Per Diem: Is it Taxable and How is it Taxed?

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When paying for business-related expenses for food, labor, travel, or accommodation, for example, businesses have multiple options. The primary ones include equipping employees with business bank cards, reimbursing them for expenses incurred using a form of expense reporting, or paying them “per diems.”

Per diems are becoming the norm throughout the US for their relative simplicity and the benefits they provide. Invoking a set daily allowance for employees when they are away with work eliminates the need to keep, track, and manage receipts for expenses. This system drastically simplifies paperwork for the company and the employees themselves when having to deal with common expenditures for accommodation and meals. 

When utilized as part of a broad company travel policy, per diems provide a straightforward and reliable way to make sure travel expenses are tax-deductible so that employees don’t get taxed on the finances they are reimbursed for.

 

Per diem definition: What is per diem?

Per diem, Latin for “per day”, generally refers to a fixed daily allowance a business gives to employees or contract workers to cover expenses while they are working or are away from home because of work. 

The term is also occasionally used to represent an employment arrangement where workers, such as contractors or nannies, are paid a fixed daily rate for on-call or temporary work. From an employers’ perspective, per diem arrangements offer significant flexibility in terms of labor costs and scheduling.

 

Is Per Diem Taxable?

For businesses that follow the US federal government’s per diem rates or offer a lower rate, there are generally no additional tax implications for their employees. The only requirement is to file an accompanying expense report within 60-days. 

Per diem rates differ by state and even city, however. For example, the standard rate established by the GSA for accommodation (excluding taxes) in 2021 was $96 per night, but in Los Angeles, it was $182 per night. For meals, the usual rate was $55, but in LA, it was $66. It’s important to note that this rate fluctuates depending on the month as well. 

If an organization offers a higher rate to their employees, the excess amount over the federal government’s rate becomes taxable income, affecting the taxes paid by the business and the employee’s taxable income. For this reason, the majority of companies in the US adhere to the governments’ per diem rates. 

Per Diem: Is it Taxable and How is it Taxed?

 

How are Per Diems taxed?

The U.S. tax code permits organizations to deduct common, reasonable expenses associated with employee travel - this includes per diems. Nevertheless, businesses must still institute an “accountable plan,” as stated by IRS guidelines, to verify the expenses and show that they are directly related to the company. Employees must sufficiently account for their expenses, usually by keeping a daily report, and must also make sure to return any excess reimbursement (the financial amount above GSA’s daily per diem amounts) within a reasonable time frame.

It isn’t required that employees submit meal and incidental receipts if they have been given a per diem allowance, although, the IRS does require accommodation receipts. Per diems are not taxable for employees providing the mandated daily reports include the following information:

  • Company purpose of the expense
  • Location, date, time, and amount of the expense
  • Lodging receipts

Updated per diem rates for areas within the continental United States can be found on the GSA website.

 

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How does per diem work? 

Per diems are used in two key scenarios: for existing employee expenses and to procure the services of workers on a day-to-day basis. 

An organization’s travel guidelines should explain their per diem policy, clearly defining what is covered by the daily rate and the actual rates themselves used for payment or reimbursement for all applicable locations.

Employees are entitled to spend up to the fixed allowance each day, providing daily reports with receipts for accommodation to certify the per diem. If they spend below the daily rate, they are generally entitled to keep the difference.

 

How do businesses typically pay for per diem rates? 

Employees receiving a per diem allowance must submit their individual reports within 60 days of the date the expenses were incurred to avoid tax penalties. If the reports aren't submitted in time, the IRS simply considers per diem payments taxable income. Businesses generally pay per diems to employees electronically or by check once the  reports are received. They are sent separately from the employee’s salary and are not subject to taxes, even Federal Insurance Contributions Act (FICA) tax.

 

Benefits of per diem

  • Being able to reimburse travel and lodging expenses on a per diem basis drastically simplifies expense reporting and accounting for businesses while helping them predict the costs of employee expenses more accurately. This saves accounting departments a lot of time and paperwork, which results in fewer errors. 

  • When employees are permitted to keep unspent per diem money, providing it falls below the government’s standard per diem rates, it acts as an incentive to keep expenses low and minimize costs for the organization.

  • Without having to commit to a set number of working hours or provide any long-term contracts, businesses can pay for help when they need it and not have to worry about fulfilling wages when they don’t. Businesses also generally aren't required to offer per diem workers benefits and often aren’t expected to, saving a significant portion of money.

  • For employees, the flexibility provided by per diem arrangements greatly appeals to professionals in the education, construction, and healthcare sectors predominantly, allowing them to work when they want and reject shifts when they don't. Per diem employment also allows them to work for multiple employers at the same time. With this improved work-life balance comes a few key tradeoffs, including uncertainty, availability of work, etc. However, because of this, per diem rates are often higher than hourly rates for part-time and full-time, contracted employees. 

Conclusion

Per diem payments are a great way to lessen the administrative burden of travel expenses for the traveling employee, management, and finance teams. 

Diving deeper really shows how useful per diem rates are to businesses when it comes to tax and paperwork and how they allow flexible travel arrangements for employees.

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