Regarding Per Diem Compensation, companies have several options when paying for business-related expenses for travel: providing employees with business credit cards, reimbursing them for actual costs incurred using travel and expense reports, or paying them “per diems.” Per Diem Compensation provides business employees a set allowance for each day spent away.

Eventually, it eliminates the need to manage myriad expense receipts. They simplify paperwork for the business and employees when dealing with ordinary expenditures for lodging, meals, and incidentals such as tips and fees. When part of an effective, comprehensive travel policy, Per Diem Compensation provides a simple way to ensure travel expenses are tax deductible for the business and that employees don’t get taxed on the money they are reimbursed.

Paying a Per Diem Rate is an easier and more cost-efficient way to reimburse employees for travel costs. The employer and the employee are spared the chores of accounting for every penny spent. Many companies prefer to pay certain workers, such as travel nurses and substitute teachers, a Per Diem Rate because it is less burdensome than adding them to the regular payroll.

In other words, Per Diem Compensation most commonly refers to a fixed daily allowance an organization provides to employees or contract workers to cover business travel expenses. They cover expenses related to business travel, including lodging, meals, and incidentals such as service-related fees and tips. The word is derived from Latin and translates to “by the day.” The term per diem is also sometimes used to describe an employment arrangement for work outside the regular business.

Understanding What Per Diem Compensation Entails In Business Transactions

Workers—such as substitute teachers, nurses, or photographers—are paid a day rate for temporary or on-call work. For an employer, Per Diem Compensation is an employment structure that frequently offers greater flexibility about labor costs and scheduling. Per Diem Compensation may cover the cost of lodging, meals, and incidentals for each day of business travel.

According to the Belindavas Consulting Agency Experts, each expense has a predetermined rate based on the average costs associated with specific locations. Under this model, a business typically pays partial per diems for the first and last day of a trip since the employee may spend part of those days at home or the office. A simple sample illustration based on rates from the United States General Services Administration (GSA) gives a clear picture. Consider these Per Diem Compensation samples:

As a rule of thumb, the GSA publishes the Per Diem Compensation Rates annually. The government uses these rates to reimburse federal employees for work-related travel within the U.S., and they are also often adopted by the private sector. That’s because the per diem rates businesses use to reimburse employees for lodging, meals, and incidentals must be equal to or less than those set by the federal government to be tax deductible for the business and to avoid a tax bill for employees.

The GSA rates go into effect annually on Oct. 1 and are based on the most up-to-date cost data for various cities and counties. A standard rate applies to about 2,600 counties in the United States and more than 300 location-specific rates for costly areas. However, these Per Diem Compensation Rates vary significantly—not surprisingly, a city like New York or Los Angeles has a higher per diem rate than a smaller city or town.

How A Business Per Diem Compensation Structure Works

Every company handles Per Diem Payments differently. They may issue credit cards, cover full or partial expenses, or offer fixed daily rates. They may require employees to cover the costs out of pocket and then request reimbursement. Some companies pay the Per Diem Reimbursement by check to indicate that it is separate from the employee’s income. Some Per Diem Compensation Payments may cover business expenses fully or partially.

Companies may use a Per Diem rate for lodging and meals or a per diem rate to cover meals only. A partial per diem, for example, may provide $100 to cover meals only, while lodging expenses and incidentals are to be paid out of pocket. In layman’s language, a company’s travel guidelines should outline a Per Diem Compensation Policy that clearly defines what is covered and the rates for payment or reimbursement for all relevant locations.

Employees may spend up to the allowance daily, submitting daily reports with receipts for lodging to receive the authorized per diem. They can typically pocket the difference if spending falls below the limit. The U.S. tax code allows businesses to deduct ordinary and reasonable expenses related to employee travel. This includes per diems. However, an organization must establish an “accountable plan,” per IRS guidelines, to substantiate the expenses.

This means that the costs are related directly to the business, employees must adequately account for their expenses (by submitting a daily report), and employees must return any excess reimbursement (above government-set daily per diem amounts) within a reasonable time. Per Diems are not taxable for employees as long as there’s necessary information.

Including:

• The business purpose of the expense
• Date, time, place, and amount of the expense
• Receipts for lodging

Employees receiving per diems must submit reports within 60 days of travel to avoid tax liability. If employees don’t submit reports, the IRS considers per diem payments taxable income. Companies typically pay Per Diem Compensation to employees electronically or by check after receiving employee reports. They are issued as payments separate from wages and are not subject to taxes, including the Federal Insurance Contributions Act (FICA) tax.

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Now that we know how a business Per Diem Compensation structure works, it’s worth noting that the Per Diem Compensation Rates for locations within the continental United States are available on the GSA Website for further exploration. Likewise, the rates for Alaska, Hawaii, U.S. territories and possessions, U.S. military installations, and foreign countries are available through the U.S. Defense Travel Management Office; those for foreign countries can also be found on the U.S. Department of State website.

At the same time, the GSA Per Diem Website and its mobile application platform offer an index that is searchable by city, state, and zip code. The index is broken down into two basic categories: “Lodging Rates” and “Meals & Incidentals Expense (M&IE) Rates.” The standard and location-specific rates display month-by-month figures.

For example, the location-specific lodging rate for Chicago is $134 in March 2021 and $216 in June. Equally important, the index allows you to input specific travel dates for a particular place and receive the total per diem for the defined period. Notwithstanding, the Per Diem Compensation Rates vary significantly across states and cities.

For instance, the standard GSA-established rate for lodging (excluding taxes) in 2021 is $96 per night. However, for the Los Angeles area, it’s $182 per night (for most months; the amount changes based on the month you’re traveling). The standard meal rate is $55, but it’s usually $66 in Los Angeles. Each company sets its payment rates, reimbursing traveling employees.

Consider these methods:

• Company Credit Cards: Some companies issue business credit cards to their employees. They use the cards to pay business expenses directly while on the job and without paying any costs out of pocket.
• Employee Expense Coverage: Some companies cover employee expenses in total, while others set limits for certain costs, such as lodging, food, and incidentals.
• Fixed Compensation Amounts: Many corporations provide employees with a fixed daily rate. Employees are expected to cover all or part of their costs with this per diem.

As a rule of thumb, employees must pay taxes on any amount over the federal government’s standard Per Diem Compensation Rates that they don’t return. Employees don’t need to submit meal and incidental receipts if they receive a Per Diem, though the IRS does require lodging receipts. Nontaxable payments appear separately from taxable income on Form W-2. 

Per Diem Compensation Plans For Government Employees

When employees are required to pay for their expenses themselves, companies usually require them to submit claims. Firms reimburse their employees if claims are approved for such out-of-pocket expenses. This method is more time-consuming than a Per Diem, requiring staff to review claims and receipts, approve or decline reimbursement requests, and issue payments.

In this case, Per Diem Compensation Plans for federal government employees who travel for work are set by the General Services Administration (GSA) of the State. Companies use these federal Per Diem Rates to guide their disbursement policies. At the same time, standard rates for domestic and international travel go into effect on October 1st of each year.

Rates set by the government are based on the cost of living in a company’s city. That’s why it sets rates for specific locations higher or lower than the standard rate. For example, we can refer to the types of Employment Compensation in Kenya. Such Per Diem Compensation Plans can take either of the two forms listed below, which determines the valuation method.

Including:

1. Cash Emoluments
2. Non-cash benefits

Usually, Per Diem Payments above the standard government rates require the employee to pay tax on the excess amount. They may return any excess amount above the government rate to the company. The excess payout is included in Box 12 of Form W-2.3. Failure to file a business expense report with the employer within 60 days generally results in a tax on the total Per Diems.

If the Per Diem is equal to or less than the federal Per Diem Rate, it isn’t considered part of an employee’s wages and isn’t taxable. However, employees must submit a business expense report to their employer to substantiate their expenses. The required report must be submitted to the employer within 60 days of the trip’s conclusion and include crucial information.

Such as follows:

• The business purpose of the expense
• Date, time, place, and amount of the expense
• The expenditure receipts for lodging

Receipts for out-of-pocket expenses should also accompany the report. Employees don’t need to submit meal and incidental receipts if they receive a per diem, though the Internal Revenue Service (IRS) requires lodging receipts. As per the Taxable Cash Emoluments In Kenya, the first KShs 2,000 is deemed a reimbursement W.E.F 16 June 2006. (s.5(2)a).

However, the Act does not provide per diem rates for overseas travel. Where an employee earns gross income, the tax paid by the employer on behalf of employees is in itself a benefit chargeable to tax. The Commissioner has given the formula for the tax-on-tax effect – Appendix 4C and 4D of the PAYE guide. Companies and employees can all benefit.

Per Diem Compensation Can Help:

• Companies budget future expenses more accurately.
• Reduce or eliminate the need to review and manage receipts.
• Reduce paperwork to a minimum for both companies and employees.
• Streamline the tax-deduction process for businesses when used for travel.
• Ensure that employees don’t get taxed on allowances that serve as reimbursements.
• Employees keep excess per diems that they don’t spend (although they will owe tax on that excess.)

On the one hand, a company’s Per Diem Rate is often the same as that set by the GSA. A higher company Per Diem Rate would require the employee to pay tax on the amount that exceeds the government rate (unless they return it to the company). On the other hand, Per Diems can be an efficient and effective way for both companies and employees to manage travel expenses.

Summary Thoughts:

When employees are required to pay for their expenses themselves, companies usually require them to submit claims. Firms reimburse their employees if claims are approved for such out-of-pocket expenses. This method is more time-consuming, requiring staff to review claims and receipts, approve or decline reimbursement requests, and issue employee payments.

Remember, Per Diems are incidental expenses or costs that are not explicitly identified but are at employees’ discretion. They may include the costs of laundry service, internet use, room service, tips, and more. Employees who use a personal car on a business trip will be reimbursed according to the IRS mileage reimbursement rate. This is an optional calculation rate.

In other words, Per Diem Compensation Plans are per-day allowances usually given for the upkeep of staff when on official travel. It’s a per-day compensation received by some workers. They get their wages by the day or the quantity of work done rather than being paid a regular salary for a full-time job. These workers are usually on temporary or short-term contracts.

For example, travel nurses and substitute teachers get Per Diem Compensation as part of their payments. However, self-employed individuals can only use a per diem for the cost of meals. Like other employees, self-employed persons must record expense reports substantiating the business trip’s date, location, and purpose. Receipts may also be required in some cases.