Understanding Per Diem Expenses: A Complete Guide

What Are Per Diem Expenses?

Per diem expenses refer to the daily allowance employers provide to their employees to reimburse them for costs incurred during a business trip. It is a predetermined amount of money that covers meals, lodging, and incidental expenses.

How Do Per Diem Expenses Work?

Per diem expenses work by providing employees with a fixed daily amount to cover their travel expenses. Instead of requiring itemized receipts, companies choose to adopt a per diem approach to simplify the reporting and approval process.

Benefits of Per Diem Expenses

There are several benefits to using per diem expenses:

• Simplified Process: Per diem expenses eliminate the need for employees to submit detailed expense reports, saving time and reducing administrative burden.
• Predictable Budgeting: Employers can set a fixed per diem rate, allowing for more accurate budgeting and forecasting of travel expenses.
• Flexibility: Employees have the freedom to spend their per diem as they see fit, as long as it falls within the guidelines set by the employer.
• Tax Advantages: Per diem expenses are often tax-free for employees, making it a cost-effective solution for both employers and employees.

Types of Per Diem Payments

There are two main types of per diem payments:

1. High-Low Method: The high-low method sets different per diem rates for high-cost and low-cost areas. This allows for greater flexibility in accommodating varying travel expenses based on location.
2. Fixed Rate Method: The fixed rate method sets a standard per diem rate for all locations, regardless of cost. This method simplifies the process by providing a consistent allowance regardless of where the employee is traveling.

Qualifying for Per Diem Payment

To qualify for per diem payment, employees must meet certain criteria:

• Traveling Away from Home: Per diem expenses are typically provided when employees are traveling away from their tax home. The tax home is the general area where the employee's main job is located.
• Temporary Work Assignment: Per diem expenses are intended for temporary work assignments that require employees to be away from their tax home for a specific period of time.
• Distance from Tax Home: The distance from the employee's tax home to the temporary work location is a factor in determining eligibility for per diem payment. The IRS sets guidelines for the maximum distance allowed.

Downsides of Per Diem Expenses

While per diem expenses have their benefits, there are also some downsides to consider:

• Less Flexibility: Employees may feel restricted by the fixed per diem amount, especially if their actual expenses exceed the allowance.
• No Reimbursement for Excess Expenses: If employees spend more than the per diem amount, they will not be reimbursed for the excess amount unless there are exceptional circumstances.
• Varied Travel Costs: Per diem rates may not accurately reflect the actual travel costs in certain locations, resulting in either overcompensation or undercompensation for employees.

Millennials and Per Diem Expenses

Per diem expenses can be particularly attractive to millennials:

• Simplicity: Millennials appreciate streamlined processes and per diem expenses offer a simplified approach to managing travel expenses.
• Flexibility: The freedom to spend their per diem as they see fit aligns with the desire for autonomy and independence.
• Work-Life Balance: Per diem expenses allow millennials to maintain a healthy work-life balance by providing them with the means to enjoy meals and lodging without worrying about submitting receipts or expense reports.

Conclusion

Per diem expenses provide a convenient and cost-effective way for employers to reimburse their employees for business travel expenses. By understanding how per diem expenses work and the benefits they offer, companies can streamline their travel reimbursement process and provide employees with a more efficient and flexible way to manage their travel expenses.