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Per Diem and Per Diem Tax Rates

Contents1 What is Per Diem?2 What Does Per Diem

What is Per Diem?

What is Per Diem?

Per diem is a fixed daily allowance for employees to cover expenses during business travels. It covers expenses like lodging, meals, and incidental costs. 

It simplifies expense management by avoiding the need for detailed expense tracking and reimbursement.

Per diem can be broken down into two key uses:

  1. Per diem expenses: It’s a daily budget for employees to cover costs when traveling for work.
  1. Per diem rates: These are when employees get paid by the day instead of a regular salary. It is usually for freelancers, consultants, and contractors who get paid by the day or hour. 

It sounds simple, but the government has set rules about how such an income is reported and taxed. 

The U.S. General Services Administration (GSA) sets standard per diem rates annually, which vary by location to account for differences in living costs.

Per diem is a Latin word that means per day or for each day. 

What Does Per Diem Cover?

When your employees travel for work, per diem simplifies how you reimburse them for their expenses on the business trip. 

The General Service Administration breaks it down into two main parts – meals and incidental expenses (M&IE) and lodging.

Meals and Incidental Expenses (M&IE)

M&IE covers expenses related to eating and minor day-to-day costs. It includes:

  • All meals (breakfast, lunch, and dinner)
  • Room service
  • Laundry services (dry cleaning and pressing of clothing)
  • Tips and fees (food servers and luggage carriers)

The GSA sets different per diem rates for cities based on their size and the business travel volume they receive. 

Source: https://www.gsa.gov/node/86696/mie-breakdown

Big cities, like San Francisco and Boston, have the highest daily M&IE allowance of approximately $79. Meanwhile, smaller but still busy cities like Tampa and Cleveland offer rates around $69.

Lodging Expenses

Lodging expenses cover your employee’s stay, which could be at hotels, motels, or resorts.

The lodging per diem is separate from M&IE, with rates varying by location. 

For example, Boston’s lodging per diem for 2024 is set at $197, while M&IE is $79. In New York City, lodging rates can range from $169 to $315, with M&IE maxing at $79.

The per diem method is a nuanced approach to reimburse employees fairly to reflect the actual expenses incurred in the travel.

How Does Per Diem Work?

Per diem is an alternative to reimbursing an employee’s expense during business travel. The employer offers a predetermined allowance instead of reimbursing the employee with the exact amount. 

The per diem allowance varies for different states, reflecting the cost of living in these areas. It can be paid in advance or reimbursed after the trip. 

Employees may still be asked to submit an expense report despite being a fixed daily rate. However, these reports are generally less detailed and should include information like the date of travel, time of travel, location, total expense, and the purpose of the visit. 

Per Diem for Government Employees

The General Services Administration (GSA) sets per diem rates for federal employees on official travel each fiscal year. These rates are a benchmark for employers to guide their per diem policies. 

The per diem rates are updated annually on October 1 to consider the change in costs due to factors like inflation and seasonal demand. 

Every year, the new standard rates apply to over 2600 United States counties and 302 high-cost areas that receive specific rates. 

As of 2024, the standard lodging rate has been updated to $107 per day, with meals and incidental expenses (M&IE) ranging between $59 and $79. For specific details and rates for different locations, you can check the GSA’s official website.

Per Diem for the Self-Employed

The IRS offers per diem rates for self-employed individuals that you can use only for meal expenses on a business trip. The meal expenses are not taxable income if they do not exceed federal per diem rates.

However, you need all the travel details handy, like the date and time of travel, location, purpose, etc. Also, keep your bills in case you need them for tax purposes. 

For lodging and other travel expenses, you must directly deduct the related costs on your tax returns, typically on Schedule C.

Per Diem Rates for 2024

The IRS has announced the per diem rates for the 2024 fiscal year on October 1, 2023. 

The standard lodging rate has moved up from $98 to $107. For areas outside CONUS, the lodging rates are higher than in other areas, as usual. For M&IE, the different tier cities will remain in the $59 to $79 range. However, the standard M&IE will be $59, the same as last year. 

Types of Per Diem Payments

types of per diem payments

When companies manage per diem payments, it is usually through the 3 most common ways:

  • Fixed rates
  • Partial payments
  • Out-of-pocket expense 

The payment methods differ based on organizational policies and employee needs. 

Fixed Rates

The fixed-rate method is when companies allocate a standardized daily allowance to employees to cover accommodation, meals, and incidental expenses. 

This rate is generally predetermined and factors in the cost of living in the travel destination and IRS guidelines. It is a simple process, and employees enjoy complete autonomy in managing travel expenses.

Employees can also get reimbursed according to mileage if they use personal cars for business travel. The IRS has recently updated the standard mileage rates for 2024. 

For business use, the rate is now 67 cents per mile, an increase of 1.5 cents from 2023. Employers can use this rate to calculate the deductible costs when an employee uses his vehicle for business starting January 1, 2024.

Partial Payments

Partial payments are much more flexible. For this payment method, companies can reimburse only certain costs, such as meals, while leaving other expenses, like lodging or transportation, to be managed by the employees. 

Most employers use this payment method for shorter trips or where a full per diem allowance is not required.

Out-of-Pocket Expenses

Out-of-pocket expenses mean the employees pay for all costs incurred during the business trip, and the employer reimburses them against claims. 

But in this case, employees need to provide bills for the claims, which may demand more administrative effort from both the employer and employee. 

Benefits of Per Diem Payments

Other than significantly simplifying budgeting for travel expenses, per diem payments have many other benefits for employers and employees. 

  • Reduce administrative work related to expense tracking
  • Streamlines tax reporting
  • Per diems do not require employees to track and manage travel receipts
  • Ensures equitable reimbursement for travel expenses
  • Employees can keep any unspent per diem amounts, though excess funds are subject to tax

How to Calculate Per Diem?

There are two ways to calculate per diem: federal rates and the high-low method. 

Federal or Standard Rates 

Most counties that come under CONUS (continental United States) operate under a standardized per diem rate, consisting of two components: the maximum lodging allowance and the meals and incidental expenses component.

As of 2024, the standard per diem rate is $166, which includes $107 for lodging and $59 for meals and incidental expenses. However, on the first and last days of their travel, employees receive only 75% of the standard rate for meals and incidental expenses.

Calculate Per Diem Using Standard Rate

Say an employee travels to Boston for business. 

The per diem rate for meals and incidental expenses (M&IE) in Oxford, Mississippi, is $59 daily. The breakdown includes $18 for breakfast, $20 for lunch, $36 for dinner, and $5 for incidental expenses.

On the first and last days of travel, the employee gets only 75% of the standard rate for M&IE, which is $44.25.

The daily standard lodging rate for Oxford is $107. 

Now, if the employee stays in Oxford for 3 days, the per diem reimbursement will be calculated as follows:

Lodging: $107 x 3 = $321

Meals and Incidental Expenses:

The employee receives the full M&IE rate of $59 per day for the one day between travel days. On the first and last days, he receives 75% of the standard rate, which is $44.25.

So, the total reimbursement for M&IE for the trip would be

Full days: $59 x 1 day = $59

Partial days: $44.25 x 2 days = $88.50

Total M&IE reimbursement: $59 + $88.50 = $147.50

Total per diem = M&IE + lodging = $147.50 + $321= $468.50

So, the total reimbursement under standard rates will be $468.50.

Calculate Per Diem Using High-Low Per Diem Method

The high-low per diem method is used when the rate is higher in some cities compared to others. For example, Boston, Massachusetts, has a per diem rate of $197 per day, with an additional $79 for M&IE. 

In other cities within the Continental United States (CONUS), the rate is $214 per day, including $64 for meals.

So, if you need to calculate per diem for higher-cost cities outside CONUS, use the highest rate, and if the destination is not to a high-cost area, calculate using the lowest for CONUS cities. 

Final Words

Per diem is a good way to manage business travel expenses for employees and employers. But it’s also necessary to follow the set rules by GSA and ensure equitable expense coverage for employees. 

Also, employers need to update their annual per diem guidelines based on updated information from the IRS. 

FAQs

1.   Why do companies pay Per Diem tax?

Companies use per diem payments to simplify expense management and ensure compliance with tax regulations. These payments are for business-related travel expenses and can be tax-exempt if they adhere to IRS guidelines.

2.   Is Per Diem reported to the IRS?

Yes, per diem payments have to be reported to the IRS. It will be treated as taxable income if it exceeds federal per diem rates or isn’t adequately accounted for.

3.   Is Per Diem Paid Out on Weekends?

Per diem is typically paid for days an employee is working or traveling for work purposes. Whether it’s paid on weekends depends on whether those days are considered work or travel days. You should consider your company policies to confirm if they are covered. 

4.   Is Per Diem Taxable?

Per diem payments are not taxable as long as they don’t exceed the federal daily rates set by the GSA and are used for business travel expenses. Payments exceeding these rates or not used for qualified expenses may be taxable.

5.   Can employers deduct per diem?

Employers can deduct per diem payments as business expenses when they are for work-related travel, and the payments are in line with federal guidelines. 

By : June 26, 2024
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