What Employers Should Know About Per Diem and Employee Rights

Per diem — Latin for “for each day” — is a common term used in the business world, especially across travel and HR departments.

But the exact definition for “per diem” depends on the context.

For example, per diem employment is an as-needed staffing position with a daily pay rate (e.g., a substitute teacher or construction worker). But in labor law, per diem describes how businesses cover employee travel expenses — such as a meeting with potential investors or staff at another one of your locations.

Knowing what per diem covers, what it doesn’t, and when employees are legally entitled to it can be a tricky subject.

Until now.

Every employer should know this about per diem and employee rights:

Table of Contents

1. When Are Employees Due Per Diem?
2. Why Employers Pay Per Diem
3. How Much Is Per Diem?
4. Types of Per Diem
5. What Does Per Diem Typically Cover?
6. What Per Diem Doesn’t Cover
7. Does Per Diem Count as Wages by the IRS?

When Are Employees Due Per Diem?

Fun fact: Employees are never really “due” per diem.

There’s no federal law from the Fair Labor Standards Act (FLSA)or Department of Labor requiring employers to offer per diem for business-related travel expenses.

But employers must reimburse these travel expenses in some way (we’ll discuss per diem alternatives later).

Not reimbursing for travel could land the business in legal hot water if it violates overtime pay laws or falls below the federal minimum wage.

Why Employers Pay Per Diem

Most private-sector businesses choose the per diem route for two reasons:

It’s simple, and it nurtures employer-worker trust.

The General Services Administration (GSA) rolls out new rates each fiscal year that identify the standard per-day rates for federal employees in the 48 continental states (CONUS).

The IRS deems these the “gold standard” — or the threshold for what it considers non-taxable employee income. Many private corporations have since latched onto these allowances and adopted them as their own.

How Much Is Per Diem?

The GSA’s per diem allowances largely depend on the geographical area of the destination and the local cost of living.

The GSA separates lodging and meals and incidental expenses (M&IE). This coverage varies from month to month and city to city to account for the cost of living and higher rates for in-season tourist hotspots.

For example, as of October 2021, Los Angeles, California’s lodging rate is $168/day, while M&IE is $74. Meanwhile, lodging is a much-lower $110, and M&IE totals are $64/day in Omaha, Nebraska.

No matter which industry you’re in, from healthcare to manufacturing, you’ll generally owe per diem whenever your employees travel for work.

Note: Per diem rates outside of the CONUS fall to other agencies. The Department of Defense sets rates for other U.S. territories, while the State Department manages all foreign travel rates.

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While most travel departments rely on the per diem amount set by the GSA, the fixed daily rate is not the only way to cover travel expenses as the employee works.

Four of the more common per diem systems include:

Fixed

The fixed daily rate is per diem at its most basic.

In other words, you’ll pay employees a set per-day rate that covers everything from lodging and meals to flights and mileage. The fixed rate does not have to be the GSA’s defined daily allowance. Company policy can dictate a per diem rate much higher or lower than these suggestions.

Yet, the IRS will consider anything over that value as taxable income for your employee. Companies can also choose whether to pay this rate up-front or after the employee returns.

Partial

Some employers won’t cover all M&IE expenses.

Instead, they’ll offer a pre-determined partial coverage for the trip, such as $120 for meals. The employee may then be responsible for incidentals, like tips and taxi fares (which they can seek reimbursement for later).

The partial per diem structure often applies to single-day trips or longer trips where lodging isn’t necessary. For example, if an employee decides to stay with family in the area or they own a house in the local area.

Actual Expenses

Actual expenses describes the laxest business travel structure for employees. You don’t hand your employees cash or a company credit card up-front with the actual expense model.

Instead, they incur their usual lodging and meal expenses, collect receipts, and request reimbursement for those expenses after the trip. Of course, this model has its flaws and may disrupt budgeting.

Company Credit Cards

The final approach is the prepaid company credit card.

It’s exactly how it sounds; each traveling worker will receive a pre-loaded corporate credit card for the entire trip. This strategy allows HR more oversight when monitoring expenditures for business trips.

Which Is Best for Employers?

Each of these per diem structures has its pros and cons. If they didn’t, major corporations and small businesses wouldn’t still use them every day!

Here’s a closer look at when each is best for employers:

Fixed

Best for typical business trips within the U.S., where lodging and meal costs are more predictable. The fixed daily rate allows employees some leeway and personalization when dividing this budget between lodging and meals.

Partial

A good option for business trips where incidentals aren’t necessary, but the employee is willing to pay out-of-pocket for them. (Incidentals such as tipping at a high-end bar or opting for a six-block taxi ride.)

Actual Expenses

This is a better route for overseas trips where rates for travel, lodging, and meals are impossible to calculate beforehand. Or in instances when the luxury option can secure a much-desired business deal (i.e., meeting an investor at a fancy restaurant vs. the corner deli).

Company Credit Cards

Company cards are ideal for larger companies requiring a tight travel budget. Cards provide control of where employees spend company cash, and make it easier to compile detailed expense reports.

This raises one important question that every employer should know the answer to:

When you send your workforce on a trip, what does the daily per diem allowance cover?

You may also like: Full Guide to Trip Risk Assessments to Keep Employees Safe

What Does Per Diem Typically Cover?

Traditional per diem is not an all-expenses-paid trip for employees. Most HR departments will approve a regular rate of pay for all days of travel (GSA), which combines both lodging and M&IE.

Employees are also entitled to 75% coverage on the first and last day of a trip.

But when flight-bound employees ask you what their per diem pay covers, what will you tell them?

Here’s a closer look at the right answer:

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

Employees have nearly full control over how and where they spend this money, assuming they end the day under budget.

So an employee who chooses lodging at a low-budget motel may have extra to spend for dinner at a high-end restaurant. Or vice versa; an employee booking a five-star hotel may prefer fast food or takeout for dining.

Lodging

Most of an employee’s per diem budget will go toward lodging or booking a mid-range hotel or motel throughout their stay.

For day trips, employees would only need an M&IE allowance. Lodging is also off the table if the employee stays with family or friends at their destination.

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.

Travel Costs

Whether it’s a single-day business trip in the next state over or a weeklong stay on the opposite coast, per diem may also cover travel costs.

Airfare

For long-distance trips, employees can request reimbursement for airfare and the additional expenses that come with it (i.e., shuttles, taxis).

However, there are limitations to what the company should cover.

For example, some policies require booking the tickets at least 14 days in advance and will only cover economy class seats.

Any optional upgrades would be out-of-pocket. Some companies will book airline tickets for employees.

Privately Owned Vehicle (POV) Mileage

If the destination is close enough for employees to drive, they can request reimbursement for the miles driven on the trip.

As of 2021, the IRS set that rate at $0.56 per mileor about $280 on a 500-mile round trip. This per-mile rate is in place of reimbursing gas tank fill-ups.

Discover: Top Day Trips from Business Travel Destinations

What Per Diem Doesn’t Cover

Full-time employees will collect receipts throughout their business trips to submit an expense report and qualify for reimbursement.

But that’s under the assumption that the employee can account for the spending, and you — the HR or travel department — can verify its relation to business.

Per diem will generally not 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?

One of the biggest per-diem-related questions that both employees and employers have is the tax question.

Does per diem count as wages?

The answer is, it depends.

Let’s take a closer look at when per diem would be taxable by the IRS.

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.

What is an Expense Report?

An expense report is a traveling employee’s accounting of how they spent their per diem allowance while on a business trip.

This report must:

• Include lodging and meal receipts (to prove spending came in at or under budget)
• Mention a precise date and time of the trip
• Explain the reason for traveling
• Be submitted within 60 days of the employee returning

Assuming the employee remained within budget and submitted a complete expense report on time, you would not have to report it as income on the employee’s W-2.

When is Per Diem Taxable?

Employers cannot strongarm employees into submitting an expense report by withholding their per diem pay. But for the worker’s sake, submitting an expense report is beneficial during 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.

Unless the situation meets one of these criteria, the IRS does not consider per diem wages, and therefore, employees will not have to pay tax on it.

Related: Per Diem and Taxes: Top 7 Frequently Asked Questions (With Answers);

Conclusion

Paying workers their fair rate during business travel is an essential employment responsibility for a company.

Even though the U.S. Department of Labor and federal employment law doesn’t require you to pay employees the GSA’s per diem allowances, doing so will save your HR and travel department trouble later on.

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