total per diem amount, subtract the standard meals and incidentals rate, and treat the remainder as the lodging per diem; or
- Take your total per diem amount, and designate 60% for lodging and 40% for meals and incidentals.
Regardless of what per diem rates you choose, it’s important to be consistent. So pick a method that works for your business, and stick with it for all employee business travel.
Are there tax implications with per diems?
Yes, and no.
You can pay your employees whatever you think is reasonable for a per diem, but there can be tax implications for both you and your employees.
Let’s talk about your employees first. They don’t have to pay taxes on per diems that are:
- Equal to or less than federal per diem rates; and
- Properly reflected on an expense report they file upon return.
But any amount you give above the federal rate is considered taxable for the employee.
And if you choose to provide a set amount and don’t require an expense report—which allows your employee to keep any excess—the entire per diem becomes taxable income to your employee.
Expense reports from employees should be filed within 60 days of travel and should include information such as:
- Business purpose
- Lodging receipts, if applicable
- Whether payment meets the GSA M&IE rate or differs
If an employee does not properly report the expenses, they could be required to pay tax on the reimbursement. We recommend chatting with your accountant (and your employees!) if timely and accurate expense reporting is a struggle.
Per diems can also impact your taxes as an employer.
You may be able to deduct portions of per diems paid to employees as business expenses. That, in turn, can reduce your business income for tax purposes.
To take advantage of these deductions, you need to make sure you keep good records. The more complete the records, the better your ability to deduct the expenses. Talk to your accountant to confirm what you can and cannot deduct.
What does per diem work mean?
Now that we’ve gone over the first type of per diem, let’s discuss per diem employment.
This is when you have workers that come in on a per-day basis to fill in gaps left by regular workers, say when a regular employee is vacationing or is on medical leave. Rather than paying per diem workers hourly, you agree on a per-day rate.
When calculating your budget and expenses for per diem workers, be sure to keep in mind the following:
- While per diem workers are paid a daily rate, it’s important to calculate their hourly rate to ensure that you don’t violate any minimum wage laws.
- If your per diem workers are traveling for work, you’ll want to cover those business-related travel expenses. Per diem workers can receive a per diem for travel!
- Employers are additionally required to pay overtime to per diem workers who log more than 40 hours in a week, or more than 8 hours in a day. Overtime pay tends to be 1.5x the “regular rate” of pay, which includes all wages and compensation—including per diems for travel—earned during a workweek. Overtime laws vary by state, so be sure to check in with your legal counsel.
Per diem workers can be classified as either employees or contractors. So make sure you still follow the relevant payroll rules, be it keeping good records or paying employer payroll taxes.
Quick note: This is not to be taken as tax advice. Since tax rules change over time and can vary by location and industry, consult a CPA or tax advisor for specific guidance. Find an accountant here.
This post was originally published on November 1, 2019.