The term “per diem” means “daily.” In a business setting, the term has come to mean the daily rates employees use for expenses incurred while traveling on business-related activities. These rates are likely to differ based on whether the employee travels in his or her home area, away from home, or internationally. The per diem allowance is the amount given to a traveler to cover expenses such as lodging, meals, and entertainment in connection with the performance of service duties for a company.
Typically the human resources department of an organization will establish per diem rates for employee travel expense reimbursement as well as policies for submitting travel expense forms and for documenting all approved expenses. Per diem amounts are normally set in advance. Employees typically may either claim actual expenses incurred or use established per diem rates or combine these methods. For example, the employee may claim a per diem amount for meals and claim actual costs for lodging, as long as lodging expenses do not exceed the per diem allowance for lodging.
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Setting Per Diem Rates
Per diem rates are established for a number of areas, including domestic air travel, international air travel, lodging, rental cars, vans, and trucks, other transportation, meals and entertainment, telephone usage, miscellaneous reimbursable and non-reimbursable expenses, and travel insurance. Companies also may specify preferred travel agencies and programs and establish policies for payment of travel expenses and per diem rates.
Companies that do not set their own rates may use per diem amounts based on U.S. federal travel regulations. Per diem amounts vary by city. U.S. meal per diem rates are set every January. Foreign meal per diem rates are issued on a monthly basis. Organizations will normally pro-rate per diems for less than a full day’s travel.
IRS regulations and reporting requirements governing per diems vary. For employees, if the per diem requested exceeds the federal per diem rate for the given location and duration of the trip, the excess amount is considered reportable income and is added to the employee’s W-2.
For independent contractors, per diem payments made to such individuals are reportable income and will be reported on Form 1099M.
It is important for a company to establish clear per diem amounts and travel policies before employees are hired and begin to travel for the company. For example, a company must decide whether it will reimburse employees’ personal phone calls while traveling, if it will reimburse employees for using airphones, etc. Other decisions include fees for currency conversion for international travel, ground transportation (taxi, bus, subway, etc.), hotel health club fees, laundry/dry cleaning/suit pressing, overnight delivery/postage, parking and tolls, tips, and visa/passport/consulate fees.
As a perk for employees, some firms consider paying for extra services to either reward, motivate, or retain employees in tight labor markets. Some per diem items to consider may include: airline club membership dues, annual fees for personal credit cards, hairdressers, clothing or toiletry items, country club dues, expenses related to vacation or personal days taken before, during, or after a business trip, golf fees, luggage and briefcases, magazines, books, newspapers, personal reading materials, mini-bar alcoholic refreshments, movies (including in-flight and hotel in-house movies), personal automobile routine maintenance/tune-ups, pet boarding, rental car upgrades, saunas, massages, shoe shines, or U.S. traveler’s check fees.
Per Diem Examples
The Per Diem, Travel and Transportation Allowance Committee exists to ensure that uniform travel and transportation regulations are issued for members of the seven branches of the U.S. military (Army, Navy, Air Force, Marine Corps, Coast Guard, National Oceanic and Atmospheric Administration, and Public Health Service).
The objective of these regulations is fair and equitable reimbursement of uniformed members and civilian personnel.
The U.S. Government, through the U.S.
Department of State, provides per diem allowance amounts for travel in foreign areas in lieu of reimbursement for actual subsistence expenses. The allowances are provided to employees and eligible dependents for daily expenses while on temporary travel status in the listed localities on official business away from an official post or assignment. The established rates are maximum amounts.
Under travel regulations implemented by the General Services Administration and individual federal agencies, authorizing officials are required to reduce the maximum rates as needed to maintain a level of payment consistent with necessary travel expenses. Separate amounts are established for lodging and meals plus incidental travel expenses. The maximum lodging amount is intended to substantially cover the cost of lodging at adequate, suitable, and moderately priced facilities. The meals and incidental expenses portion is intended to substantially cover the cost of meals and incidental travel expenses such as laundry and dry cleaning.
See also: Expense Accounts