In Latin, per diem means, "for each day." In the business world, the term often refers to the daily allowance that businesses give employees for travel time. The per diem often pays for lodging and food for the trip. While the concept may seem simple, it's important to learn your legal requirements, the nuances of reimbursement and per diem rates.
TL;DR (Too Long; Didn't Read)
Businesses have to reimburse employees for travel if not doing so would drop the employees below minimum wage. Per diems can also help companies retain great talent.
Per Diem Laws
The Fair Labor Standards Act doesn't explicitly state that companies have to reimburse all employees for business travel. However, refusing to cover these expenses could violate the law in some cases.
That's because the United States Department of Labor states that wages must be over the local or federal minimum after you subtract any kickbacks that employees must make to conduct their work. Not reimbursing employees for their travel and lodging can also break laws regarding overtime.
Illegal Per Diem Practices
Imagine you send an employee on a two-day trip for work. From the time he leaves for the airport to the time he gets home will be 48 hours.
If your business falls under the federal minimum wage, that's 16 hours at $7.25 per hour and 32 hours at $10.88 per hour. In total, he needs to make $464.16 for the trip. This amount must come after the hotel, food, travel and incidental expenses he has on the trip.
Clearly, an employee who makes minimum wage will need reimbursement even if they spend just one penny. However, what about staff members who make over the required minimum?
Let's say an employee makes $15 per hour and goes on the same trip. You would need to pay her $960 for wages and overtime. When you start making deductions, it may come under the minimum.
Perhaps she had to stay at a specific hotel for the conference that cost $200 for the night. Luckily, the conference was close enough to drive instead of fly, but the rental car and gas set her back $300. While she was away, she had six meals for an average of $15 each.
At this point in the trip, her wages minus expenses leave her with just $370. This is far below the absolute minimum for such a trip. If you didn't reimburse this employee, you could be in legal trouble. It's important to pay attention to these per diem requirements.
Per Diem Versus Reimbursement
While the common per diem meaning is similar to reimbursement, these are not necessarily the same to your human resources department. Generally, reimbursement requires employees to submit receipts and expense reports to get their money back.
The U.S. General Services Administration sets per diem rates that vary throughout the country. Businesses can choose to pay this amount for each day employees travel for business rather than make them file expenses. This practice lightens the load on the human resources department and generally makes things easier.
What Per Diems Cover
While reimbursements cover any expenses that the company accepts, per diem rates only cover lodging, meals and incidental costs. Meals include three per day. Incidental charges include things like dry cleaning and tips for hotel workers. Lodging covers the night at a mid-range hotel.
Notably missing from per diems is the cost to travel. Companies who want to rely solely on per diems can pay for plane tickets and rental cars directly or allow employees to access the company card. Otherwise, you can use per diems for everything except travel and have employees submit expense reports for their tickets.
Per Diems and Taxes
Although employees do not need to submit expense reports to receive per diems, it's still good practice. Without these reports, you must report them as taxable income. However, the reports allow you to make the per diem tax-free.
- United States General Service Administration: Per Diem Rates
- Forbes: IRS Announces New Per Diem Rates For Taxpayers Who Travel For Business
- AZ Central: Does a Company Have to Pay Per Diem?
- U.S. General Services Administration. "Frequently Asked Questions, Per Diem." Accessed Nov. 25, 2019.
- U.S. General Services Administration. "Federal Travel Regulation, Section 300-3.1," Pages 22 and 71. Accessed Nov. 25, 2019.
- U.S. General Services Administration. "M&IE Breakdown." Accessed Nov. 25, 2019.
- U.S. General Services Administration. "FY 2020 Per Diem Rates for Georgia." Accessed Nov. 29, 2019.
- U.S. General Services Administration. "FY 2020 Per Diem Rates for Illinois." Accessed Nov. 29, 2019.
- U.S. General Services Administration. "Factors Influencing Lodging Rates." Accessed Nov. 25, 2019.
- U.S. General Services Administration. "FY 2020 Per Diem Rates for New York." Accessed Nov. 29, 2019.
- U.S. General Services Administration. "FY 2020 Per Diem Highlights." Accessed Nov. 25, 2019.
- Internal Revenue Service. "Notice 2019-55," Page 3. Accessed Nov. 25, 2019.
- Internal Revenue Service. "Per Diem Payments Frequently Asked Questions," Page 2. Accessed Nov. 25, 2019.
- Internal Revenue Service. "Topic No. 511 Business Travel Expenses." Accessed Nov. 25, 2019.
Mackenzie Maxwell is a small business owner. She has two businesses, including a martial arts gym in Texas. Prior to building her own, Mackenzie worked with small businesses and organizations to create effective marketing - from churches to insurance companies. She enjoys helping businesses with the startup spirit grow. Mackenzie has been writing in this field for six years and shows no signs of slowing.