Per Diem

Intro to Per Diem?

Per diem, Latin for “per day,” is a daily allowance provided to employees to cover expenses incurred while traveling for business purposes. This system simplifies expense management by establishing predetermined rates for meals, lodging, and incidental expenses rather than requiring detailed receipts for reimbursement. Per diem rates typically vary by location, acknowledging that costs differ significantly across cities and countries, making it an essential component of business travel policies and expense management in organizations of all sizes.

Definition of Per Diem

Per diem refers to a fixed amount of money provided to employees for each day of business travel to cover expenses such as meals, lodging, and incidental costs without requiring itemized receipts. The term literally means “per day” in Latin, reflecting its daily allowance nature.

Per diem payments typically fall into two main categories:

1. Full per diem: A comprehensive daily rate covering all travel-related expenses, including lodging, meals, and incidentals.
2. Partial per diem: Separate allowances for specific expense categories, such as meals and incidental expenses (M&IE) only, with lodging either reimbursed based on actual costs or covered directly by the employer.

In many countries, government agencies establish standard per diem rates that vary by geographic location to account for cost-of-living differences. For instance, in the United States, the General Services Administration (GSA) publishes per diem rates for domestic travel, while the State Department sets foreign per diem rates.

From a tax perspective, per diem payments that do not exceed established government rates and meet specific requirements are generally not considered taxable income for employees. This creates an administrative advantage for both employers and employees by reducing paperwork and simplifying tax compliance.

It’s important to note that per diem systems must be properly documented with information about the business purpose of travel, dates, and locations to maintain compliance with tax regulations and internal control standards.

Importance of Per Diem in HR

Per diem allowances play a crucial role in effective human resources management, particularly for organizations with mobile workforces or frequent business travel requirements:

Administrative Efficiency: Per diem systems dramatically reduce the administrative burden associated with expense processing. Instead of reviewing detailed receipts for every meal and incidental expense, HR and finance teams can process standardized daily allowances based on location and travel duration. This streamlined approach reduces processing time and administrative costs.

Cost Control and Predictability: Predefined per diem rates help organizations establish clear budgets for business travel. By setting fixed daily allowances, companies can accurately forecast travel expenses and prevent excessive or unnecessary spending. This predictability is particularly valuable for project-based work where travel costs must be estimated in advance.

Employee Satisfaction: Per diem arrangements often enhance employee satisfaction by eliminating the need to track and submit receipts for minor expenses. Employees appreciate the autonomy to manage their daily allowance without micromanagement, and immediate access to funds prevents them from having to cover business expenses with personal resources for extended periods.

Tax Compliance: When properly structured, per diem programs offer tax advantages for both employers and employees. Payments within government-established rates are generally non-taxable, reducing the tax burden compared to regular compensation. HR departments play a crucial role in ensuring per diem programs comply with relevant tax regulations.

Global Workforce Management: For international organizations, per diem systems provide a standardized approach to expense management across different countries. This is particularly important for multinational corporations managing attendance management and expense reporting across diverse regulatory environments.

Duty of Care: Per diem allowances help organizations fulfill their duty of care obligations by ensuring employees have adequate resources for safe and comfortable business travel. Appropriate per diem rates allow employees to stay in safe accommodations and access proper nutrition while representing the company away from home.

Examples of Per Diem

Example 1: Standard Domestic Business Travel

Marketing Manager Sarah travels from Chicago to San Francisco for a three-day industry conference. Her company uses the GSA per diem rates, which specify $69 for meals and incidental expenses (M&IE) and $302 for lodging in San Francisco. The company handles the following:

• Sarah’s hotel is booked and paid directly by the company at the corporate rate of $280 per night
• She receives $69 per day for meals and incidentals, totaling $207 for the three-day trip
• The per diem is provided through a prepaid corporate card loaded before her departure
• Sarah doesn’t need to collect or submit meal receipts, only document the business purpose of her trip
• When she returns with $25 unspent, she can keep this amount as it falls within the approved per diem rates

This approach simplifies expense reporting while ensuring Sarah has adequate funds for her business travel needs.

Example 2: International Assignment with Location-Based Rates

Engineering Director Michael is sent to Dubai for a two-week project implementation. His company uses a location-specific approach reflecting the high cost of living in Dubai:

• Michael receives a full per diem of $150/day for meals and incidentals in Dubai
• The company directly covers his hotel accommodation and transportation
• For travel days (when he’s in transit), he receives a reduced per diem rate of $75
• The HR department provides a digital per diem policy guide with specific rates for different global locations
• Michael uses the company’s HRMS Middle East portal to submit his time on assignment and receive the appropriate per diem

This system acknowledges the significantly higher costs in Dubai while maintaining consistent expense management processes across the global organization.

Example 3: Long-Term Field Assignment with Tiered Rates

Construction Supervisor Elena is assigned to oversee a six-month project in a remote location. Her company implements a tiered per diem approach to manage costs for extended assignments:

• First 30 days: Full per diem rate of $200/day for lodging, meals, and incidentals
• Days 31-90: Reduced rate of $150/day, reflecting the ability to secure longer-term accommodations and find economical meal options
• Beyond 90 days: Further reduced rate of $125/day for the remainder of the assignment
• Elena receives a monthly lump sum payment at the beginning of each month based on the applicable tier
• The company provides additional weekend travel allowances every two weeks to allow Elena to return home

This tiered approach recognizes that expenses typically decrease as employees become familiar with an area and can make more economical arrangements for extended stays.

How HRMS platforms like Asanify support Per Diem

Modern HRMS platforms like Asanify offer comprehensive tools to streamline per diem management and integrate it with broader human resources processes:

Automated Rate Calculation: Advanced HRMS systems maintain updated databases of location-specific per diem rates, automatically calculating appropriate allowances based on travel destinations and durations. These systems can apply different rates for domestic versus international travel and adjust for partial travel days according to company policies.

Digital Trip Documentation: HRMS platforms provide intuitive interfaces for employees to document business travel details, including dates, locations, and business purposes. This digital documentation creates audit trails that satisfy internal controls and tax requirements while eliminating paper-based processes.

Integration with Payroll: Per diem management seamlessly integrates with payroll processing in comprehensive HRMS platforms. The system can distinguish between taxable and non-taxable per diem payments based on compliance with government rates and automatically apply the correct tax treatment. This integration ensures accurate reporting on employee pay statements and year-end tax documents.

Mobile Accessibility: Modern HRMS solutions offer mobile applications that allow employees to manage per diem requests and documentation while traveling. These apps enable users to submit travel plans, receive per diem pre-approvals, and access funds through digital wallets or corporate card integrations.

Policy Enforcement: HRMS platforms can encode company-specific per diem policies and automatically enforce compliance. The system can flag exceptions, such as per diem requests that exceed maximum allowable rates or trips that don’t meet minimum distance requirements for eligibility.

Reporting and Analytics: Comprehensive reporting tools allow organizations to analyze travel spending patterns across departments, projects, or individual employees. These insights help identify opportunities for cost savings and inform policy refinements. For example, the system might reveal that certain locations consistently generate higher expenses, prompting a review of per diem rates or travel arrangements for those destinations.

Global Compliance Management: For multinational organizations, HRMS platforms help navigate the complexity of per diem regulations across different countries. The system can maintain country-specific rules about maximum allowable rates, documentation requirements, and tax implications, helping organizations maintain compliance while operating globally.

FAQs about Per Diem

Are per diem payments considered taxable income for employees?

Per diem payments generally aren’t taxable income for employees when they meet specific IRS requirements. These include: staying within federal per diem rate limits for the specific location; being paid in connection with business travel requiring overnight stays; being properly substantiated with documentation of business purpose, dates, and locations; and not exceeding the actual number of business days traveled. However, per diem payments become taxable when they exceed federal rates, aren’t properly documented, are provided for non-overnight travel, or represent wages rather than expense reimbursements. Per diem payments that qualify as non-taxable don’t appear on W-2 forms as wages, though excess amounts must be reported as taxable compensation.

How are per diem rates typically determined?

Per diem rates are typically determined through several methods. Many organizations adopt government-established rates, such as those published by the U.S. General Services Administration (GSA) for domestic travel or the State Department for international locations. These rates are regularly updated to reflect current costs in specific geographic areas. Some companies develop their own internal rate structures based on historical expense data, cost-of-living indices, or industry benchmarks. Others use tiered systems with different rates based on employee level or location categories (major cities versus rural areas). Additionally, collective bargaining agreements may stipulate specific per diem rates for unionized workforces. The most effective per diem structures balance cost control with reasonable allowances that reflect actual expenses employees encounter while traveling.

Can employees keep unspent per diem amounts?

Whether employees can keep unspent per diem depends entirely on company policy. Many organizations operating under an “allowance” model permit employees to retain any unspent funds, considering the per diem a fixed entitlement regardless of actual spending. This approach offers simplicity and incentivizes cost-conscious behavior. However, other companies implement a “reimbursement” model where employees must return unused amounts or receive only what they actually spent up to the maximum rate. Some organizations use hybrid approaches, such as allowing employees to keep unspent meal allowances but requiring reconciliation of lodging expenses. The chosen policy should be clearly documented, consistently applied, and communicated to all employees to avoid confusion or perceived inequities in travel expense management.

How do per diem payments work for international travel?

Per diem for international travel typically involves higher rates that reflect destination-specific costs and additional considerations. Organizations often use country-specific rates published by government agencies (such as the U.S. State Department’s foreign per diem rates) that account for local costs. International per diems frequently include allowances for currency exchange fees and specific regional expenses. Companies commonly provide international per diem in the local currency or via corporate cards that minimize exchange fees. For extended international assignments, organizations may implement tiered rates that decrease over time as employees settle into their locations. Many companies also build in allowances for communication expenses to maintain contact with the home office. International per diem policies typically require more detailed documentation due to heightened tax scrutiny of foreign business activities.

What documentation is required for per diem reimbursements?

While per diem systems reduce receipt requirements for specific meals and incidental expenses, proper documentation remains essential for tax compliance. Required documentation typically includes: the business purpose of the trip (specific reasons for travel); exact travel dates (departure and return); precise destinations (cities and countries visited); an itinerary showing business activities versus personal time for mixed-purpose trips; lodging receipts when lodging is reimbursed separately from the M&IE per diem; and transportation receipts for airfare, train tickets, or rental cars. Organizations should maintain these records for at least seven years to support tax deductions and respond to potential audits. Many companies implement digital documentation systems through expense management platforms that capture and store this information electronically, simplifying compliance while reducing administrative burden.