The term “per diem” originates from Latin, literally meaning “by the day.” It is a financial mechanism used by employers to compensate employees for costs incurred while traveling for work or on temporary duty. Per diem represents a fixed daily allowance intended to simplify the administrative process of tracking and repaying expenses. This predetermined daily rate covers necessary living costs associated with working away from one’s usual location, offering a straightforward daily stipend instead of requiring itemized expense reports. The employee is paid the set amount regardless of their actual spending, which streamlines accounting for both the employee and the employer.
Defining Per Diem
Per diem functions as a predetermined daily rate paid to an employee traveling away from their regular place of business. This fixed sum is designed to cover the necessary living costs associated with working outside of one’s usual location. Its primary function is to replace the cumbersome process of submitting itemized expense reports for every small transaction.
Common Scenarios for Per Diem Payments
Per diem payments are typically utilized when an employee must be away from their home base for a sustained period, often requiring an overnight stay. This includes standard business travel, such as client meetings or conferences held out of town. The allowance is also common for temporary duty assignments, where an employee is relocated to a different office or project site for several weeks or months. Eligibility is generally determined by the distance from the employee’s regular workplace and home, ensuring the employee is incurring additional costs due to the travel.
What Expenses Does Per Diem Cover?
The per diem rate is generally broken down into two main categories of expenses intended to cover the most significant costs incurred when an individual is working away from home. These categories are Lodging and Meals and Incidentals (M&IE). Using per diem for these costs allows for administrative simplicity by eliminating the need for detailed record-keeping.
Lodging
The lodging component of the per diem covers the cost of temporary accommodation, such as hotel stays, motels, or short-term rental housing. This rate is intended to cover the full cost of the room, including any mandatory fees and taxes associated with the stay. While the lodging per diem provides a set amount, many companies choose to handle the hotel booking and payment directly, or they reimburse the actual lodging cost based on a receipt. The fixed rate is meant to reflect a reasonable cost for a standard room in the particular travel location.
Meals and Incidentals (M&IE)
The Meals and Incidentals Expense (M&IE) portion is the most common use of the fixed daily allowance and is intended to cover all food, beverage, and miscellaneous costs. The “Meals” part includes breakfast, lunch, and dinner, as well as any associated tips for food service. “Incidentals” are minor costs incurred during the trip, such as fees for hotel services, laundry and dry cleaning, and tips given to porters or housekeeping staff. M&IE also covers necessary local transportation, like taxis, rideshares, or public transit, that is not covered by a separate travel budget.
How Per Diem Rates Are Determined
Most private companies base their per diem structure on the rates published by the United States General Services Administration (GSA), which sets the maximum non-taxable federal rates. The GSA calculates separate rates for lodging and M&IE, revising them annually to reflect the current cost of living across the Continental United States (CONUS). These rates vary significantly by location, as the GSA identifies specific Non-Standard Areas (NSAs), such as major cities, that have higher average costs. For all other areas, a standard CONUS rate applies, ensuring the allowance is reasonable for that region. Companies often use the GSA rate as a safe harbor limit but may set their own internal rates based on their travel policy and budget.
Tax Implications of Per Diem
The tax treatment of per diem payments is determined by whether the employer’s reimbursement process qualifies as an “accountable plan” under Internal Revenue Service (IRS) guidelines. A per diem paid under an accountable plan is generally non-taxable to the employee and is not reported as wages on Form W-2.
Accountable Plan Requirements
To qualify as accountable, the plan must meet three requirements:
The expense must have a business connection.
The employee must substantiate the time, place, and business purpose of the travel.
The employee must return any excess advance payments within a reasonable timeframe.
When the per diem rate paid does not exceed the federal maximum set by the GSA or the IRS, the payment is typically non-taxable, provided the accountable plan rules are met. This federal maximum acts as a non-taxable benchmark for the M&IE portion of the allowance. If an employer pays a per diem higher than the federal rate for a specific location, only the amount exceeding the federal limit is treated as taxable income. This excess amount must be reported as wages on the employee’s W-2 form and is subject to withholding and payroll taxes. If the employer’s plan fails to meet the requirements, it is classified as a “non-accountable plan,” and the entire per diem payment becomes fully taxable.
Per Diem vs. Expense Reimbursement
The primary difference between per diem and traditional expense reimbursement lies in the administrative process and the level of required documentation. Expense reimbursement operates on a dollar-for-dollar repayment model, requiring the employee to meticulously save and submit a detailed receipt for every purchase made during the trip. This method provides precision in accounting but results in a significant administrative burden for both the employee and the finance department.
Per diem, in contrast, is a fixed allowance that eliminates the need for detailed receipt tracking for the Meals and Incidentals (M&IE) portion of the trip. The employee is simply given the set daily amount, simplifying the process and making costs predictable for the employer. While per diem is used for variable, smaller costs like meals and tips, lodging expenses are often still handled via direct payment or receipt-based reimbursement to ensure precise cost tracking.