What is per diem pay, and how does it work?

Last updated: December 6, 2023

Per diem is a valuable tool for handling work-related expenses, but understanding how it works can be a challenge, especially if your company doesn’t have policies in place yet. This guide will walk you through the ins and outs of per diem pay, from its meaning to the benefits it provides for employers and employees.

What does per diem mean?

“Per diem” is a Latin phrase that translates to “by the day.” In a business context, per diem refers to a daily allowance from an employer to cover work-related expenses during business travel or temporary assignments. Per diem expenses might include meals, lodging, and other incidentals.

How does per diem work?

Now that you have a basic understanding of what per diem pay is, let’s dive into the different payment and reimbursement options available. While rates may vary depending on the employer and the specific circumstances, there are 3 main types of per diem payments: fixed, partial, and out-of-pocket.

Fixed per diem rate

A fixed per diem rate is a predetermined daily amount provided to cover expenses. This amount is usually calculated based on factors like location, time of year, and industry standards. Fixed rates offer employees the flexibility to spend as they see fit within the given allowance and usually eliminate the need to submit receipts or documentation for each expense.

Fixed per diem allowances are typically covered through prepayment to the employee or through a corporate credit card.

Partial per diem payment

In some cases, employers may offer a partial per diem payment, which means covering a portion of daily expenses while the team member is responsible for the rest. For example, for a day trip, a business might provide its employee with a per diem allowance for meals but expect that the employee will manage their own transportation.

Partial per diem payments are also common for the first and last days of a longer business trip, when an employee might spend part of their day in the office.

Out-of-pocket reimbursement

This type of payment involves employees paying for work-related expenses themselves and submitting receipts to their employer. While this option may require more paperwork and recordkeeping, it can be a useful approach when employees have unique or unusual expenses that don’t fit within a company’s standard per diem rate.

How per diem rates are determined

Per diem rates can vary depending on several factors, including federal mandates, company policies, cost of living variations, and industry standards. Let’s take a closer look at how these factors play a role in determining per diem rates.

Federal mandates

Specific requirements for per diem may apply in your sector. In the US, the General Services Administration (GSA) sets per diem rates for government employees. Private companies and other organizations may use the GSA rates as a starting point when determining their per diem rates. For international travel, the US Department of State establishes per diem rates for US federal employees. These rates are based on the cost of living in the countries and cities where the employees are traveling abroad.

Cost of living variations

Per diem rates are often adjusted to account for differences in the cost of living between various locations. An employee traveling to an expensive city like New York or San Francisco, for instance, might receive a higher per diem rate than someone traveling to a more affordable location.

Industry standards

Some industries have established per diem rates based on the unique needs and expectations of their employees. Before you put your policy together, consider typical expenses and research the rates that other organizations may offer.

What are the benefits of per diem?

Per diem rates offer many benefits for employers and employees. Understanding these advantages can help you make informed decisions about how you implement per diem pay. Here are some of the most significant benefits:

For employers

• Simplify expense tracking: Providing employees with a fixed per diem rate makes it easier for employers to track and manage expenses because there’s no need to review individual receipts.
• Control costs and compliance: Establishing per diem rates can help employers control costs, reduce their tax burden, and ensure compliance by setting a fixed daily allowance.
• Attract and retain talent: Offering competitive per diem rates can make a company more attractive to prospective employees and help retain existing staff.
• Reduce administrative workload: You can decrease the amount of paperwork and time spent reviewing individual receipts and processing expense reports, freeing up valuable resources for other tasks.

For employees

• Financial predictability: Receiving a fixed per diem rate allows employees to plan their spending more effectively because they know how much money they have available.
• Flexibility: With per diem rates, employees have the freedom to allocate their daily spending in a way that’s best for them, which can lead to a more enjoyable, less stressful travel experience.
• Reduced documentation: Per diem rates can minimize the need for employees to keep track of receipts and submit detailed expense reports. -Potential tax advantages: In some cases, per diem payments may be considered non-taxable income, depending on the specific circumstances and applicable tax laws.

Take the stress out of per diem policies

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