Business travel is a regular part of many working professionals’ lives, and it’s standard for businesses to provide a budgeted reimbursement for travel expenses. When a profession requires travel for training, meetings, or management, incidental expenses often occur. After all, employees still need to eat and have somewhere to sleep, even when they’re not in their home city.
That’s where a per diem comes in. This article will explain the basics of per diems and how to record per diem expenses in QuickBooks.
What is a per diem?
Per diem, meaning “per day” in Latin, is the designated allowance for lodging, meals, and incidental expenses. It is regulated by the General Services Administration (GSA) for destinations within the continental United States. Per diems provide guidance on what amount of money is appropriate for an employee to spend to cover travel expenses while on business travel.
How per diem works for employees
When employees incur travel expenses, they are often expected to keep and submit receipts to comply with expense tracking policies. One benefit of using a per diem payment is that per diems are simpler and easier to use than a traditional expense tracking report system. Employees are immediately reimbursed for their expenses, know the budget ahead of time, and don’t have to cycle through a lengthy approval process. Per diems help managers, their direct reports, and the finance team save valuable time. Remember, it’s good to save a record of employee expenses through a simple expense report to avoid future tax implications.
Per diem is also a classification of employees. Per diem employees work as needed, although the term itself means “for each day.” A per diem employee could be needed on Monday, but not have enough work to be needed on Tuesday. When a worker is per diem, their schedules can vary considerably from one week to the next based on business needs and employee availability. A good example of a per diem worker is a substitute teacher. These employees usually hold different hours from a full-time employee and often don’t qualify for employer-funded benefits. Their pay also differs from full-time or part-time staff, as per diem employees are paid a daily per diem rate, rather than a salary or an hourly wage. It’s important to note that according to the Internal Revenue Service (IRS), a self-employed person can only use per diems to cover meal costs and incidental expenses while incurring travel expenses on a business trip.
What travel expenses does a per diem cover and how is it calculated?
There are two different categories of travel expenses that per diems cover. One is meals and incidental expenses, and the other is lodging expenses. Meals and incidental expenses cover all meals and expenses such as room service, laundry, dry cleaning, steaming of clothing, and tips for staff such as waiters, concierges, and maids. Lodging expenses cover accommodations for necessary overnight stays at hotels, motels, inns, resorts, and apartments.
Per diems can cover these two expenses, but employees cannot receive per diem reimbursement to cover transportation or mileage expenses. However, employees that opt to stay with a family member rather than in a hotel can be paid a lesser per diem rate that doesn’t include lodging—only meals and incidental expenses. For example, an employee traveling 200 miles by car would be able to receive a full per diem reimbursement for three meals daily on the road, incidental expenses like tips, and a night at a hotel.
According to IRS rules and regulations, there are two main substantiation methods for per diem rates: the high-low method and the regular federal per diem rate method. The high-low method uses only two per diem rates: one for places designated as high-cost locations and another rate for all other locations that don’t fall into that specific bucket. The high-low substantiation method may be used only if it is used for all amounts paid to an employee for travel away from home in the continental United States during the calendar year. In contrast, the regular federal per diem rate method simply uses location-specific per diem daily allowance rates that are set annually by the federal government for its civilian employees.
Per diem rates
Meals and incidental expenses
- Standard rate of $55–$76
- Standard rate of $96
Standard and nonstandard rates
- 319 locations with a maximum allowance higher than standard
Perks of using a per diem model
Per diem payments decrease the amount of paperwork needed to accurately verify business travel expenses for companies. By giving employees a set amount of money each day to spend without having to submit receipts, both the employer and employee save time. Employees who choose to dine at costs lower than the federally regulated amounts can keep the additional funds without tax implications, since employers rarely ask for unused funds to be returned back to the business.
Confusion is avoided, because set expense amounts and resourcing for demand are ensured through the per diem model of reimbursement and labor allocation. One of the many benefits of per diems is that expense tracking is greatly simplified, so the need for a complicated expense tracking policy is virtually eliminated.
Potential perils of using per diems
While per diems generally simplify the process of expensing costs from business travel, there are a few potential challenges when using this method. For the self-employed, per diems are only usable for meal costs while traveling on businesses, and for all businesses, per diem reimbursements are not taxable income to the employee if the payment is less than or equal to the federal per diem rate. To remain compliant with the tax code set by the GSA and the IRS, employees must still submit an expense report to verify the per diem payment is not taxable income.
Employees also still must keep track of their expenses, which can be a bit of a hassle when traveling for work. If employees fail to miss the 60-day filing deadline for their expenses, the per diem payments quickly become taxable income.
Finally, it’s imperative that employers stay vigilant and ensure that employees are not committing expense report fraud or abusing their per diem privileges. Common ways employees commit fraud in these situations include requesting per diem money for lodging when staying with family or requesting meal allowances when lunch and dinner are already included in the cost of an event or conference. Employers should remain aware of the possibilities of per diem abuse and involve human resources when needed.
How QuickBooks can help
If you’re looking to manage your business expenses, Intuit can help you determine the right solution for your needs. QuickBooks can account for per diems and help determine if they make sense for your business. Find out more here.
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