While business travel often brings new opportunities and can help you close deals, it comes with its own set of problems — even if you use a corporate travel tool. There are hotels to book, flights to arrange, and schedules to make. It also creates 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. This simplified way of covering travel costs can help you cut down on admin time and make business expenses easier to manage. Keep reading to learn everything you need to know about per diem. 

What Is a Per Diem? 

While per diem looks like a complicated concept, it’s relatively simple. 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 for travel expenses. This daily rate covers lodging, meals, and incidental expenses (also known as M&IE). Your employees can also use their per diem allowance to cover laundry or dry cleaning services for those all-important business meetings. They may also use it for gratuities or tips for their servers.

Using per diem makes it easier for employees traveling on business. They don’t need to cover costs out of pocket, and they can choose how they use the payment. For example, they might want to upgrade to a more comfortable suite or save money on meals by opting for more affordable lunch options.

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

How Does a Per Diem Work?

One of the benefits of using per diem payments is that it’s often simpler to manage than a traditional expense tracking policy. There’s no need to keep and submit receipts for every expense, and they don’t need to go through a clunky approval process. This saves a lot of time for your employees, their managers, and your finance team.

While employees won’t need to submit receipts for approval, you still need to keep a basic record of their expenses. Doing so is essential if you want to avoid any tax implications for your employees. Ask them to fill out a simple 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 
  

Ask your employees to 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 their own money upfront. 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.

It’s also up to you 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, it just seems a little cheap.) 

What Are the Current Per Diem Rates?

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. 

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 takes into account that there won’t be the same level of lodging, meal, 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, but it’s harder to manage if your employees often travel for business. 

Rates for individual cities are also affected by seasonality. If a location is more popular at a certain time of year, the rates are adjusted to reflect the amount of money you'll need 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 each month, with the lowest at $239 and the highest at $374.

Sometimes there won’t be a designated rate for a city. If that’s the case, you’ll need to use the standard rate. For 2020, the standard rate is $96 for lodging and $55 for meals and incidental expenses, totaling $151 per day. 

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

There’s also a simplified version of per diem rates known as high-low rates. 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 2020, the high-low per diem rates are: 

High-cost areas

• Total per diem rate: $297
• M&IE only per diem rate: $71

Standard areas

• Total per diem rate: $200
• M&IE only per diem rate: $60
  

It’s critical to check the yearly updates to see which cities have changed from NSAs to standard or the other way around. For example, in this year’s per diem highlights update, we can see that Boise, Idaho, has become an NSA, while Dover, Delaware, now comes under the CONUS rates. 

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 $55) and count any remaining as your lodging rates. 

Is Per Diem Taxable?

For companies that use the federal government’s per diem rates (or lower), there are typically no additional tax implications for your employees. The only provision is that there must be an accompanying expense report filed within 60 days. 

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. Because of this, many companies use the per diem rates set by the government. 

Simplify Your Expense Tracking by Using Per Diem 

By switching to per diem rates, you can make your expense tracking and management feel a lot 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: There are some grey areas in guidelines set by the IRS definitions, so it is up to an employer to 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.