What is Per Diem? Meaning & Rates

Per diem is a daily allowance provided to employees to cover expenses incurred during business travel or work away from their regular workplace.

This Latin term, meaning "for each day," encompasses reimbursement for costs such as meals, lodging, and incidental expenses. The purpose of per diem is to simplify expense management for both employers and employees, reducing the need for detailed expense reports and receipts.

Per diem rates—or the specific monetary amount provided to employees per day—are generally determined by organizations based on the average cost of living in the destination.

Many companies reference government-established rates as a guideline. In the U.S., the U.S. General Services Administration (GSA) provides a benchmark of per diem rates based on state and city.

Per diem can be applied in various work settings, including traditional office environments, open-plan spaces, and remote work scenarios. In some cases, it may even cover using flexible workspaces or coworking facilities when employees are traveling or working away from their primary office.

While not legally mandated, offering per diem is considered good business practice and is often expected by employees who travel for work. It provides a clear framework for managing travel expenses, ensuring fair compensation for out-of-pocket costs, and maintaining consistency across an organization's global operations.

Types of per diem rates

Per diem rates vary depending on the specific expenses they cover and the purpose of the travel. Here are some of the most common types of per diem rates:

Meal per diem. Covers the cost of daily meals for employees during business travel, including breakfast, lunch, dinner, and incidental expenses like tips. Rates often vary by location and may be adjusted for partial travel days.
Lodging per diem. An allowance for hotel or temporary lodging expenses that typically fluctuates based on the destination's cost of living and seasonal demand. This rate may include taxes but usually excludes incidental charges like room service or minibar expenses.
Mileage per diem. Reimburses employees for vehicle-related expenses during travel, calculated based on the distance driven using a set rate per mile or kilometer. This rate is designed to cover fuel, maintenance, and depreciation costs for personal vehicles used for business purposes.
Combined per diem. A single rate covering both lodging and meals, simplifying the reimbursement process. This type is often used for extended trips or at locations where expenses are relatively consistent.
Incidental expense per diem. Covers minor travel-related costs such as fees for luggage handlers, local transportation, and service tips. This is sometimes included in the meal per diem rate but may be separate for more detailed expense tracking.
International per diem. Rates specifically set for travel to foreign countries, adjusted for currency exchange rates and local cost of living. These rates often include additional allowances for expenses unique to international travel, such as passport fees or vaccinations.
Government per diem. Standardized rates set by government agencies, such as the GSA in the U.S., for federal employees. Many private companies use these rates as policy benchmarks due to their comprehensive nature and regular updates.
Industry-specific per diem. Tailored rates for industries with unique travel requirements, such as trucking or healthcare. These rates often account for industry-specific expenses and travel patterns not covered by standard per diem policies.

Per diem rates can be adjusted based on factors such as location, duration of travel, and specific company policies. Employers should communicate their per diem policies to ensure employees understand what expenses are covered and how to report them properly.

How per diem rates are determined

Per diem rates are established through government regulations, regional economic factors, and industry standards. Understanding these factors helps employers set fair and compliant rates for traveling employees across different countries and regions.

As mentioned above, the U.S. GSA sets standard rates for federal employees in the U.S., which provides a baseline for private companies. These rates are updated annually, considering changes in the cost of living and travel expenses across different locations. The Internal Revenue Service (IRS) also provides guidelines for U.S. employees, including the "high-low" method, which offers simplified rates for high-cost and standard areas.

Regional cost of living differences significantly influence per diem rates. Cities with higher living costs typically have higher per diem allowances. For example, while the standard U.S. lodging rate for 2024 is $107, it can reach up to $374 in New York City during peak seasons.

Internationally, various countries and regions have developed their approaches:

European Union (EU). The European Commission sets per diem rates for EU officials and external experts. These rates vary by country and are regularly updated. For instance, the daily rate for Austria was €228, while Bulgaria's was €167.
Germany. Germany uses a tiered system based on trip duration for domestic business trips. For international trips, they employ country-specific rates.
United Kingdom. The U.K. government publishes Worldwide Subsistence Rates for civil servants, which many private companies use as guidelines. These rates are specific to each country and major city.
Australia. The Australian Taxation Office (ATO) provides a schedule of reasonable travel and overtime meal allowance expense amounts, which are updated annually. These rates vary depending on salary levels and destinations within Australia.
Singapore. The Inland Revenue Authority of Singapore (IRAS) sets a flat rate of S$150 for domestic travel, with varying rates for international destinations based on the country of travel.
Canada. The Canada Revenue Agency (CRA) sets per diem rates for employees traveling within Canada and the U.S., with separate rates for international travel. Rates vary based on location and include specific meal allowances, incidental expenses, and transportation.

Industry standards and employer policies also factor into per diem rate determination. While many companies use government rates as a starting point, they may adjust these based on their needs, budgetary constraints, and industry norms.

Factors affecting per diem rates include:

Seasonality. Rates may fluctuate based on peak travel seasons in specific locations.
Duration of stay. Some policies offer different rates for short-term versus long-term travel.
International travel. Rates for foreign countries often account for currency exchange rates and local economic conditions.
Specific expense categories. Separate rates may be set for lodging, meals, and incidental expenses.

Regular assessment and adjustment of these rates ensure they remain relevant and appropriate in changing economic conditions and travel patterns across different countries and regions.

How to use per diem in business

Implementing a per diem system can streamline expense management for both companies and employees. To establish an effective per diem policy, businesses should consider industry standards, government guidelines, and financial constraints.

Companies often start by referencing official rates set by relevant authorities in their respective countries or regions. From there, organizations can adjust rates based on their specific needs and travel patterns.

The main advantage of using per diem over reimbursing individual expenses is simplicity. Per diem eliminates the need for employees to maintain and submit detailed receipts for every meal or incidental expense. This saves employees and accounting departments time, reducing administrative burden and processing costs. However, it's important to note that some expenses, like lodging, may still require receipts even under a per diem system.

When implementing per diem, businesses should communicate their policies to employees. This includes specifying which expenses are covered, how rates are determined for different locations, and any special considerations for international travel. Companies should also establish procedures for requesting per diem advances and reporting expenses upon return from travel.

A crucial component for proper compliance and financial management is tracking and reporting per diem expenses. Many companies use travel expense management software to automate this process, which allows employees to easily log their travel days and destinations.

These systems can automatically apply the correct per diem rates and generate reports for accounting purposes. Maintaining accurate records of per diem payments is essential, as they may be subject to audit by tax authorities.

How per diem works for international travel

When employees travel abroad for business, international per diem rates differ significantly from domestic rates. These variations reflect the diverse costs of living, currency exchange rates, and economic conditions across different countries and regions.

International per diem rates are usually higher than domestic rates to account for increased expenses in foreign countries. Companies typically establish specific policies for international travel to ensure fair compensation while maintaining cost control.

When implementing international per diem policies, companies often consider factors such as:

Currency fluctuations and exchange rates
Local cost of living in the destination country
Specific travel requirements and business needs
Compliance with both home and host country regulations

It's crucial for businesses to regularly review and update their international per diem rates to ensure they remain appropriate and competitive. Some companies opt for a tiered system with different rates for various countries or regions based on their relative costs.

Employees traveling internationally should be well-informed about their per diem allowances and any specific requirements for expense reporting. This may include understanding which expenses are covered by the per diem and which require separate reimbursement. Clear communication and guidelines can help prevent misunderstandings and ensure smooth expense management for the company and the traveling employee.

Pros and cons of per diem

There are benefits and pitfalls to using per diem systems for businesses and employees. Recognizing these pros and cons can help organizations construct more equitable travel expense policies.

Advantages of per diem:

Simplifies expense reporting with a flat daily rate.
Reduces the need for detailed receipts and accounting work.
Encourages employees to manage their own expenses.
Provides clear expectations for travel expenses.
Helps control costs through predetermined allowances.

Drawbacks of per diem:

May not cover all actual expenses, reducing flexibility.
Can lead to overspending as employees try to use the total allowance.
Might discourage wise spending with a flat rate system.
Fails to account for cost variations in different locations.
May make employees feel penalized if expenses fall below the per diem.

When implementing a per diem system, businesses may consider adopting a hybrid approach that combines per diem allowances with some flexibility for exceptional circumstances. This can help maximize the benefits of per diem while mitigating potential drawbacks. Frequently reviewing and modifying per diem policies can also ensure they remain fair and effective for all parties involved.

FAQs about per diem

Per diem policies can be complex, and many employees and employers have questions about how they work. Here are some frequently asked questions about per diem:

Is per diem taxable?

Generally, per diem payments are not taxable if they fall within prescribed limits and are appropriately documented. However, the excess amount may be considered taxable income if the per diem amount exceeds government-set rates or if proper records are not maintained. It's helpful to consult with a tax professional or relevant tax authority for specific guidance.

Do per diem rates vary by state?

Yes, per diem rates often vary by state and even by city within states. These variations reflect differences in the cost of living and travel expenses across different locations. Many countries publish location-specific per diem rates that take these factors into account.

How often are per diem rates updated?

The frequency of updates to per diem rates varies by country and organization. Many government agencies update their rates annually to reflect economic conditions and travel costs. However, some may review and adjust rates more frequently, especially for high-cost or volatile areas. Companies should regularly review their per diem policies to align with current market conditions.

Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. © 2024 Velocity Global, LLC. All rights reserved.