What are Per Diem Payments?

Per diem payments are like the allowance you got as a kid…

When you were young, your parents may have given you a weekly allowance, so you’d have money to spend when you were out with your friends. Per diem works like an allowance, except it’s one that employers give to their employees for work-related travel expenses.

A per diem payment is a daily amount that employers give to employees to cover certain expenses while they’re traveling for work. Per diem payments typically cover meals, lodging, transportation, and incidental expenses.

Employers can choose one of two different types of per diem payments. First, employers can give their employees a flat amount per diem. In that case, they designate a daily rate they’ll provide to employees, and the employee can spend it as they please on their trip.

In this situation, the employee doesn’t necessarily have to file an expense report, and they can probably keep any money they don’t spend, although it can vary by employer.

The other option for paying per diem is to reimburse employees for expenses they incurred on their trip. With this type of per diem, employees might have to pay the costs upfront.

Then they’ll have to file an expense report when they get home. The employer will ultimately reimburse them for their out-of-pocket costs, up to the maximum daily per diem amount.

Each company is responsible for setting its own per diem rate, though they can use the federal per diem rate as guidance. How a firm chooses to do this depends on what type of per diem payments they use.

If the company uses fixed per diem allowances, they might designate a lump sum that an employee receives and can allocate as they wish for meals, lodging, and incidental expenses.

If an employer makes per diem payments by reimbursing out-of-pocket expenses, then it might set separate rates for meals, lodging, and incidental expenses. In this case, the employee is generally more restricted as to how they can spend the money.

Every year the U.S. General Services Administration (GSA) sets a federal per diem rate. The GSA generally sets one standard per diem rate — In 2021, the GSA rate is $151 per day. That $151 breaks down to a lodging rate of $96 and a meal and incidental rate of $55.

The GSA also sets geographic per diem rates. Since some parts of the country are more expensive than others, there might be a higher per diem rate if an employee is traveling there.

Per diem rates can vary widely depending on where an employee is traveling. If an employee is going to New York City, for example, the lodging rate increases from the standard $96 per night to $298 per night. The meal rate increases from $55 per day to $76 per day.

While many locations (319 destinations as of 2021) may have per diem rates that are higher than the standard rate, no place has a per diem rate that is lower than the standard rate.

The federal per diem rate only applies to full travel days. On the day an employee leaves for their trip, and on the day they return from their trip, the per diem rate is only 75% of the standard rate.

The federal per diem rate applies to all government employees, but private employers don’t have to use the federal per diem rate. They can instead choose to offer a higher or lower rate to their employees. If the company decides to provide a per diem rate that is higher than the federal rate, it could result in the employee paying income taxes on those payments. Employers can also choose to offer no per diem at all.

Companies might choose to make per diem payments in one of several different ways. In the case of fixed per diem payments, an employer is likely to provide these funds to employees upfront. That way, employees can use that money while they’re traveling.

When it comes to per diem payments based on an employee’s expenses, the employer might ask the employee to pay for expenses out-of-pocket while they’re traveling. Then, after the employee returns and files an expense report, the employer will reimburse them for their costs.

The final way that employers can pay per diem is through a company credit card. Rather than asking an employee to pay for expenses and then reimbursing them, the employee brings a company credit card and uses that for qualified per diem costs.

If the employee is using a company card, the employer might still require them to fill out an expense report to justify their expenses.

If your employer requires you to fill out a per diem expense report and reimburses your spending, then you won’t have any leftover funds. But if your employer chooses to pay you a flat amount for per diem instead, then you’re generally able to keep any money you don’t use.

Keep in mind, however, that this money will be subject to taxes. If you prefer to avoid the taxation that comes with the flat per diem payment, you may want to talk to your employer about returning the excess amount and filing an expense report.

In general, per diem payments are not taxable income, and employers don’t have to report the money on the employee’s W-2 form. But there are exceptions to this.

First, per diem payments are only tax-exempt if they are equal to or less than the federal per diem rate at the time. If the amount the employer pays exceeds the federal rate, then the amount that is more than the federal rate is subject to taxes.

The other requirement for per diem payments to be exempt from taxes is that employees correctly report their expenses. Employees will have to submit an expense report within 60 days of their trip, indicating the dates of employee travel, how much they spent, and what they spent it on. Employees will also have to include receipts with their expense reports.

If the employee doesn’t fill out an expense report or if the report doesn’t cover all of the necessary information, the entire per diem amount is taxable. If a per diem payment is taxable, then income and payroll taxes will apply.

Per diem payments can be an excellent way for employees to travel for work without being stuck with the bill. Depending on how it’s done, per diem payments can help provide lodging and food for employees during their travels without requiring that they pay taxes on the money.

But depending on how the per diem payments work in a company, they might also cost the employee money in taxes. If a company chooses to offer a flat per diem amount and not require an expense report, the employee could be on the hook for paying income taxes on the entire per diem amount.