3 MIN READ
Per diem—if you’ve ever traveled for work, chances are you’re familiar with this term. As an employee, it’s pretty straightforward. You’re given a fixed, predetermined allowance for your daily travel expenses, you take your trip, submit for reimbursement, and that’s pretty much the gist of it.
But what does per diem look like from an employer’s perspective?
While there's a bit more to it from an employer standpoint, per diem reimbursement is still pretty simple. Essentially, instead of reimbursing employees for their actual travel-related lodging, meal, and incidental expenses, you reimburse them at a fixed rate.
When using per diem rates, employees don’t have to meet the standard record-keeping rules; the time, place, and business purpose of travel must still be substantiated, but receipts of expenses aren’t generally required under the per diem method. This simplifies the reimbursement process for the employer, who doesn’t have to sift through piles of receipts.
By definition, per diem (which is Latin for "by the day") is reimbursement paid to employees for lodging, meals, and incidental expenses incurred during business-related travel. (Incidental expenses are described as "fees and tips given to porters, baggage carriers, hotel staff, and staff on ships.") The General Services Administration (GSA) sets these rates each year for destinations within the lower 48 Continental United States (CONUS).
The majority of the CONUS are covered by the standard CONUS per diem rate of $149/day—$55/day for meals and incidental expenses and $94/day for lodging.
This rate may increase depending on the city of travel. In 2019, there are 325 Non-Standard Areas (NSAs) that have per diem rates higher than the standard CONUS rate, as established by the GSA.
As the employer, you get to decide if you will reimburse at the standard rate or at an increased rate.
You also get to decide the extent to which you will reimburse. Employers can use a per diem rate to reimburse employees for combined lodging and meal costs, or for meal costs alone. The choice is yours.
Typically, the standard meals and incidentals per diem is the most beneficial choice for your business because you can reimburse at a flat rate of $13 for breakfast, $14 for lunch, and $23 for dinner, for a total of $50.
Note: On the first and last days of travel, employees are only eligible for 75% of the total per diem rate.
If you would prefer not to track based on a specific city or state, you can instead use the “high-low substantiation method.” Under the high-low method, the IRS establishes an annual flat rate for areas with higher costs of living. This IRS publication states which areas are considered “high-cost.” Every location within the CONUS not listed as high-cost automatically falls into the low-cost category.
If using the high-low method to reimburse for business travel for fiscal year 2019, which starts on October 1, 2018 and ends on September 30, 2019, high-cost areas will be reimbursed at a per diem rate of $71/day for meals and incidental expenses ($216 for lodging); all other areas, which are, by default, considered low cost, will be reimbursed at a per diem rate of $60/day for meals and incidental expenses ($135 for lodging). These rates are subject to change from year to year.
As the employer, you are able to pay whatever you think is reasonable. If you are reimbursing an employee equal to or less than the federal per diem rate(s), and the employee submits a proper expense report that includes the date(s), location(s), and business purpose(s) of travel, then there is not a taxable event for the employee.
If you choose to reimburse an employee more than the federal per diem rate, then the amount paid in excess of that rate is taxable (even if the employee submits an expense report).
If an expense report is not submitted, then the entire amount becomes taxable income to the employee, even if the employee was reimbursed at a rate equal to or less than the federal per diem rate.
As an employer, you have quite a bit of liberty when it comes to per diem reimbursement. Whatever you decide, once you choose a reimbursement rate, it’s best to be consistent.
None of the information provided is intended as tax advice. Your use of the information is at your sole risk. It’s best to consult a CPA or tax advisor for specific guidance as tax rules change over time and vary by location and industry.