If you’ve ever been involved with any business travel, you may have heard of the term “per diem”. It’s a type of reimbursement that employers give employees when they’re traveling for work purposes. Since per diem payments are a simple way to compensate employees for traveling, most employers hop on board.
Unlocking Reimbursement Rules
Keep in mind that reimbursements for travel expenses are not federally required by law– only some states require these types of reimbursements. Therefore, some employers decide that they won’t give their employees reimbursements for their business travel expenses. Although this is up to the discretion of the employer, many choose to reimburse their employees in order to receive tax deductions.
Although reimbursements are not federally required, some states have exceptions. For example, California employers must reimburse employees for all travel expenses incurred, but that doesn’t include commute time. Before thinking about ways that you may want to reimburse employees (like choosing to reimburse with per diem versus actual costs), it’s wise to speak with a tax expert who can advise you on the best course of action for your business. It might be okay to give your employees a lump sum of money as a reimbursement, while other states may require an employer to reimburse an employee the exact amount they spent.
What is Per Diem?
The Latin meaning of per diem is “by the day” or “each day”. Therefore, per diem is a rate that’s given to employees which they can use on a daily basis. The U.S. General Services Administration (GSA) defines per diem as “the allowance for lodging (excluding taxes), meals and incidental expenses.” Per diems are typically given to employees when they travel for work on official business and the amount given is used to cover most expenses. For example, an employer may provide an employee with $200 a day for meals and lodging while on a trip. Per diems can also be used as payment for short-term workers who earn a daily rate rather than an hourly rate. For instance, an employer might give an employee working multiple jobs $50 a day for their travel.
When to Apply Per Diem Rates
Employees may claim costs associated with:
- Room service
- Laundry services
- Baggage & food server fees
Employers may use per diem as a method to reimburse their employees for all of their travel expenses. On the other hand, any person who is self-employed may only expect a per diem reimbursement for their meal costs.
Per Diem Rates
There are two different per diem rates:
- Per diem rate for combined lodging and meal costs
- Per diem rate for meal costs alone
Rates are set by fiscal year, starting on October 1st. Rates differ by state and county based on cost of living in that area. For example, Binghamton, New York lodging rates are $100 while M&IE (meals and incidental expenses) are $61; meanwhile, New York City lodging rates are $298 while M&IE rates are $76. Therefore, you must keep in mind that the employee’s rate may vary depending on which locations they visit.
Not only do rates change based on location, but they may also change based on the season and demand for those services. Overall, it’s very important that you familiarize yourself with an area’s rates. The GSA has a handy guide so you can look up your area’s information easily. If you cannot find a specified rate in your area, you will follow the standard CONUS (Continental of the United States) rate. As of 2020, the rate is $55 per diem for M&IE and is $96 for lodging. According to the IRS, you can choose to pay more or less than the federal rate; however, the excess will be taxable to the employee if you pay more.
It’s advised that employees file their expenses within 60 days after they incurred them. When an employee is reporting their expenses, they must include:
- The purpose of the business trip
- The date and location
- receipts for lodging
It’s really easy for employees to lose receipts, especially when they’re traveling, so it’s advised that employees track their expenses electronically on a system like Timesheets.com. Things stay a lot more organized when they’re stored electronically, and they’re a lot easier to access at a later time if necessary.
Per Diem Payments are Not Wages?
Per diem payments do not count towards an employee’s wages if the payment was equal or less than the federal per diem rate and if the employer receives an expense report from the employee.
If an employee fails to follow the guidelines for reimbursement, the per diem payments would be treated as wages and employment taxes would be due from the employer. The following circumstances could disqualify the employee from their per diem rate:
- Does not submit an expense report
- The expense report filed doesn’t include the date, time, location, purpose of business expense
- The employer gives the employee a flat amount of money
- Per diem is paid more than the standard federal rate
Breaking it Down
Per diems are a great option for reimbursing employees, as long as you follow protocol. Rates vary by location and are based on the season, so it’s vital that you keep up with the latest information. Remember that if your reimbursements do not exceed the maximum federal per diem rate, they’re non-taxable. When it’s time to reimburse your employees, it’s wise to speak with a tax specialist before you solidify your per diem policy.
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