What Employers Should Know About Per Diem and Employee Rights
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 DiemMost 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.
Types of Per DiemWhile 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:
FixedThe 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.
PartialSome 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 ExpensesActual 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 CardsThe 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:
FixedBest 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.
PartialA 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 ExpensesThis 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 CardsCompany 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:
MealsThe 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
LodgingMost 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 ExpensesIncidental 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
Travel CostsWhether 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.
AirfareFor 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) MileageIf 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 mile or 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 CoverFull-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:
- Alcohol (must be deducted from receipt)
- Room service
- First-class plane tickets
- Any lodging or meals that exceed the per diem rate
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
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.
ConclusionPaying 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. Save up to 60% on business lodging when booking a hotel for your traveling employee by using Hotel Engine’s platform!
Audrey Fairbrother is the Content and SEO Manager at Hotel Engine. She spends her days writing about all things business travel, researching topics that are important to Hotel Engine’s audience and cultivating the company’s brand voice. When she’s not working, Audrey enjoys spending time with her family, and hiking in the nearby Rockies with her dog, Albie.