When Is Per Diem Required To Be Paid

Per Diem: A Deep Dive for Business Professionals

Have you ever wondered about the mysterious term "per diem" and its elusive definition?

Your questions are about to be answered! Dive into the world of per diem and get a clear understanding of:

• When Is Per Diem Required To Be Paid

• When employees are entitled to it

• Why employers pay it

• How much it can be

Let's solve the per diem mystery and guarantee fair and compliant business procedures for you.

Often used in the business world, particularly in travel and HR departments, per diem—Latin for "for each day—is a familiar term.

But the context determines the precise definition for "per diem."

Per diem employment, for instance, is a daily pay rate as-needed staffing post for a substitute teacher or construction worker. In labor law, however, per diem refers to how companies pay for employee travel expenses, including as visits at another one of your sites or a conference with possible investors.

It might be difficult to know what per diem covers, what it does not, and when workers are legally entitled to it.

When Do Workers Get Paid Per Diem?

Fun fact: There is never a true "due" per diem for employees.

Employers are not required by the Department of Labor or the Fair Labor Standards Act (FLSA) to provide a per diem for business-related travel expenditures.

However, businesses have to pay back these travel costs in some fashion (we'll talk about alternatives to per diem later).

If the company doesn't reimburse for travel expenses and doesn't follow overtime pay regulations or the federal minimum wage, it may find itself in legal hot water.

What Makes Employers Pay Per Diem?

Per diem is the preferred option for most private-sector companies for two reasons:

It is easy to use and fosters trust between employers and employees.

Every fiscal year, the General Services Administration (GSA) announces new rates that set the basic daily pay for federal employees working in the 48 continental states (CONUS).

These are regarded by the IRS as the "gold standard," or the cutoff point for employee income that is not subject to taxation. Since then, a large number of private companies have seized hold of these benefits and made them their own.

What Is The Cost Per Diem?

The geographic location of the destination and the cost of living there have a major impact on the GSA's per diem payments.

Meals and incidental expenditures are separated from lodging in the GSA (M&IE). In order to account for the cost of living and higher rates for popular tourist destinations during the off-season, this coverage varies from month to month and city to city.

For instance, the cost of a hotel in Los Angeles, California, as of October 2021 is $168 per day, while M&IE is $74. In contrast, lodging costs significantly less in Omaha, Nebraska, where M&IE totals $64 per day.

Whenever one of your workers travels for work, regardless of the industry—from manufacturing to healthcare—you will typically be responsible for paying per diem.

Note: Other agencies are responsible for per diem fees outside of the CONUS. The State Department oversees all foreign travel rates, while the Department of Defense establishes charges for other US territories.

There are other options outside the fixed daily rate for covering travel expenditures while the employee works, even though most travel departments rely on the per diem amount determined by the GSA.

Among the more popular four-per-diem schemes are:

Fixed

At its most basic, the predetermined daily rate is per diem.

Put another way, you will give staff members a fixed daily charge that includes everything from travel and housing to meals and airfare. The GSA's specified daily allotment does not have to be the fixed rate. A per diem rate significantly greater or lower than these recommendations may be required by company policy.

However, anything beyond that amount will be deemed taxable income by the IRS for your employee. Additionally, companies have the option of paying this rate immediately or after the worker returns.

Partial

Certain employers refuse to pay for full M&IE costs.

Rather, they will provide a pre-arranged portion of the coverage for the trip, like $120 for meals. After that, the worker might be liable for unforeseen expenses like gratuities and cab fare (which they could later file for reimbursement).

For lengthier travels where housing is not required, such as one-day excursions, the partial per diem structure is sometimes applicable. For instance, if a worker chooses to remain nearby with family or if they purchase a home there.

Actual Expenses

The loosest policy regarding employee business travel is actual expenses. When using the actual expense model, you do not provide your staff cash or a business credit card up front.

Rather, they pay for their customary lodging and meals, save their receipts, and then submit a reimbursement request after the trip. Budgeting may be affected by this approach, of course, as it has shortcomings.

Company Credit Cards

The company credit card that is prepaid is the last method.

It sounds like it: for the duration of the trip, each traveling employee will receive a company credit card that has been pre-loaded. This tactic gives HR greater control over how much money is spent on corporate travel expenses.

What Does Per Diem Typically Cover?

Conventional per diem does not entitle workers to an expense-paid excursion. A regular rate of pay for all days of travel (GSA), which includes both housing and M&IE, is typically approved by HR departments.

In addition, employees are entitled to 75% coverage on the initial and final day of their trip.

But what would you say to employees who are leaving on a flight and inquire what their per diem pay covers?

Taking a closer look at the correct response:

Meals

The GSA’s per diem rates divide the daily M&IE coverage into four categories, with the exact value depending on the destination:

• Breakfast (or Continental Breakfast):  $13–$18

• Lunch:  $15–$20

• Dinner:  $26–$36

• Incidental Expenses:  $5

Assuming they stay under budget for the entire day, employees have almost complete discretion over where and how they spend this money.

Therefore, a worker who stays at a cheap motel might have extra money to spend on supper at a fancy restaurant. Conversely, a worker who makes a reservation at a five-star hotel could like ordering takeout or quick meals.

Lodging

During their stay, an employee will use the majority of their per diem budget to book a mid-range hotel or motel.

Employees would only require an M&IE allowance for day excursions. If the worker stays at their destination with family or friends, lodging is also not allowed.

Incidental Expenses

Incidental expenses — or incidentals — are smaller fees or gratuities (tips) paid for services while on a business trip.

These expenses could include:

• Laundry and dry cleaning

• Tipping servers and bellhops

• Cab and shuttle fare

• ATM fees

• Valet services

• Car rentals

• Tolls

Each company and HR department has its own policies regarding which incidentals it’ll approve or reimburse.

What Per Diem Doesn’t Cover

When on business trips, full-time employees will gather receipts in order to submit an expense report and be eligible for compensation.

However, that is predicated on the employee's ability to account for the expenses and your ability as the HR or travel department to confirm the expenditures' connection to the business.

Generally speaking, per diem won't cover:

• Souvenirs

• Entertainment

• Alcohol (must be deducted from receipt)

• Room service

• Postcards

• First-class plane tickets

• Any lodging or meals that exceed the per diem rate

While not reimbursing these expenses is standard, private companies are free to set their own employee policies.

Does Per Diem Count as Wages by the IRS?

The tax question is one of the most common per-diem-related queries from both employers and employees.

Does a per diem qualify as pay?

It depends, is the response.

Let's examine more closely when per diem might be subject to IRS taxation.

When is Per Diem Not Taxable?

This is where using the GSA’s locality-based per diem payments comes in handy.

Generally, if the employee doesn’t exceed the standard daily allowance, it does not count as income. It doesn’t count as employee wages —  meaning it isn’t taxable income . You wouldn’t withhold payroll taxes or add it to the employee’s W2 as wages as the employer.

Yet, employees must satisfy another requirement to keep their per diem rates tax-free: filing an expense report.

When is Per Diem Taxable?

Employers are not allowed to deprive workers of their per diem income in order to coerce them into filing an expense report. However, filing an expense report is advantageous for the employee at tax time.

That’s because per diem is taxable and subject to payroll tax or income tax withholding if:

• The employee doesn’t submit a report at all, meaning per diem would fall under taxable income.

• The filed expense report is missing critical information, like receipts, dates, times, and locations.

• The employee’s lodging and M&IE expenses exceed the GSA’s suggested per-day rate for the locality (the overhead is taxable).

• The employer doesn’t require submission of expense reports.

Employees won't be required to pay tax on per diem wages because the IRS doesn't take them into account unless one of these conditions is met.

Conclusion

In conclusion, per-diem is an adaptable and practical way for companies to pay for their workers' travel expenses. Although it's not legally necessary, it can promote trust and guarantee adherence to labor rules.

In regards to the taxability of per diem, the IRS views it as non-taxable up to the "gold standard" rates set by the GSA. This implies that your taxable income won't be impacted if you receive per diem reimbursement up to these maximums.

It's critical to take your employees' unique demands and circumstances into account when drafting your business travel policy in order to guarantee equitable compensation and compliance with regulatory requirements.