Ever wondered what a per diem is? Or what the difference between a per diem and a daily rate is? Or how much you should budget for your trip if you’re extending your stay?
If you have questions about managing your per diem payment, then this blog post is for you. We’ll discuss how to calculate your travel expenses, tips for saving money while traveling, and more.
This post is all about understanding how per diem works so that your travels can be as stress-free as possible.
What is a Per Diem Rate?
Per diem is a term that has many meanings. But in the context of business travel, in lieu of a corporate credit card, it refers to an allowance given to an employee for meal costs, lodging expenses, room service (should you be so lucky), and other incidental expenses.
It’s important to know how per diem works when traveling on company business because this will affect the amount of money you’ll spend on your business travel expenses.
Per diem payments work best for employees who travel for a significant amount of time and are more of a budgeting tool that helps keep your expenses to a minimum while on the road, which will ultimately save you and the company money.
Daily rates, expense reports, are other terms used instead of per diem, but they all mean about the same thing: providing certain employees with an allowance to spend while on a business trip for business purposes.
How Does a Per Diem Rate Work?
Travelers who are away from home for an extended period, such as two days or more, will be given per diem rates by their company to help cover meals and other travel expenses while they are out of town.
Employees can use this allowance however they see fit (within the limits of their per diem rate), but require employees to submit receipts along with an expenses report. And keep a record of all receipts in case of an audit.
Per diem rates are typically set by the federal government every year, but they can also be established internally for employees who need a little more money while away from home on business trips.
Per diem payments vary depending on where you travel to, domestic travel (continental United States) vs traveling to foreign countries so it’s important to know what you’re covered – and what’s not before hitting the road.
What Are the Current per Diem Rates?
Per diem rates can be as low as a few dollars a day to more than $300 per night, depending on the final destination.
If you’ll be spending time in an expensive city like New York City or Paris, it’s good to look at the per diem rates for that area.
According to GSA, the standard per diem rates as of 2021 are $96 per diem for lodging and $55 per diem for M&IE.
The standard rates are broken down into 12 per diem regions within the United States.
Why Do Rates Differ by Location?
Per diem payments vary because prices for food and lodging can vary depending on where you’re located or traveling to.
For example, per diem rates are higher in expensive cities because an employee who travels to New York City may struggle to cover their expenses than if they were living in, say, Cincinnati, Iowa.
You can find out your current per diem rate by checking with your employer or searching online.
Still, it’s important to note that some companies choose not to advertise their employees’ daily allowance because of security concerns.
If you’re unsure of your per diem amounts or daily allowances, you should ask your employer or human resources department before traveling on company business.
Is a Per Diem Taxable Income?
A per diem is generally considered non-taxable by the Internal Revenue Service (IRS), but it can vary depending on where and how you use it.
If you choose not to spend all of your allowances on a given day, many companies will allow you to save the remaining amount and apply it for future use and travel days.
Per Diem rates are completely tax-free when used solely for business expenses and do not exceed the maximum federal government per diem rates.
If employees choose to pocket part or all of their allowance, they must report it as taxable income.
Incidental Expenses and Per Diem Reimbursements
In cases where employees use their per diem allowance as a form of reimbursement, the IRS considers it taxable income.
This means that any reimbursements for business-related expenses must be reported as total earnings on an employee’s W-tax return.
They will have to pay taxes accordingly once they file their annual returns with the government.
This format might seem like a hassle, but it works to an employees’ advantage because they can deduct their business expenses from the taxable income they have earned.
For example, suppose an employee earns $100,000 in total gross salary but spends $20,000 on various business-related costs throughout the year.
In this case, the employee may be able to deduct this amount from their taxable income and will only have to pay taxes on the remaining $80,000.
Per Diem as a Salary Alternative
Offering a per diem as a salary alternative is an increasingly popular option.
A per diem, or daily rate, can also be used in lieu of a salary for employees who work from home regularly. However, most companies are usually hesitant to do this because it can impact the amount of taxes that they pay and company culture.
Because a per diem is often considered taxable income, employers should be cautious when it is used as part or all of an employee’s pay package.
Many companies offer per diems to attract top talent who otherwise might not want to relocate due to the high cost of living in certain areas around the country.
By offering a higher daily allowance for travel that is potentially tax-free, employees can save money while working away from home during the week.
It’s important to note that per diem is not meant as a salary replacement for employees who work in an office or other location daily because it does not include any benefits like healthcare insurance or paid time off (PTO).
While per diem rates can help employers attract talented candidates willing to work from home, they should only be used in conjunction with a regular salary and other benefits.
A per diem is a form of reimbursement for employees who work away from home, and it’s tax-free when used solely for business expenses and below the national rates.
If employers offer their employees compensation equal to what they would make if they were working from home instead of traveling, this could have tax implications for both the employee and business so proceed with caution.
Do often travel for work? How do your per diem travel rates compare to that of other companies or the federal minimum?
Start a conversation with us in the comments below. We would love to hear from you.