Per diem: What it means and how it works

If you travel for business, your company may cover your expenses. It may give you a business credit card, request receipts for reimbursement or pay with per diems. 

Per diems have a few benefits for both employers and employees. Here are some things you may want to know about per diems.

Key takeaways

• Per diems are daily allowances for business travel expenses.
• Per diems are typically for expenses like lodging, meals and incidentals.
• Businesses may refer to the federal per diem rate when determining a payment amount, but they don’t have to stick to it. 

Per diem is a Latin phrase that means “by the day.” In the work world, it generally refers to one of two things:

• Daily allowances given to employees to cover daily business-related travel expenses 
• How some workers are paid: by the day instead of by the hour or with a salary

Per diem payments often cover eligible traveling expenses like lodging and rentals as well as meals and incidental expenses—commonly referred to as M&IE. They could also include dry cleaning, room service, gratuities and other costs.

What don’t per diem payments cover?

Per diem payments may not cover some expenses incurred during business travel, like transportation costs or mileage on an employee’s personal vehicle. Depending on the company, it might still reimburse travelers for those costs outside the per diem. 

It’s a good idea to discuss what’s covered and what might need to come out of your own pocket with your employer before you travel. You can use the government’s guidance on transportation rates as a benchmark. 

If you’re traveling for business—or pleasure—creating a travel budget can help you avoid overspending.

Per diem rates vary by employer. Employers may set theirs by referring to the federal per diem reimbursement rates established for each state by the United States General Services Administration (GSA). These rates change every October. 

Companies can decide to pay more or less than the federal rate. They also have a choice as to how to pay out the funds. They may require you to pay out of pocket and then get reimbursed. Or they may provide you with a business credit card, petty cash or a written check. 

Per diem payments are mainly designed to offer simplicity when it comes to business travel. Here’s how both employers and their employees might benefit: 

• They can help companies budget for travel. Establishing fixed per diem travel rates can help businesses anticipate the cost per employee for work-related travel.
• They reduce the amount of recordkeeping and paperwork. Providing employees with per diems can minimize paperwork and avoid lengthy reimbursement claims processes. Employees traveling without a per diem would otherwise have to keep up with receipts and submit claims for out-of-pocket expenses like food and lodging. The company would then have to process the claims paperwork before approving or rejecting the request and issuing reimbursement payments to employees.
• They keep employees from being taxed on funds they had to be reimbursed for. Providing a per diem may help employees avoid unnecessary taxation. This is because per diems set at or below the federal rate aren’t considered income—which means they’re not usually subject to income taxes.
• They give employees the freedom to prioritize their travel-related expenses as they see fit. The IRS typically recommends putting 60% of per diem rates toward lodging and 40% toward M&IE. These guidelines can help companies and employees plan for trip expenses in advance. But because the percentages aren’t fixed, per diems allow employees to adjust spending as needed throughout the trip.

Per diems can help businesses and employees manage travel expenses. When traveling for business, thinking ahead and mapping out your expenses can also help minimize out-of-pocket costs. 

If the company you’re traveling for reimburses you instead of providing a per diem in advance, make sure you keep your receipts. That’s because by law you must submit a business expense report justifying your expenses within 60 days of your trip. 

If you’re looking for an easy way to make the most of out-of-pocket travel expenses, discover how you can use a travel credit card to earn rewards on business trips and personal getaways.