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 answer “What does per diem mean?”, 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.
Key takeaways
- Per diem is a fixed daily allowance that covers business travel essentials: Typically lodging, meals, and incidentals, so teams can travel without collecting itemized receipts for every purchase.
- Rates are location-based and updated annually in the U.S.: The General Services Administration publishes federal per diem rates each fiscal year, starting October 1.
- For international trips, per diem rates are set by the U.S. Department of State and can change frequently: Verify the destination's rate before travel at the State Department per diem directory.
- Tax treatment depends on compliance: Under an accountable plan, per diem up to federal rates is generally not taxable, while amounts above those rates are taxable. Employees must substantiate the business purpose, dates, and destination.
- A clear policy keeps budgets predictable and compliance high: Define covered expenses, timing (advance, reimbursement, or payroll), and proration for partial days. Expensify automates rate lookups, daily caps, and reimbursements end to end.
What does per diem mean?
What is per diem? The per diem definition (sometimes spelled as one word: “perdiem”) starts with its Latin roots: "for each day." In the business world, it's a daily allowance that companies give employees to cover travel expenses including lodging, meals, and incidentals.
Incidentals are minor expenses that come up during business travel, such as tips for hotel staff, baggage handling fees, or dry cleaning services.
The main advantage of per diem is simplicity. Instead of requiring employees to save every receipt (which usually includes itemized receipts) from a business trip and submit detailed expense reports, companies provide a flat daily rate. Employees receive their allowance and can spend it as needed, without the administrative burden of itemizing every meal or taxi ride.
How per diem works
Companies typically determine per diem rates based on travel destination and the expected cost of living in that area. For example, an employee traveling to New York City might receive a higher daily allowance than someone heading to a smaller market because lodging and meals cost more in high-cost cities.
The same principle applies globally. Companies headquartered in London, Berlin, or Singapore set location-based rates that reflect local costs, whether employees are traveling domestically or internationally.
Business travel continues to represent a significant portion of corporate spending. According to the U.S. Travel Association, business travel generated $312 billion in spending in 2024, with individual work-related trips accounting for roughly $186 billion of that total.
So, as organizations manage large travel budgets, standardized reimbursement approaches like per diem help control costs and simplify expense management.
Who receives per diem?
Per diem allowances are typically provided for:
Employees traveling for business purposes. This includes sales representatives visiting clients, consultants working at client sites, executives attending conferences, or anyone whose job requires overnight business travel.
Government workers and contractors. Federal, state, and local government employees often receive per diem for official travel, following established government rates.
Temporary workers on assignment. Professionals working on short-term projects away from their home base may qualify for per diem rather than relocation assistance.
When employees receive per diem payments
Companies handle per diem payments in different ways, depending on their cash flow policies and administrative preferences:
Before travel: Some companies provide per diem as an advance payment, giving employees cash or a deposit before the trip begins. This approach helps employees avoid using personal funds for business expenses.
After travel: Other organizations reimburse employees for per diem after the trip is complete. The traveler submits documentation showing the business purpose, destination, and dates of travel, then receives payment.
With payroll: Some companies add per diem to regular paychecks during the travel period. This method integrates per diem payments into existing payroll systems rather than processing separate reimbursements.
Partial days and unused per diem
Most companies prorate per diem for partial travel days, particularly the first and last day of a trip. A partial day occurs when an employee begins travel partway through the day or returns home before the day ends. Rather than paying a full day's allowance when someone leaves at 3 PM or arrives back at 10 AM, companies typically provide 75% or 50% of the standard rate.
What happens to leftover per diem funds varies by company policy. In following federal guidelines, many organizations allow employees to keep any unspent allowance. This approach can actually encourage cost-conscious behavior since employees have a financial incentive to spend wisely.
An important note: employees may be subject to reporting this unspent allowance on their tax return, so they should check with their tax preparer if they’re unsure what’s required for their personal situation.
Other companies require employees to return unused funds or provide receipts showing how the allowance was spent.
Per diem vs expense reimbursement
Most companies use two main approaches to cover employee travel costs: per diem allowances and actual expense reimbursement. Each method has distinct advantages, depending on business needs.
| Per diem | Expense reimbursement |
|---|---|
| Fixed daily amount regardless of actual spending | Reimburse exact amounts with receipts |
| Minimal paperwork and receipt collection | Detailed documentation required |
| Predictable budgeting for finance teams | Costs vary based on actual spending |
| Employees may spend less to keep difference | No financial incentive to reduce spending |
| May not cover costs in expensive locations | Accurately reflects true travel expenses |
| Fast processing without review of receipts | Slower processing due to receipt verification |
Per diem provides a fixed daily allowance for meals, lodging, and incidental expenses, offering predictability and streamlined 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 receipts for every expense, providing a precise record of spending but creating significantly more administrative work for both travelers and finance teams.
What expenses does per diem cover?
Per diem typically covers three main expense categories during business travel, though the specific structure can vary by organization.
Lodging
Lodging allowances cover hotel or accommodation costs during business trips. Many per diem systems, particularly federal rates, separate lodging from other expenses because hotel costs can vary dramatically by location.
Some companies include lodging in a single, combined per diem rate, while others provide a separate lodging reimbursement alongside meals and incidentals.
Meals and incidental expenses
M&IE (meals and incidental expenses) combines daily food costs with small miscellaneous expenses. Under a per diem policy, meals typically include breakfast, lunch, and dinner eaten during business travel.
Incidentals bundled with meals include things like: tips for service staff, porter and baggage fees, dry cleaning or laundry during extended trips, and other minor personal expenses related to travel.
Federal per diem rates published by the General Services Administration separate lodging allowances from meals and incidental expenses (M&IE), with rates varying by location and updated each fiscal year.
Transportation
Transportation expenses such as flights, rental cars, and mileage are usually reimbursed separately and are not part of the standard per diem allowance.
What does per diem not cover?
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.
Types of per diem
Per diem rates and structures vary, depending on whether you're dealing with government agencies, private companies, or international travel.
Government per diem
The General Services Administration (GSA) sets federal per diem rates for U.S. government employees traveling domestically. The GSA is the federal agency responsible for managing government property and establishing standard reimbursement rates. These rates serve as benchmarks that many private companies use when creating their own per diem policies.
Federal rates distinguish between standard locations and high-cost areas. Travel to major cities like San Francisco, New York, or Washington, D.C., qualifies for higher per diem amounts than smaller markets with lower costs of living.
Many countries outside the United States maintain similar government-established per diem systems. European Union institutions publish per diem rates for staff travel, while individual member states like Germany, France, and the Netherlands establish their own official rates for public sector employees.
Companies headquartered in these regions often reference government rates as starting points for their corporate policies, just as U.S. companies reference GSA rates.
Corporate per diem
Private companies can establish their own per diem rates based on business needs and budget considerations. Some organizations adopt GSA rates as a starting point, then customize them based on where employees typically travel and how much the company wants to spend on travel allowances.
Companies headquartered outside the United States follow similar approaches, often referencing their home country's government rates or industry standards. A company based in Amsterdam might use Dutch government rates for European travel while establishing separate rates for trips to Asia or North America.
The core principle remains consistent across regions: set location-based allowances that balance cost control with employee support.
Companies might set flat rates for simplicity, tiered rates based on destination cost levels, or role-based rates that provide different allowances for executives versus individual contributors.
International per diem
International business travel follows a different per diem structure than domestic trips in the United States. While federal domestic rates are published by the General Services Administration (GSA), international per diem rates are established by the U.S. Department of State.
These rates vary significantly, depending on the destination and are updated regularly based on local lodging costs, currency fluctuations, and economic conditions. Companies that rely on standardized travel allowances often reference the official State Department per diem tables when creating international travel expense policies.
Employers and travelers can verify the current rates for specific destinations using the U.S. Department of State's international per diem directory.
What is a per diem job?
Beyond travel allowances, you might wonder, “What is per diem work?” Well, Per diem work is working on an as-needed basis without guaranteed hours or a set schedule. Think of it as on-call employment where workers fill in when regular staff are unavailable.
Per diem employee meaning
A per diem employee is someone hired to work irregular schedules, typically filling shifts as needed rather than following a consistent schedule. This employment structure is common in industries with fluctuating staffing needs, such as:
Healthcare: Nurses, therapists, and medical technicians who cover shifts at hospitals or clinics when regular staff call out or during busy periods.
Hospitality: Hotel workers and event staff brought in during peak seasons or special events.
Education: Substitute teachers who fill in for absent regular teachers.
Per diem employees are different from part-time workers who have regular scheduled hours, and from full-time employees with consistent schedules and comprehensive benefits.
Per diem pay and work scheduling
What is per diem pay? Per diem employees typically receive higher hourly rates than their full-time counterparts to compensate for the lack of guaranteed hours and reduced benefits. The pay premium offsets the uncertainty of irregular work schedules.
Scheduling works on short notice. Per diem workers might get called the day before a shift or even the morning of, depending on immediate staffing needs. This flexibility benefits employers who need to cover gaps quickly, while giving workers the freedom to accept or decline shifts based on their availability.
Benefits of per diem
Per diem offers several advantages for both companies and employees managing business travel expenses.
Simplified administration
Per diem eliminates the tedious process of collecting, organizing, and reviewing countless receipts. Finance teams spend less time scrutinizing expense reports, and employees avoid the hassle of documenting every meal and taxi tip. This reduction in paperwork frees up resources for more strategic work.
Improved budget predictability
Companies can forecast travel costs more accurately when using fixed daily rates. Instead of wondering whether a team member will spend $40 or $140 on dinner in a particular city, finance teams know exactly what the daily cost will be. This predictability makes budget planning and expense forecasting significantly more reliable.
Increased policy compliance
Clear, daily limits reduce disputes over appropriate spending and make policy violations easier to identify. When the daily allowance is transparent and predetermined, there's less room for interpretation about what constitutes reasonable expenses.
Potential cost savings
Employees who know they can keep unused funds may choose less expensive options, benefiting both themselves and the company. This natural incentive to spend wisely can lead to meaningful savings over time without requiring micromanagement of individual spending decisions.
Challenges and downsides of per diem
Per diem policies also present some practical challenges that organizations should consider:
Geographic variations: Standard per diem rates may not adequately cover actual costs in unusually expensive cities or during peak travel seasons, leaving employees to cover the difference from their own pockets.
Perceived unfairness: Employees traveling to high-cost areas may feel shortchanged if the per diem doesn't match their actual expenses, while those in lower-cost locations might receive more than they need.
Tracking complexity: Managing different rates for different locations, adjusting for partial days, and handling exceptions requires administrative systems that can handle geographic variations.
Policy abuse: Without proper oversight, some employees might claim per diem for trips that didn't occur or extend business travel unnecessarily to collect additional allowances.
How to create a per diem expense policy
A clear, well-documented per diem policy ensures consistency, reduces confusion, and helps maintain both budget control and employee satisfaction. With Expensify, you can enable per diem expenses and automate many aspects of policy enforcement, making implementation easier.
The IRS requires employees to document the business purpose, travel dates, and destination of trips even when per diem allowances are used, ensuring organizations maintain compliance under accountable plan rules. See IRS Publication 463 for current rules.
Here's what a basic per diem policy structure might look like:
| Policy element | Example |
|---|---|
| Domestic per diem rates | Lodging: Based on GSA rates by location; M&IE: $79/day (standard), $94/day (high-cost cities) |
| International per diem rates | Europe: €120/day; Asia-Pacific: $135/day; Other regions: Based on State Department rates |
| Partial day calculation | First/last day of travel: 75% of standard rate |
| Payment timing | Advance payment available five business days before travel |
| Covered expenses | Meals, tips, baggage fees, dry cleaning, internet access |
| Not covered | Flights, rental cars, hotel stays (reimbursed separately), personal entertainment |
| Documentation required | Travel dates, destination, business purpose |
| Unused funds | Employee may keep unspent allowance |
| Approval required | Manager approval for trips over seven days or exceeding $1,500 total per diem |
1. Research GSA rates and industry standards
Start by reviewing current federal per diem rates as a benchmark. The GSA publishes updated rates each October covering hundreds of locations across the United States. These rates reflect government research into actual lodging and meal costs in each area.
For companies headquartered outside the United States, research your home country's government-established rates or industry benchmarks. Many European countries publish official per diem rates that serve the same benchmarking function as GSA rates in the U.S.
Next, consider industry standards and what competitors typically provide. Some sectors have established norms for travel allowances.
Finally, analyze your company's historical travel data to understand where employees travel most frequently and what they typically spend.
2. Define covered expenses and limits
Specify exactly which expenses the per diem covers and any daily caps or restrictions. Clear documentation prevents confusion and disputes later.
Decide whether lodging is included in the per diem or reimbursed separately. Clarify which meals are covered and whether there are different rates for different meal times. List which incidentals are included and which require separate approval.
Document any expenses explicitly excluded from per diem coverage, such as personal entertainment or alcohol beyond reasonable business meals.
3. Establish approval and documentation processes
Outline who needs to approve per diem requests before travel occurs. Specify what minimal documentation employees must provide, such as proof of business purpose, travel dates, and destination. Create a clear exception handling process for unusual circumstances that fall outside standard policy.
Even though per diem reduces receipt collection, employees should still document their travel itinerary and business justification to maintain IRS compliance under accountable plan rules.
4. Communicate the policy to employees
Make the policy easily accessible through your employee handbook, company intranet, or expense management platform. Provide training sessions for frequent travelers so they understand how to calculate their allowances and what documentation they need to submit.
Create quick reference guides or FAQs addressing common questions about partial days, weekend travel, and how to handle expenses that exceed the allowance.
5. Choose technology to track and automate per diem
Manual per diem tracking creates opportunities for errors and inconsistencies. Expense management software automates per diem calculations based on destination and travel dates, enforces policy limits without requiring manual review, and integrates with accounting systems to streamline reimbursement payments.
Expensify automatically looks up current GSA rates based on travel location, applies daily caps and proration rules for partial days, and processes reimbursements quickly so employees get paid back for travel expenses without delays.
How to calculate per diem
Calculating per diem involves determining the appropriate rate based on travel destination, then applying that rate to the number of days traveled while accounting for partial days.
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 ($) | Incidentals ($) | Total Per Diem ($) | |
|---|---|---|---|---|---|
| 10/15/2025 | New York, NY | 80 | 200 | 20 | 300 |
| 10/16/2025 | New York, NY | 80 | 200 | 20 | 300 |
| 10/17/2025 | New York, NY | 80 | 200 | 20 | 300 |
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 $300 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.
Simplify per diem management with Expensify
Managing per diem manually means looking up rates for each destination, calculating daily amounts, tracking partial days, and processing reimbursements for every trip. Expensify automates the entire workflow.
The platform automatically retrieves current GSA and State Department rates based on travel location and dates. It applies company-specific policy rules and daily caps, calculates proration for partial travel days, and processes reimbursements through ACH or integrates with existing accounting systems for seamless payment.
For companies outside the United States, Expensify can be configured with custom per diem rates that reflect your organization's policy and regional standards.
Realtime visibility into travel spending helps finance teams monitor budgets and identify patterns, while employees get paid back faster without chasing down approvals or wondering about calculation errors.
Get started today with Expensify to streamline per diem tracking and simplify travel expense management.
FAQs about per diem
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Per diem payments are generally not taxable if they do not exceed federal rates and the employee provides basic documentation of business travel purpose, dates, and destination. Amounts exceeding federal limits are typically taxable and must be reported as income.
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GSA per diem rates vary by location and are updated annually each October. Employers should check the GSA website for current rates specific to each travel destination. Rates range from standard amounts for most locations to higher rates for expensive cities.
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Many companies allow employees to keep unused per diem funds, which can encourage cost-conscious travel spending. Federal per diem policies permit this, though individual company policies may differ. Some organizations require employees to return unspent allowances.
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Same-day travel typically qualifies for reduced per diem or meals-only allowances, depending on company policy and whether the trip includes an overnight stay. Many companies do not provide lodging per diem for same-day trips but may offer a reduced meal allowance.
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When expenses exceed the per diem allowance, employees typically cover the difference out of pocket unless company policy allows exceptions with manager approval. Some companies permit employees to submit receipts for actual expenses instead of taking per diem if they know costs will be higher than the standard rate.
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