Per diem is a fixed daily allowance provided to employees to cover expenses incurred while traveling for business. The Latin phrase “per diem” translates literally to “for the day,” establishing the fundamental unit of this reimbursement method. This structure is intended to simplify the process of accounting for expenses like lodging, meals, and incidentals, often eliminating the need for travelers to submit receipts for every minor purchase. Understanding this daily rate structure is important for employees who travel for work and seek proper reimbursement.
Defining Per Diem Allowances
Per diem is generally divided into two components: Lodging and Meals and Incidental Expenses (M&IE). The Lodging component covers the cost of overnight accommodation, such as a hotel stay. This is typically reimbursed based on a maximum daily rate or the actual cost incurred, and the allowance varies significantly by destination to account for local market costs.
The M&IE portion is the fixed daily amount intended to cover all food, gratuities, and minor out-of-pocket costs. Incidental expenses specifically include fees and tips given to service staff, like porters and baggage handlers. This M&IE rate is the amount most often associated with the standard daily per diem figure that employees receive for non-lodging costs.
Per Diem is Based on Days, Not Hours
The central concept of per diem is that it is a flat, standardized daily rate tied to the traveler being away from home overnight on official business. The allowance is not tied to a time-based calculation of how many hours a person worked or traveled during that 24-hour period. Therefore, the question of “how many hours is per diem” does not apply to the standard calculation methodology.
The rate is applied for each calendar day the employee is in travel status, allowing for simplified record-keeping and reimbursement. Consequently, there is no standard “per diem hourly rate” to calculate or apply in the traditional sense. The allowance covers the subsistence cost of being on the road, regardless of whether the employee works eight or twelve hours. Establishing the allowance as a daily rate streamlines the process, eliminating the need to track minute-by-minute expenses.
Calculating Per Diem for a Full Travel Day
For the days between the traveler’s departure and return dates, the per diem rate is applied at the full daily amount. A full travel day is defined as any calendar day during the trip, excluding the first day of departure and the final day of return. For these full days, the employee is considered to have incurred the maximum expenses for meals and incidentals while away from home.
The traveler receives 100% of the established M&IE rate for the location where they spent the night. This approach assumes that the traveler is responsible for covering all of their meals and minor costs for that entire day. For example, a three-day trip spanning Monday, Tuesday, and Wednesday would treat Tuesday as a full travel day eligible for the complete M&IE allowance. The simplicity of the 100% rate application helps reduce administrative complexity.
How Partial Travel Days Are Calculated
The calculation for partial travel days, specifically the first and last day of a business trip, is often the source of confusion, as it introduces a factor that appears time-related but remains fixed. For these days, the traveler is eligible for a reduced rate, regardless of the specific hour of departure or arrival. The method widely adopted by the federal government and many private companies is the 75% rule, often called the three-quarters rule.
Under this rule, the traveler is reimbursed for 75% of the total M&IE rate for the location of travel on both the day they leave and the day they return. This fixed percentage is used instead of prorating the allowance based on the exact number of hours or meals missed. The 75% rate is applied because the traveler has reduced expenses, typically consuming at least one meal at or near their home station. This standardized reduction simplifies the process significantly.
Who Sets the Official Per Diem Rates
Per diem rates that serve as a guideline for most U.S. businesses are established by federal agencies. For travel within the Continental United States (CONUS), which includes the 48 contiguous states and the District of Columbia, the General Services Administration (GSA) sets the maximum rates. These GSA rates are location-specific, with a standard rate applying to most areas and higher rates established for Non-Standard Areas (high-cost cities).
For travel outside of CONUS, the responsibility shifts to other federal bodies. The Department of Defense (DoD) establishes the rates for non-foreign areas, such as Alaska, Hawaii, Puerto Rico, and U.S. territories and possessions. While private corporations are not mandated to use these federal rates, many adopt them or use them as a ceiling for their own internal travel policies. Using the official federal rates helps companies maintain a consistent standard and simplifies the tax treatment of the payments.
Tax Implications of Per Diem Payments
The tax treatment of per diem payments depends on whether the employer’s reimbursement arrangement qualifies as an “accountable plan” under Internal Revenue Service (IRS) rules. For an accountable plan, three conditions must be met: the payments must cover business expenses incurred while traveling away from home, the employee must substantiate the time, place, and business purpose of the travel, and any excess amount paid must be returned to the employer. When these conditions are met, the per diem allowance is not considered taxable income to the employee and is not reported as wages on the Form W-2.
If the per diem arrangement fails to meet these requirements, it is considered a non-accountable plan, and the entire per diem amount is treated as taxable wages. If an employer pays an amount that exceeds the federal per diem rate, only the amount up to the federal rate is considered non-taxable under an accountable plan. The amount exceeding the federal rate is treated as taxable income to the employee, subject to income tax withholding and payroll taxes.