Table of contents
Per diem means “for each day” in Latin and refers to a set amount of money that companies pay to employees for each day they’re traveling for work. Employees receive the same amount of money each day no matter how much they spend when traveling.
Should Employers Pay Per Diem Rates?
Employers are not legally required to reimburse employees for business travel expenses. However, required business travel can be expensive when considering lodging, meals, gas, and airfare. Companies generally choose to pay for employees’ work-related travel because many employees would view not being reimbursed as unfair.
When reimbursing for travel, employers have two options: covering the costs of their actual travel expenses or paying a per diem rate. The advantage of paying a per diem rate is that it simplifies travel reimbursement—employees don’t need to submit receipts.
Per diem rates are typically adjusted for the cost of living in different areas. So, the amount that employers reimburse should be similar regardless of whether they pay actual expenses or a per diem rate.
What are Per Diem Rates?
Companies can calculate their own per diem rates for different countries or cities. Different allowances can be made for lodging, meals, and other expenses, or a company may choose to lump all expenses together into a single per diem rate.
Alternatively, for travel within the US, they can use standardized per diem rates that are calculated by the US government’s General Services Administration (GSA) each year. These rates are adjusted for the cost of living in hundreds of US cities and take into account seasonal changes in lodging costs.
GSA rates are broken down into per diem rates for lodging and per diem rates for meals and incidentals. Per diem rates for lodging are typically offered per night of travel, while per diem rates for other expenses are typically offered per day of travel. The GSA offers 75% of the full daily rate for meals on the first and last days of travel, since employees may spend part of these days at home or the office.
The US Department of State offers standardized per diem rates for international travel that companies may choose to use.
How to Calculate Per Diem
We’ll offer an example that shows how to calculate an employee’s travel reimbursement using the GSA’s per diem rates.
Say an employee is traveling to Denver in June for a 3-day conference. The GSA’s nightly lodging rate for Denver in June 2023 is $199. The meals and incidentals rate is $79 or $59.25 for the first and last day of travel.
In this case, per diem could be calculated as follows:
Lodging $199 x 2 nights = $398
Meals and incidentals ($59.25 x 2 days) + ($79 x 1 day) = $197.50
Total reimbursement $398 + $197.50 = $595.50
Is Per Diem Taxable Income?
Per diem may or may not be considered taxable income depending on the amount paid. If an employer pays per diem rates that are at or below those recommended by the GSA or State Department, then per diem is not taxable.
However, if an employer pays higher rates, the excess reimbursement above the federal-recommended per diem is considered taxable income. In the latter case, this excess reimbursement must be reported on an employee’s W-2 form.
Importantly, employees must also file daily expense reports with their employer for each day they are traveling. Expense reports must be filed within 60 days of the end of an employee’s travel. If an employee fails to file expense reports, their per diem reimbursement is considered taxable income by the IRS.
Conclusion
Per diem is a set amount of money that employees receive for each day of business travel to cover lodging, meals, and other travel-related expenses. Using per diem rates to reimburse employees for travel can reduce paperwork compared to paying actual expenses.
Employers are free to calculate their own per diem rates, but many choose to use the rates published by the federal government. If employees receive reimbursement in excess of that recommended by the federal government, this excess is considered taxable income.
