What does per diem mean? How to create a per diem expense policy
The world has become increasingly globalized, so it’s no surprise that business travel has become an even more essential component for many organizations that want to expand their reach and foster relationships. However, managing the financial aspect of these trips can get a little… complicated. One way companies often use to streamline travel expenses is the “per diem system,” which offers employees a predetermined daily allowance for expenses incurred while traveling. Understanding how per diem works and establishing a clear policy can help businesses control costs while providing their employees with flexibility.
In this article, we’ll explore what per diem means, compare it with other expense reimbursement methods, and guide you through creating a comprehensive per diem travel expense policy tailored to your organization’s needs.
The per diem definition – what is per diem, and how does it work?
Business travel is common in many professions, allowing employees to attend meetings, conferences, or projects away from their regular work location. Effectively managing travel expenses is vital for both the company and the employee to ensure trips are cost-efficient without compromising safety or comfort. Enter the per diem system.
What does per diem mean? Latin for “by the day,” a per diem is a daily allowance given to employees by their employer to cover expenses incurred while on business trips.
How does per diem work? A per diem travel expense is intended to simplify the reimbursement process by providing a fixed amount for daily expenses, such as meals and incidental expenses, without requiring detailed (itemized) receipts for each transaction – though there may be some exceptions.
Per diem rates are usually determined by the employer or based on government per diem rates like the U.S. General Services Administration (GSA) rates. Regarding taxation, per diem is generally not taxable as long as it adheres to the IRS guidelines and doesn’t exceed federal rates. A clear per diem travel policy helps companies simplify spend management, save time, and reduce the administrative burden while ensuring employees are adequately compensated.
Per diem vs. the actual expense reimbursement method
Two primary methods for reimbursing employees are per diem and actual expense reimbursement. Each has its own set of advantages and disadvantages.
Per diem provides a fixed daily allowance for meals, lodging, and incidental expenses. It offers predictability and can streamline budgeting for both employers and employees. However, the per diem rates may not always match actual costs, which could be a disadvantage in high-cost cities.
Actual expense reimbursement requires employees to submit detailed expense reports with receipts. This method ensures employees get compensated for the exact amount spent. However, it can be time-consuming and increase the administrative workload. It also requires scrutiny to prevent financial fraud.
Ultimately, choosing between per diem and actual expense reimbursement depends on a company’s specific needs and policies.
What’s in a per diem travel expense policy?
A per diem travel expense policy is a structured way for companies to manage employee travel costs. It outlines the daily allowance for meals, lodging, and incidental expenses. Let’s break it down further.
Per diem rates
In the U.S., per diem rules and rates are determined by the GSA for domestic travel and by the Department of State for foreign travel. These rates can vary widely, depending on the location and whether it’s considered a high-cost area, as such locations often have higher rates to accommodate increased expenses.
Eligibility
Per diem allowances are typically offered to employees who travel for business purposes. Eligibility may depend on the trip duration and whether the employer provides meals. Some policies may exclude certain types of travel or periods that don’t align with the company’s business needs.
Meal expenses vs. incidentals
Under a per diem policy, “meals” refer to the cost of breakfast, lunch, and dinner. Incidental expenses include minor costs such as tips and laundry. Depending on the policy, the per diem rate allocated for meals can be itemized or given as a lump sum.
Receipts and documentation
Remember when we mentioned there may be exceptions to submitting itemized receipts? While per diem simplifies the travel expenses process, keeping receipts or providing an equivalent may be necessary for expenses that exceed a specific threshold as outlined by GSA regulations. For example, non-receiptable expenses, such as mileage, might require alternative documentation like mileage logs to get reimbursed for mileage.
Unused per diem
Employees might wonder about how to handle unused per diem funds. According to IRS regulations, the employee typically does not keep unused per diem. It’s important to note any tax implications associated with per diem amounts, which can be found in an announcement on the IRS’s official website.
Creating your own per diem travel expense policy
When creating a per diem travel expense policy, consider your company’s size and how often employees travel. Frequent trips may need a more detailed policy, whereas sporadic travel might allow simpler guidelines.
Research typical travel destinations and analyze common expense patterns to set realistic and fair per diem rates. Balance the need for flexibility in expense management with the control required to maintain company budgets. And ensure compliance with legal requirements by looking into tools or software that can simplify managing per diem expenses.
Steps for creating your per diem travel expense policy
Here are the steps for creating your own per diem expense policy. By carefully considering the following factors, you can create an effective per diem policy that benefits your company and its travel employees.
Assess travel needs: Evaluate the volume and nature of your company's business travel, including popular destinations and typical durations.
Research current rates: Consult government per diem rates, such as GSA per diem rates, to understand standard allowances for meals, lodging, and incidental expenses.
Determine rates: Based on research, set your company's per diem rates and align them with your budgetary requirements. If necessary, consider different rates for various destinations.
Define rules and exceptions: Clearly outline what is covered by per diem allowances and any exceptions, such as special events or additional expenses beyond the standard allowance.
Develop a policy document: Create a comprehensive document detailing the per diem travel policy, ensuring clarity and accessibility for all employees.
Implement tracking tools: Use software to track per diem expenses and simplify reimbursements, aiding compliance and financial management.
Per diem expense report example
As you’ve seen throughout this article, understanding what per diem means and how to make an effective policy can streamline travel budgeting. Now that you know the steps it takes to create your own policy so employees know how to submit an expense report, here’s an example of what that could look like:
| Destination | Meals ($) | Lodging ($) | Incidental ($) | Total Per Diem ($) | |
| 10/15/2024 | New York, NY | 70 | 200 | 20 | 290 |
| 10/16/2024 | New York, NY | 70 | 200 | 20 | 290 |
| 10/17/2024 | New York, NY | 70 | 200 | 20 | 290 |
So, in this particular example, the employee traveled to New York for three days. A fixed per diem rate covered meals, lodging, and incidental expenses totaling $290 per day, following the company’s per diem travel policy. This approach ensures compliance with organization guidelines while facilitating hassle-free reimbursements.
One thing to note: if the employee’s expenses exceed the company’s per diem rate, they can submit individual receipts for reimbursement. However, the employee cannot claim per diem and actual expenses for the same day, so review the company’s per diem policy to determine if the per diem allocated will be enough to cover their daily meals and incidentals.
What does per diem cover and not cover?
While per diems provide a convenient way to reimburse employees for daily expenses during business trips, it’s important to understand that they don’t cover every expense.
Specifically, per diem is designed to encompass meals such as breakfast, lunch, and dinner and incidental expenses such as gratuity, laundry, and other small, non-meal-related expenses.
Per diem does not typically include expenses such as transportation, lodging, and other major costs associated with travel. For these types of expenses, ensure you’re tracking and submitting receipts to get paid back. Additionally, expenses incurred during non-business-related activities or personal days during the business trip are not eligible for per diem reimbursement.
The benefits of per diem
Because business travel involves managing numerous expenses, and per diem helps streamline this process.
For employers, using a per diem policy simplifies expense management by setting fixed daily rates for travel-related costs such as meals and lodging expenses. This approach reduces paperwork since employees do not need to submit individual receipts for every expense. Additionally, a well-structured per diem plan can enhance employee satisfaction by providing upfront clarity and reducing the hassle of detailed expense reporting.
For employees, per diem simplifies tracking and reporting travel expenses. A set allowance eliminates the need to meticulously track every purchase, thereby reducing out-of-pocket costs and financial stress during trips. Per diem provides clear guidelines on what types of expenses are covered, offering employees peace of mind and reducing uncertainty about which expenses are reimbursable.
Potential drawbacks of per diem
As with anything, there are some potential drawbacks of per diem. Here’s what to know.
Misconceptions and misuse: Misconceptions and misuse of per diem can arise when employees misunderstand the purpose, leading to overspending or incorrect allocation of funds. In turn, this can affect the financial integrity of company travel policies.
Limitations and restrictions: Furthermore, per diem rates are subject to limitations and restrictions. They often cover meals and lodging but not other necessary travel expenses like transportation. If expenses are higher than the allocated per diem allowance, employees may have out-of-pocket costs.
Tax implications: Tax implications and considerations also pose a challenge. While per diem rates are generally non-taxable, improper documentation can lead to tax liabilities. Companies must ensure adherence to IRS guidelines to avoid unexpected taxes.
Cut down expense management time with a per diem policy
Now that you’re convinced that per diem is the way to go for certain expenses, how can you start immediately? Employers can easily set per diem rates directly in an app like Expensify to ensure employees are automatically following the company’s per diem policy, resulting in reduced paperwork and saved time. Per diem rates can be based on location, trip duration, and more based on your company’s needs.
Interested in setting up a per diem travel expense policy for your employees? Sign up below and get started right away!
FAQs about per diem expense policies
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Is per diem taxable? Per diem payments are generally not considered taxable income as long as they adhere to IRS guidelines, covering travel expenses like meals and lodging. However, if employees do not provide proper documentation or the rates exceed IRS-established limits, the payments could become taxable.
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A $ 100-a-day per diem means an employee receives a fixed daily allowance of $100 to cover specific travel-related expenses such as meals and incidentals. This simplifies reimbursement processes and keeps expense management straightforward for both employers and employees.
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The standard per diem meal allowance varies by location and is set by the government or your company. In the US, the federal government sets per diem rates for federal employees, which you can find on the GSA website. However, individual companies often have their own per diem policies.
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A per diem expense report is a document used by employees to record their daily per diem allowances during business travel. It provides details like dates, destinations, and the per diem rate applied, ensuring accountability and adherence to company policies for travel allowances.
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As previously mentioned, receipts are not generally required for per diem expenses because the allowance is standard and predefined. This reduces the administrative burden on employees and simplifies the expense report process. However, employees should keep track of travel locations and dates for documentation.
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Whether an employee can keep unused per diem from business travel depends on the company's policy. Some companies allow employees to keep the unused portion, while others require it to be returned or used to offset future expenses. It's best to consult your company's travel policy, company admin, or HR department for specific guidelines. Also, remember that if the amount exceeds the allowable per diem rates set by the GSA, it’s considered taxable income because it falls under the category of additional compensation.
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If actual expenses exceed the per diem rate, employees have limited options. They may need to cover additional costs out-of-pocket or consult company policy for potential reimbursement beyond the per diem. Employers might allow exceptions, but this depends on specific travel policies.
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Alternatives to per diem travel expense policies include actual expense reimbursement, where employees submit receipts for individual expenses incurred. This method ensures precise reimbursement but can be more time-consuming and administratively demanding, requiring detailed documentation and processing of travel costs.
