If your employees travel for business, whether it’s internationally or locally, you might consider covering these costs by providing them with per diem pay. Per diems can be a great way to simplify expense management in your business and provide your employees with a predictable daily budget to cover their essential travel expenses.
So, what is a per diem, and what are the government per diem rates for 2023?
This article will explore the meaning of per diem and what businesses need to keep in mind when they calculate business travel expense reimbursements for their employees. We will answer common questions including “What is per diem pay?”, “What is a standard per diem meal allowance?”, and “What are the GSA per diem rates for 2023?”. We will also highlight how using software to centralize your expense management processes can help you streamline expense tracking, simplify your reimbursement procedures, and ensure compliance with per diem policies and regulations.
- Per diem meaning
- How does per diem work?
- How is per diem calculated?
- GSA per diem rates 2023
- Is per diem taxable?
- Centralize expense management with Factorial
Let’s start with the meaning of per diem.
Per diem, derived from the Latin for “by the day”, is a daily allowance that covers expenses that an employee incurs while traveling or on official business. These expenses include meals, lodging, transportation, and incidental costs incurred during a trip. Traveling employees can spend up to this defined amount each day to cover their essential expenses without expense reimbursement approval.
For example, if an employee is on a business trip and their company provides a per diem rate of $100, it means they are entitled to spend up to $100 per day on expenses related to the trip. Any amount spent beyond this allowance would typically be the responsibility of the employee, while any unspent amount might not be reimbursed.
This system simplifies the out-of-pocket reimbursement process and provides a standard daily allowance so that employees do not need to submit detailed receipts for every individual expense. It is commonly used in the business world, government, and various other organizations that require their employees to travel for work purposes.
What about per diem jobs? What does per diem work mean?
This is a slightly different concept. A per diem job is an employment arrangement where individuals are hired on a day-by-day or as-needed basis, typically without a long-term commitment or fixed schedule. In this type of job, common in industries including healthcare and hospitality, employees are considered temporary or on-call workers, available to fulfill specific duties whenever the employer requires their services. We won’t be focusing on this in today’s article.
We’ve explored the per diem meaning, so now let’s take a look at how it works, exactly.
Per diem rates
Organizations, companies, or governments set per diem rates based on the location of travel and the purpose of the trip. Different places may have different rates due to variations in the cost of living and travel expenses. We’ll expand on this below.
Calculation of per diem
Most organizations determine the per diem amount by considering the following expenses:
- Meals. Covers breakfast, lunch, dinner, and any incidental snacks.
- Lodging. Covers the cost of the hotel or other accommodation.
- Incidentals. Covers small miscellaneous expenses like tips, transportation to and from the airport, or other minor costs.
More on calculations below.
When an employee goes on a business trip, they can claim an allowance for each day they are away. They usually do not need to provide itemized receipts, as the per diem rate is meant to cover everything. You calculate the total reimbursement by multiplying the PD rate by the number of days spent on the trip.
Total reimbursement also takes the following into account:
- Partial days. For arrival and departure days, when the traveler doesn’t spend the full day away, the daily allowance may be prorated based on the time spent on the trip.
- Non-reimbursable expenses. Some organizations may specify certain expenses that are not eligible for reimbursement. For example, personal expenses or alcohol might not be covered.
Unused per diem
If a traveling employee spends less than the allowance rate on a given day, you might decide to allow them to keep the unused portion of the allowance. However, some organizations require employees to return any excess funds not spent during the trip. Ultimately, though, this will depend on each company’s expense policy.
Accounting and reporting
Finally, accounting and reporting are vital aspects of the per diem system, ensuring accuracy and adherence to the organization’s policies. When employees go on a business trip and incur eligible expenses, they must follow specific procedures for accounting and reporting:
- Expense tracking. Employees must track their expenses during the trip. They must also note any additional costs beyond the fixed per diem rates, such as transportation expenses.
- Per diem reimbursement requests. After the trip, the employee submits a detailed expense report to the finance or HR department. The report includes the trip dates, purpose, destination, and daily expense breakdown.
- Per diem vs. actual expenses. The report distinguishes between per diem expenses and actual expenses, if applicable.
- Receipts and documentation. Depending on each organization’s policies, employees may need to submit itemized receipts as proof of incurred expenses.
- Approval and reimbursement. Finance reviews and approves the report. They then reimburse employees for any eligible expenses.
- Unspent allowances. Employees might retain any unused per diems if expenses were below the allowance. However, this will depend on each organization’s internal policies. The same applies to any excess allowances not used appropriately.
- Auditing and record keeping. Organizations must retain detailed per diem records, receipts, and expense reports. This enables efficient auditing and ensures tax compliance where appropriate.
The best way to manage all the above is by using expense management software tools. The right solution can help you create an efficient per diem request system, and ensure accurate reimbursement and financial transparency. More on this below.
The way you calculate per diem rates will depend on a variety of factors. This includes the location of travel, the purpose of the trip, and the standard cost of living in the area. However, the specific process can vary depending on the organization or government agency setting the rates.
Nonetheless, here’s a general outline of how organizations typically calculate per diems to give you an idea.
Location plays a crucial role in determining per diem rates. This is because the cost of living, accommodation expenses, and meal costs can vary significantly from one location to another.
Let’s explore some factors related to location in the context of per diem calculation:
- Cost of living. Rates are often higher in cities or areas with a high cost of living. These locations tend to have more expensive meals, accommodation, transportation, and other daily expenses.
- International travel. For international travel, factors such as currency exchange rates, local economic conditions, and cultural factors can affect rates. Governments and organizations may have different rates for various countries to reflect these variations.
- Seasonal variations. Seasonal variations in travel demand can also impact rates. Popular tourist destinations may have higher rates during peak seasons when demand for accommodation and services is at its highest.
- Travel restrictions. Finally, travel restrictions, security concerns, or political stability in certain regions can influence rates. For example, some locations with high-risk factors might have lower rates to discourage unnecessary travel.
Meals and Incidental Expenses (M&IE)
Meals and Incidental Expenses (M&IE) cover an employee’s daily food allowance and minor miscellaneous expenses during business travel. The M&IE rate is typically calculated based on the location and duration of the trip.
Here’s a closer look at what M&IE includes and how it functions:
- Meal expenses. The M&IE portion of a per diem covers expenses related to meals. This includes breakfast, lunch, dinner, and any incidental snacks or refreshments consumed during the day. Per diem rates for meals can vary depending on the time of day and the specific location.
- Standard meal allowances. M&IE rates are often set by the government or organizations based on established guidelines. For instance, the General Services Administration (GSA) in the United States provides standard M&IE rates for various locations within the country, which can change annually to reflect fluctuations in food costs.
- Incidental expenses. Apart from meals, M&IE can also include incidental expenses, which are small miscellaneous costs incurred during the trip. These might include tips for hotel staff, bellhops, or other service providers. They might also include transportation to and from the airport or local business-related transportation expenses.
Federal or standard rates
Federal or standard rates refer to the predetermined per diem allowances established by the government or relevant authorities for specific locations or regions within a country. In the United States, for example, the General Services Administration (GSA) sets the federal per diem rates for various cities and regions. These rates are designed to reflect the average expenses an individual is likely to incur while traveling for official government business.
Federal or standard rates take into account factors such as the cost of living, accommodation, and meal expenses in each location. The government usually updates these rates annually to align with changing economic conditions and travel expenses. As a result, these rates provide a convenient and uniform way for government employers to reimburse employees for their business-related travel without the need for detailed receipts.
While federal or standard rates are typically used for government-related travel, private companies and organizations can also adopt these rates as a reference point for setting their own per diem policies. That way, they can ensure consistency and fairness in their expense reimbursement policies.
Most organizations calculate the lodging portion of the per diem according to the average cost of accommodation in the area. This usually depends on hotel rates or other approved lodging options.
Total per diem
The total per diem is the sum of the M&IE rate and the lodging rate.
In other words:
Total Per Diem = M&IE rate + Lodging rate.
So, for example, if the M&IE rate for a specific location is $60 per day, and the lodging rate is $100 per day, the total per diem for that location would be $160 ($60 + $100).
Exclusions and adjustments
Some organizations might exclude certain expenses from the per diem, such as travel between the traveler’s home and the destination or expenses related to conferences or events with provided meals.
Per diem reviews and updates
Organizations, companies, or government agencies should regularly review their per diem practices to ensure they remain relevant, fair, and in line with current economic and travel conditions.
This process is crucial because:
- Economic factors, such as inflation, fluctuations in living costs, and changes in travel expenses, can impact per diem rates. Regular review allows you to make adjustments to keep rates up-to-date and reflective of current conditions.
- The cost of living directly influences per diem rates in certain locations. As the cost of living changes over time, you should review your per diem rates regularly to accommodate these shifts.
- Organizations might observe changes in travel patterns, such as shifts in the frequency or destinations of business trips. This information can help you determine whether you need to adjust your per diem rates to match new travel trends.
- Reviewing and updating per diem policies regularly promotes transparency and openness within the organization. This is because employees understand that you are continuously evaluating your rates to meet their needs.
- Finally, for government employees or contractors, per diem rates are usually based on official government guidelines. Periodic review ensures that the organization aligns its rates with any updates or changes in these guidelines.
In the U.S., Federal per diem reimbursement rates are set by the General Services Administration (GSA), in collaboration with the Department of State (DoS), and the Defense Travel Management Office (DTMO). These GSA per diem rates, set on October 1 each year, are used by Federal agencies to reimburse their employees for expenses incurred while on official travel.
GSA per diem reimbursement rates are made up of two components: a maximum lodging allowance and a meals and incidental expenses (M&IE) allowance. The standard per diem rate for most locations within the contiguous United States (CONUS), covering approximately 2,600 counties, is $157 per day. $98 of this is allocated to lodging and $59 to M&IE. However, this fiscal year (FY), there are 316 non-standard areas (NSAs) with per diem rates that are higher than the standard federal per diem rates for 2023.
Since FY 2005, maximum lodging allowances have been determined based on the average daily rate (ADR) concept. ADR is a widely accepted metric in the lodging industry, obtained by dividing a property’s room rental revenue by the number of rooms rented, providing the average rate in a specific area. You can find out more information about how lodging per diem rates are determined from the GSA’s official lodging rates webpage.
Business travel per diems in the United States are either taxable or non-taxable, depending on how your employees use them.
Here’s a breakdown of the tax treatment of per diems in the U.S.:
- Non-taxable. A per diem is non-taxable if it meets certain conditions set by the Internal Revenue Service (IRS). To qualify as non-taxable, the per diem amount must be within the federal government’s standard per diem rates for various locations. The General Services Administration (GSA) publishes these rates annually, as we have just seen above. If the per diem does not exceed the GSA standard rates and it is used for legitimate business travel expenses, it is non-taxable income. Employees are not required to keep detailed records of actual expenses when using non-taxable per diem.
- Taxable. If the per diem you provide employees exceeds the federal government’s standard rates or if it is not specifically tied to business travel, you must treat it as taxable income. Per diem amounts that you pay in excess of the standard rates or those that employees use for non-business-related expenses are taxable wages and subject to regular income tax withholding.
- Accountable plan. To ensure proper tax treatment, many employers use an “accountable plan” for per diem payments. An accountable plan is a set of policies and procedures that meet IRS requirements for reimbursing employees for business expenses. Under an accountable plan, you do not include non-taxable per diem reimbursements in an employee’s taxable income, and you treat any excess amount as taxable.
In today’s dynamic business landscape, where remote work and travel are increasingly prevalent, an integrated and user-friendly expense management solution is essential. With its comprehensive suite of tools, Factorial provides organizations with a seamless and efficient solution for managing time and expenses associated with business travel.
For example, the platform’s time and expense tracking feature ensures that employees can effortlessly log their travel-related expenses, making it easy to keep an accurate record of expenses throughout their journeys. Plus, by enabling real-time tracking, Factorial empowers both employees and employers to stay informed about incurred costs, ensuring transparency and accountability.
Moreover, Factorial’s user-friendly interface for submitting reimbursement requests further simplifies the expense management process. Not only that, but employees can effortlessly submit their expense reports, saving time and reducing administrative burdens. As a result of this streamlined approval workflow, managers can quickly review and approve claims, allowing for a faster reimbursement process.
One of the standout features of Factorial’s expense management tool is the option for corporate expense cards. With these cards, organizations can issue prepaid cards to employees, simplifying expense tracking and reducing the need for out-of-pocket spending. You can seamlessly integrate the cards into the system, allowing for real-time expense updates and easier reconciliation.
Ultimately, Factorial is a solid solution for businesses looking to optimize their per diem management processes, foster better expense control, and empower their employees to focus on what truly matters – achieving their business objectives. Embrace the power of Factorial’s expense management feature and embark on a journey towards greater efficiency, cost savings, and enhanced productivity.