Paying per diem means providing employees with a daily allowance for travel-related costs, enhancing budget control and employee satisfaction. This blog explores how this payment method can streamline financial operations while addressing the complexities involved in payroll and tax compliance.
Picture this: You own a hot chicken restaurant near Riverwalk outlets that has quickly become a community staple. As it draws crowds and rave reviews, your Head Chef reminds you that the annual Hot Chicken Week in Nashville is coming up.
As a small business owner, you’re aware that participating in it is an opportunity that promises to shine a spotlight on your establishment and enhance your chef’s culinary repertoire, so you decide to send your Head Chef there. Your Head Chef is elated about the idea, but they will obviously incur daily expenses while representing your restaurant out of town.
How do you plan to manage these costs?
A: Do you reimburse them once they’re back based on a pile of receipts, navigating through every meal and stay, complicating your accounting process?
OR
B: Do you adopt the per diem method, providing a fixed daily allowance that covers all work-related expenses? This method simplifies financial management and offers your chef convenience during their travel.
Opting for the ‘pay per diem’ approach streamlines expense processing and fosters transparency and trust. This ensures that your chef can focus on representing your restaurant without worrying about out-of-pocket costs.
Meanwhile, back at the restaurant, the show must go on. But how do you ensure that operations continue seamlessly without your Head Chef? This is where ‘hiring per diem’ steps in. With a ‘per diem’ chef, you can ensure your kitchen keeps firing on all cylinders in your head chef’s absence.
Curious about what hiring per diem entails? We’ve covered that in detail in our blog on ‘Hiring Per Diem’—a must-read for understanding how to integrate temporary talent into your business strategy when you’re understaffed or need increased capacity.
For now, let’s define ‘per diem’, explore what ‘paying per diem’ means, and how it’s an easier way for businesses to compensate employees for out-of-pocket costs.
Meaning of paying per diem
“Per diem” is a Latin phrase meaning “per day,” and it broadly encompasses two distinct concepts within the workplace: ‘hiring per diem’ employees and ‘paying per diem’ allowances.
While the hiring aspect refers to employing part-time staff on a daily or hourly basis without committing to a long-term or full-time contract, ‘paying per diem’ relates specifically to compensating employees for their out-of-pocket expenses when they travel on business. This system provides a daily allowance meant to cover essentials such as accommodation, meals, and incidental expenses during travel.
Understanding per diem payment methods is crucial for business owners—ensuring accurate compensation while enhancing employee convenience and satisfaction. Implementing a per diem system can be particularly advantageous for businesses with significant travel requirements.
Most common types of per diem payments:
As we’ve discussed, integrating a per diem system into your organization streamlines expense management and ensures financial efficiency. Below, we explore the most common types of per diem payments that can help you compensate employees effectively depending on what best suits your business:
Fixed rates
The organization provides a fixed rate to cover daily employee expenses. For example, you will provide $10 to your per diem employees every day to cover their meals.
Company credit cards
Around one-third of companies in the US[1] have standardized their regime by giving their per diem employees company credit cards. This method streamlines the process of managing business-related expenses, eliminating the need for cumbersome reimbursement processes.
Note: As a business owner, it’s essential to establish clear guidelines and communicate responsibilities to your team regarding the use of company credit cards. These cards are a convenient tool for handling business expenses, such as travel and meals, facilitating smooth operations without the cumbersome process of reimbursements. However, they come with the expectation that they will be used responsibly and strictly for business purposes.
Employers must establish explicit policies regarding allowable expenses and the process for reporting them to maintain financial integrity and prevent misuse. Implementing a robust card usage framework ensures transparency in business expenditures and protects against unauthorized personal use.
So when you hand over the company credit card to your per diem employee, they are to use it strictly for business purposes and not like they are a kid in a candy store. This is to avoid the constant stress of going back and forth with employee reimbursements when they use money out of their pocket to pay for company business.
Fun Fact: Did you know?
Even celebrities and athletes sometimes operate on per diem arrangements! The highest per diem rate ever reported was during the 2008 Beijing Olympics, where some athletes received allowances of up to $500 per day to cover expenses in the expensive host city.
Full expense coverage
Under this method, employees receive reimbursement for all expenses incurred during business travel up to the predetermined per diem rate. This means that the employer covers all costs, including lodging, meals, transportation, and incidental expenses.
Full expense coverage offers convenience for employees, as they don’t have to worry about covering any costs out of pocket. However, it places a heavier financial burden on the employer, as they are responsible for reimbursing all expenses, regardless of the actual amount spent.
Partial expense coverage
Partial expense coverage involves reimbursing employees for only a portion of their expenses, typically up to a certain percentage of the per diem rate. For example, the employer may choose to cover 75% of the per diem rate for meals and incidental expenses but require employees to cover the remaining 25% themselves.
This approach allows employers to control costs more effectively while still providing some financial support to employees. However, it may require employees to contribute their own funds to cover the remaining expenses, which can be a drawback, especially for those with limited financial resources.
Benefits of paying per diem
In addition to facilitating employees, per diem payments help streamline and predict financial expenditures related to employee travel, making it easier for businesses to manage their budgets effectively. Here’s how:
Cost predictability: Per diem allowances provide a fixed daily rate for expenses like meals, lodging, and incidental costs. This predictability allows employers to budget and plan financials more effectively, knowing exactly how much they will be spending on employee travel expenses.
Simplified expense management: By using a set per diem rate, employers can eliminate the need to process a multitude of receipts and detailed expense reports. This reduces administrative overhead and simplifies the accounting process.
Control over expenses: Per diem rates can help control costs by setting a clear limit on what the company is willing to cover. This helps prevent overspending and ensures that employees are aware of budget limits while traveling.
Tax benefits: If implemented correctly, per diem payments are exempt from taxes, providing financial benefits to both employers and employees, and simplifying tax preparation.
But, wait — do per diem allowances complicate payroll?
Yes, paying per diem may complicate employee expense reporting if expenses are not categorized and tracked accurately. Here are some ways per diem payments might affect your payroll operations:
Record keeping: You must maintain precise records of when and why per diem payments are made. This involves tracking the eligible days for per diem allowances, which can vary based on travel location and duration. Effective record-keeping is key to simplifying this aspect of your payroll.
Integration with payroll systems: Integrating per diem payments into your existing payroll system requires setting up specific codes or payment types for per diem allowances, separate from regular wages. Ensuring that these systems work together smoothly is critical for maintaining payroll accuracy.
Tax implications: It’s crucial to track and report per diem allowances accurately to comply with IRS guidelines. If your per diem payments exceed the federal rates, or if they are not substantiated correctly, they may be taxable to you as income. Proper record-keeping and integration with your payroll systems are essential to manage these tax implications correctly.
Regulatory compliance: Different states may have various rules regarding per diem payments, especially in relation to minimum wage requirements and overtime calculations. You must ensure that your per diem practices comply with all relevant laws, adding complexity to your payroll management.
Example: California vs. Texas
California:
In California, per diem payments that are not used exclusively for travel expenses, such as meals and lodging, may be considered part of an employee’s regular pay rate when calculating overtime. This means if an employer includes per diem as a part of compensation beyond expenses, it could affect the overtime rate calculation. California generally requires that any earnings, including some per diem payments, be included in the regular rate used to calculate overtime if they serve as compensation for work rather than reimbursement for expenses.
Texas:
Contrastingly, in Texas, per diem payments strictly intended to cover travel expenses do not typically affect overtime calculation as long as they are reasonable approximations of actual expenses and properly accounted for. Texas adheres more closely to federal guidelines, which do not require employers to include per diem payments in the regular rate as long as these payments are reasonably calculated not to exceed what an employee would spend on lodging, meals, and incidental expenses.
So, while paying per diem offers convenience for employees as they don’t have to worry about covering any or most costs out of pocket, it can complicate your payroll operations and, subsequently, taxes too. Designed for businesses like yours, CoCountant can significantly ease these financial management challenges with accounting services that include expense management, reimbursements, and employee expense reporting.
With CoCountant, you can rest assured that your employees’ per diem allowances are processed correctly and adhere to tax laws, reducing the administrative load on your team and helping you focus more on your core business activities.
General Services Administration (GSA) per diem rates
Understanding and applying the GSA per diem rates in your business is essential, but remember, these rates are benchmarks, not mandates.
Many businesses choose to set their own per diem rates, sometimes above the GSA standards, to accommodate their operational needs and employee comfort in a better way. However, it’s important to know that offering per diem rates higher than the GSA’s recommendations may have tax implications, turning the excess amount into taxable income for your employees.
The 2024 fiscal year per diem rates[2] are $59 and $79 for meals and accommodation, respectively.
The bottom line
So, for your hot chicken restaurant, opting to pay per diem to your Head Chef as they attend Nashville’s Hot Chicken Week is not just about covering expenses—it’s about empowering them to focus on representing your business without financial distractions.
This decision reinforces your commitment to your team’s growth and your business’s reputation, ensuring that both your staff and your restaurant can shine even when apart.
While per diem payments streamline expense management for your team, they can also complicate your payroll and employee expense reporting. At CoCountant, our accountants specialize in simplifying these complexities, ensuring accurate management of per diem expenses and compliance with tax regulations — allowing you to focus on what you do best: running and growing your business.
FAQs
1- Is per diem taxable?
Per diem can be taxable or non-taxable, depending on the circumstances. If per diem payments are made for business-related expenses and are within IRS-approved rates, they are typically non-taxable for employees. However, any amount exceeding the IRS-approved rates or used for non-business purposes may be subject to taxes.
2- How does per diem work?
Per diem works by providing employees with a fixed daily allowance to cover expenses incurred while traveling for work, such as meals, lodging, and incidental expenses. Employers may establish their per diem rates or adhere to IRS-approved rates, and employees are typically not required to submit receipts for expenses within the per diem allowance.
3- What is per diem pay?
Per diem pay refers to the daily allowance provided to employees to cover expenses associated with business travel. It is a flat rate paid by the employer to the employee, intended to reimburse them for meals, lodging, and incidental expenses incurred while away from home for work-related purposes.
4- What is per diem rate?
The per diem rate is the predetermined daily allowance provided to employees for business travel expenses. It may vary depending on the location and duration of travel and can cover expenses such as meals, lodging, and incidentals.
5- What is the federal per diem rate?
The federal per diem rate is the maximum allowance established by the federal government for reimbursing employees for lodging, meals, and incidental expenses while on official travel. It varies depending on the location and is updated annually by the General Services Administration (GSA).
6- What is standard per diem meal allowance?
The standard per diem meal allowance is the maximum amount the IRS allows for reimbursing employees for meal expenses while on business travel. It is part of the overall per diem rate and varies depending on the location and travel duration.
7- When is per diem required to be paid?
Per diem is typically required when employees travel away from home for work-related purposes and incur expenses for meals, lodging, and incidentals. Employers may establish their own per diem policies or adhere to federal regulations regarding per diem payments.
