You’ve probably run across the term “per diem” at least once in your career, but what does it cover and how do you get reimbursed?
Per diem is a Latin phrase that translates to “by the day.” The term also refers to the amount of money paid to employees for 2 different types of “day” scenarios
The most common use of the term per diem refers to expenses a company reimburses an employee when they travel on business.
Another type of per diem is for employees who receive a set amount of pay for a single days’ work.
Each has a set of guidelines that must be adhered to in order to be compliant with the law.
What are per diem reimbursements?
Per diem reimbursements pay an employee back for the expenses they incur while traveling on business. If the employee does not have access to a corporate credit card to charge expenses, they typically pay out of pocket.
For these expenses, per diem sets a maximum amount the employee can spend on lodging, food, and incidentals, as well as a partial reimbursement for the first and last day of travel.
When employees are issued a per diem for business travel, they are reimbursed up to the amount of the per diem allotment without having to submit individual receipts for meals for reimbursement.
What are the per diem travel rates?
The federal government sets maximum rates for per diem payments in 3 categories:
There is a standard rate per diem set by the General Services Administration (GSA) for each of the categories at the federal level, however, states and cities can allow for higher (not lower) per diem payments.
The standard per diem rate for lodging, effective January 2020, is $96 per day. This does not include any taxes paid on the cost of lodging.
For meals and incidental expenses (M&IE) expenses, the standard rate per day is $55 total.
The government breaks meals down by what it should cost for breakfast, lunch, and dinner.
The standard rate for “incidental” expenses per day is $5. These include fees and tips the employee may give to hotel staff or baggage handlers.
First/last day of travel per diem rates
For employees’ first and last day of travel, the federal government allows a portion of the per diem payment to be made.
In most cases, the allotment is 75% of the normal expense, based on the assumption the employee will not need all their meals/incidentals reimbursed.
For a standard $55 M&IE payment on the first or last day of travel, the amount to be allocated to the employee would be $41.25.
Tax implications of per diem reimbursements
For 2020, a self-employed person can only use per diem for the meal costs they incur while traveling on business. For all businesses, per diem reimbursements are not taxable income to the employee if the payment is equal to or less than the federal per diem rate.
To comply with tax code set by the GSA and IRS, employees must submit an expense report to verify the per diem payment is not taxable.
The report includes:
- Details of the trip (dates/place)
- The business purpose of the trip
- Receipts for lodging (which the company may have)
- If they’re only being paid the M&IE rate
Reports should be submitted within 60 days of the travel. If the report is not submitted, per diem payments are considered taxable income for the employee.
If an organization allows more than the standard rate for their area (or the federal rate if no rate is designated in their city, county, or state) any additional funds allocated to the employee are considered taxable income. Per diem payments at or below the standard rate are not reported on an employee’s W-2 form. But for anything over the standard rate, the employer will have to report the payments as income and pay the necessary and appropriate taxes.
How is per diem paid?
Some employers issue per diem checks before an employee embarks on their trip so they have the funds necessary for travel. Others reimburse after the trip with a separate check that does not include tax and FICA payments.
The benefits of per diem payments
For business, per diem payments cut down on the paperwork necessary to verify business travel expenses. The employee has an allotment per day to spend without having to submit receipts to their employer for reimbursement.
The federal guidelines suggests these rates for daily expenses:
- $13 for breakfast
- $14 for lunch
- $23 for dinner
Employees who dine at a lower cost are able to keep the additional funds without any tax implications, and employers rarely ask for any funds not used to be returned.
The other per diem: Per diem employees
The other business application of the term “per diem” is for employees who work on a daily basis. Organizations set a day rate and hours to be worked in advance. If the employee is called in, the per diem rate is paid, generally irrespective of the amount of hours worked, but there are some limitations.
One of the most common types of per diem worker in the U.S. is the substitute teacher. With contracts negotiated in advance, these teachers are paid a flat rate for every day they step in to fill an absence or vacation vacancy. Many industries, outside of education, also use per diem workers.
In healthcare, travel nurses are commonly used on a per diem basis. Many healthcare providers pay per diem nurses a higher rate than staff nurses, as an incentive to get help quickly when staffing levels are low. Other industries, some that run 24/7 or have production peaks and valleys, use per diem employees to help when extra hands are needed.
Opting to use per diem employees
Per diem employee rates are generally agreed upon in advance — the number of hours may fluctuate somewhat, but the day rate typically remains the same. For business, knowing the flat rate it will cost to bring in another staffer for the day helps manage expenses and costs. But there are things to consider when looking at per diems for your organization.
Wage and hour laws still apply
Per diem employees are not exempt from the law. No matter what day rate you agree upon, if the employee’s total hours versus wages calculate to less than the federal or local minimum wage, the rate will need to be adjusted to meet the minimum.
Alternatively, if employees’ hours meet overtime requirements, either locally or by federal guidance, they will need to be paid the appropriate hourly rate for that time.
Benefits and compliance
Per diem employees typically do not receive the standard benefits employees are entitled to, like healthcare coverage, sick and vacation time. Because they only work on a day-to-day basis, most employers do not provide fringe benefits to these staff members. Optionally, if their plan provider allows, businesses may provide healthcare coverage as a further incentive to attract per diem staffers.
Most employers provide annual performance reviews for per diem staffers (with wage increases, if appropriate) to assure the ongoing relationship stays mutually beneficial. These can be helpful to make sure the work is being performed correctly and the worker is satisfied with the arrangement.
Employers must take care not to classify workers as per diem if they are consistently and regularly scheduled to work. If a per diem staffer is used regularly, they should be moved to full- or part-time status to avoid any compliance issues.
The benefits for business
Per diem payment reimbursements manage travel expenses for business and employees by cutting down on paperwork. These help business pre-set costs for meals and travel expenses while staffers can plan for costs while on the road for their employer.
Per diem workers can help businesses maintain coverage or meet demand. These specialized on-call workers fill in when needed or help organizations complete tasks beyond the reach of their regular staffing levels.