How Does Per Diem Work? A Quick Guide

Cassy Aite
December 28, 2023
How Does Per Diem Work? A Quick Guide

Business travel brings new opportunities and can help you close deals, but it comes with its own set of problems — even if you use a corporate travel tool. You have hotels to book, flights to arrange, and schedules to make, creating the need to track, manage, and pay business travel expenses.

If you’re looking for a better way to manage employee travel expenses, per diem may be the way to go. Learn how this simplified way of covering costs for business trips can reduce admin time, make business expenses easier to manage, and all while answering the oft-asked question, “How does per diem work?”

What Does Per Diem Mean?

An employee handling five one hundred dollar bills

Simply put, per diem is a Latin phrase that means “per day” or “for the day.” In the business world, a per diem payment is a daily allowance given to employees for business-related travel expenses. This daily rate covers lodging expenses, meals, and incidental expenses (also known as M&IE).

Per diem employees can also use their per diem allowance to cover laundry or dry cleaning services for those all-important business meetings, tips for servers, and transportation when they arrive — such as public transit, rideshares, or taxis.

Flexibility is one of the main benefits of per diem. Your employees don’t need to cover costs out of pocket, and they can choose how they use the per diem amount. For example, they might want to upgrade to a more comfortable suite, get room service if they’re working in the hotel, or save money on meals by choosing more affordable lunch options. All of these are per diem expenses your full-time or part-time traveling employees can enjoy.

However, one aspect that per diem payments can’t cover is mileage. If your employees are driving on business and you want to reimburse them, you must handle mileage reimbursement rates separately. Take a look at the IRS standard mileage rates for more guidance.

How Does Per Diem Work?

So how does per diem work? It’s almost entirely up to you or your company's travel policy/per diem policy. While employees won’t need to submit receipts for approval, you must keep a basic record of their expenses. Doing so allows these per diem expenses to become tax deductible when they file their income taxes.

Ask them to fill out an expense report for your records, which should include the following information:

  • Date, place, times
  • Business purpose
  • Whether the rate consists of lodging or is for meals and incidentals only

Employees should file this expense report within 60 days. If they don’t hit this deadline, the per diem payments become taxable income.

Many companies choose to give their employees the per diem before they travel — this is great news for your employees since they won’t have to spend cash or carry a balance on their credit cards. Other organizations make the per diem reimbursement after the travel is complete. As long as you’re consistent with how you apply the rules, either way works.

You can also decide whether your employee can keep the full per diem payment if they haven’t used it all. If you offer per diem payments ahead of traveling, it probably doesn’t make sense to try to reclaim any unspent funds afterward. (Plus, the leftover per diem is a nice reward for going out on the road or planning an event in person.)

What Are the Current Per Diem Rates?

Businessman checking into a hotel while looking at his phone

Now that you’ve answered the question, “How does per diem work?” you can get down to the actual expenses and per diem rates to apply to your business.

Each year the U.S. General Services Administration (GSA) publishes a list of standard per diem rates. While these were originally designed for federal employees, they're now the benchmark most companies use to set their own per diem rates. These rates are broken down into two areas — lodging, and meals and incidentals. As of 2024, GSA rates have an average fixed amount of $166 daily but may increase in cities or regions where the cost of living is higher.

To calculate to correct per diem, apply the relevant per diem rate for each day your employee is away on business. For the first and last day of travel, you only need to pay 75% of the per diem rates. This infers that the employee may have reduced expenses on lodging, meals, or incidental expenses for these days.

Two different types of rates exist: You can either choose city-specific per diem rates or a simplified method known as “high-low” rates.

Per Diem Rates Per City

City-specific rates vary between locations, so you can base your allowance on the city where your employee is staying. In other words, your rates are tailored to the costs of staying in that specific location. However, this method is difficult to manage if your employees often travel for business, as expenses in New York would obviously be higher than those in most other American cities.

Rates for individual cities are also affected by seasonality. If a location is more popular at a certain time of year, you can adjust the rate based on the amount of money your employee needs to stay in the city.

For example, the per diem rate for Salt Lake City remains at $183 throughout the year. In New York City, the per diem rate varies monthly, with the lowest at $239 and the highest at $374.

However, you may not find a rate for each city, especially smaller metro areas. If so, you’ll need to use the standard rate. For 2024, the standard rate is $107 for lodging and $59 for meals and incidental expenses, totaling $166 per day.

Standard and Non-Standard Areas (High-Low Per Diem Rates)

You may also want to use a simplified version of per diem rates known as high-low rates, so don’t get confused. Answering “How does per diem work?” can change slightly when you use this method.

Here, cities are grouped into non-standard areas (NSAs or high-cost) or continental United States (CONUS or standard) areas, with one rate for each. The advantage of using this system for your per diem rates is that you won’t need to look up each city every time someone travels.

For 2024, the high-low per diem rates are:

High-cost areas

  • Total per diem rate: $309
  • M&IE only per diem rate: $74

Standard areas

  • Total per diem rate: $214
  • M&IE only per diem rate: $64

Check the yearly updates to see which cities have changed from NSAs to standard or vice versa. For example, in this year’s per diem highlights update, Huntsville, AL, and Charles Town, WV, have become NSAs, while the following cities now fall under CONUS rates:

  • Hammond / Munster / Merrillville, IN (Lake County)
  • Wichita, KS (Sedgwick County)
  • Baton Rouge, LA (East Baton Rouge Parish)
  • Baltimore County, MD
  • Frederick, MD (Frederick County)
  • East Lansing / Lansing, MI (Ingham and Eaton Counties)
  • Kalamazoo / Battle Creek, MI (Kalamazoo and Calhoun Counties)
  • Eagan/ Burnsville / Mendota Heights, MN (Dakota County)
  • Akron, OH (Summit County)
  • Wooster, OH (Wayne County)
  • Erie, PA (Erie County)
  • Corpus Christi, TX (Nueces County)
  • Round Rock, TX (Williamson County)
  • Appleton, WI (Outagamie County)
  • Brookfield / Racine, WI (Waukesha and Racine Counties)
  • Morgantown, WV (Monongalia County)

Do You Have to Pay the Federal Per Diem Rates?

While the U.S. government has suggested per diem rates, you don’t have to stick to these. If you want to offer an amount below this, you’ll need to designate 60% of your rate for lodging and 40% for meals and incidentals. Alternatively, you can use the standard M&IE rate (currently $59) and count any remaining as your lodging rates.

Is Per Diem Taxable?

People having a toast at a business meeting

For companies that use the federal government’s per diem rates (or lower), your employees typically have no additional tax implications. The only provision is that employees must file an accompanying expense report within 60 days. As a result, you may want to shop for the right office software to enable streamlined expense reporting.

If you offer a higher rate than the federal government’s per diem rates, the excess amount becomes taxable income, which affects both the employee’s taxable income and the taxes paid by the company. To avoid these tax implications and reduce employees’ taxable income, many companies use the per diem rates set by the government.

Simplify Your Expense Tracking by Using Per Diem

By answering the question, “How does per diem work?” and switching to per diem rates, you can make your expense tracking and management feel far less complicated. You’ll no longer need to manage approvals or ask your employees to hold onto receipts, and you can easily set your rates based on the IRS’s published guidance.

Simplify your expense tracking even further by offering employee stipends. Like per diem rates, stipends are an effortless way to give employees the funds they need for wellness, professional development, and productivity pick-me-ups. To find out more about how Hoppier can simplify employee benefits, book a demo with us.

Disclaimer: The guidelines set by IRS definitions have some gray areas, so the employer must define what they consider a taxable benefit vs. a non-taxable benefit. We always suggest consulting with your finance or accounting team or tax experts for formal guidance. However, we want to be helpful, so we put this info together from what we've learned from resources published by the IRS.

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