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What to Know About Per Diems

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The phrase “per diem” as it applies to business typically refers to the amount of money paid to employees for travel expenses. Businesses can reimburse travel expenses with set per diem rates in order to avoid creating a taxable event to the employee. Let’s dive into the details of per diem reimbursements, rates, how they’re taxed, and more.

Per Diem Reimbursements

Per diem reimbursements pay back expenses employees log while traveling for business. Per diem rates are the maximum amount employees can be reimbursed for lodging, meals, and incidentals, as well as partial compensation for first and last day travel expenses. 

One of the purposes of per diems is that employees do not have to submit individual receipts for traveling expenses; rather, they are simply reimbursed up to the allotted per diem amount. 

Per Diem Travel Rates

The General Services Administration (GSA) sets the standard rate per diem for each reimbursable travel expense at the federal level. States and cities can set higher, but not lower, per diem amounts. These expenses include lodging, food, and incidentals:

  • The standard per diem rate for lodging is $96 per day

  • The standard per diem rate for food and incidentals is $55 per day

Keep in mind the federal government also allows an employee to be partially reimbursed for their first and last day of business travel. Generally, 75% of first and last day expenses are reimbursable, under the guise that the traveling employee will eat at least one meal back home.

Per Diem Payment

It’s up to the employer as to when they pay their employees the allotted per diem amount. Some choose to pay before the trip so employees have the funds upfront, while others reimburse afterward with a check that does not include tax or FICA payments. This method is beneficial to businesses because it streamlines the amount of paperwork for travel expenses. The employee has a predetermined amount per day they can spend, and they don’t have to worry about submitting receipts. 

Per Diem Taxes

Per diem reimbursements are not taxable income for employees if the amount is equal to or less than the federal per diem rate. To ensure the per diem payment is not taxable, employees need to submit a report. The report must include:

  • The business purpose of the trip

  • Dates and locations

  • Receipts for lodging

  • If they’re only being paid the M&IE rate

These reports need to be submitted within 60 days of the business trip. If not, the per diem payments are considered taxable income for the employee.

If a business pays more than the standard reimbursement rate for their city (or the federal rate if no rate is designated in their city or state) any additional funds paid to the employee are considered taxable income. Per diem reimbursements at or below the standard rate are not reported on an employee’s W-2, but anything over the standard rate will have to be reported as income and the employer must pay the appropriate taxes. 

Your business may deduct per diem expenses if you have an accountable plan. An accountable plan must include three elements:

  • The employee’s travel expenses have a business connection

  • The employee accounts for these expenses in a reasonable time

  • The employee returns any excess reimbursement or allowance within a reasonable time

If you have such an accountable plan in place, your employees don’t need to document expenses. However, the expenses must be “ordinary and necessary,” and employees still need to document the date, place, and business purpose for the travel.

The Benefit of Per Diem for Businesses 

The benefit of per diem rates and reimbursements is to better manage travel expenses and reduce paperwork for businesses and employees. It assists businesses in budgeting for meals, lodging, and other expenses for their traveling employees.

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