Per diem, or "per day" in Latin, is an important concept to grasp for those who travel for work or manage people who do. Essentially, the per diem refers to the set amount employees are reimbursed for the accommodation, meals, and minor expenses they incur while on business travel. These rates are updated annually, with the General Services Administration (GSA) determining them for anywhere in the Continental U.S. Meanwhile, non-foreign rates (think Alaska, Hawaii, Puerto Rico, and Guam) are appointed by the Department of Defense, and rates outside the U.S and its territories fall under the State Department's jurisdiction.
Understanding per diem is beneficial because it offers a simpler alternative to managing detailed expense records, thereby simplifying the bookkeeping process. Let's delve deeper into this system and how it can benefit travelers as well as employers.
The per diem rates are bifurcated into two parts: meals/incidental expense (M&IE) and lodging. The M&IE umbrella covers costs related to all meals (breakfast, lunch, and dinner), room service, laundry and cleaning, and any tipping. Larger cities like New York City or Boston typically have the maximum per diem rate of $79, while smaller cities with substantial business traffic like Tampa or Cleveland fall in the $59 to $74 range.
Lodging, on the other hand, covers any overnight accommodation. Separate rates for M&IE and housing are set, depending on the destination. As an example, the 2024 per diem rate for Atlanta is $173 for accommodation and $74 for M&IE, whereas in Chicago, the rates vary from $213 to $233 for accommodation (depending on the month) and $79 for M&IE. Rates also differ for the first and last day of travel.
These rates are calculated based on the cost of living of an area. Accordingly, larger metros have higher per diem rates than non-metropolitan areas, and lodging rates can fluctuate each month depending on the demand and supply of accommodations. You can search for specific rates on the GSA website by city, state, or zip code.
While most businesses utilize GSA-set per diem rates, there are alternatives. For example, some might utilize the IRS high-low method, one flat per diem rate for higher-cost locations, and one for all other locations.
The per diem mileage rates for taxes reference the IRS-designated rates taxpayers can claim for business-related travel using their personal vehicle. For 2024, the standard mileage rate is 67 cents per mile.
Per diem payments are not counted as wages, hence they are non-taxable, as long as they meet certain conditions. However, if your per diem exceeds the federal limit or you do not follow documentation standards, your per diem payment could be considered taxable. It is recommended to consult a tax advisor in these cases.
Similar to the per diem, a stipend is a set amount paid to an employee. However, a stipend is frequently used for academic or research purposes and provides for more generic needs, whereas per diem is mostly used for expenses incurred away from home.
Per diem advantages lie in developing a predictable travel budget and eliminating the need for individual expense tracking, thereby decreasing administrative work and easing tax reporting. It ensures all employees get reimbursed the same amount for traveling to the same location.
However, per diem may not cover all costs incurred during business travel. Plus, different geographical areas will mean different per diem rates. Companies risk overpaying or underpaying employees as actual expenses are likely to differ from the per diem amount.
Before you decide to opt for per diem, it is important to understand the pros and cons, consult with a tax specialist if required, and navigate this efficiently to ensure employees are not burdened with unexpected travel costs.