What Does Per Diem Mean and How Can You Use It to Manage Employee Travel Expenses?

You’ve probably heard the term "per diem" in reference to employee travel expenses. But what does per diem mean anyway, and how does it apply to your business?

A per diem is a daily allowance paid to employees to cover the cost of travel while they’re away on business trips.

Understanding how per diems work is important for managing your company’s travel costs and ensuring you’re in compliance with tax and labor laws.

We'll dive into what per diem means, how per diems work, the federal rates and what per diem payments cover.

Let’s get started.

Per diem, which means "per day" in Latin, is a payment made to employees to cover their out-of-pocket expenses while traveling for work.

This daily allowance can cover business travel expenses like meals, lodging and incidental costs.

Per diem payments are tax-free for the employee if the payment is equal to or less than the federal per diem rate. However, any amount over the federal rate is considered taxable income.

Companies usually reimburse employees electronically or by check for a per diem. Payments are issued separately from wages.

You can also use a travel business credit card to pay per diem expenses, which can simplify the process. Business credit cards offer other benefits as well — such as rewards points and cash back — which can be used to offset the cost of business travel expenses.

As a small business owner, using a per diem to reimburse your employees can have both advantages and disadvantages.

Here are some to consider.

There are several benefits to using per diem for travel expenses.

• Simplifies expense reporting: Instead of submitting receipts for every meal and incidental expense, employees receive a fixed amount for each day they’re traveling.
• Saves time: Employees don't have to spend time submitting receipts, and your small business doesn't need to review and approve each expense.
• Predictability: Fixed per diem rates make it easier to budget for your employee’s business travel costs because you know exactly how much you need to pay for each day of travel.

Using a per diem has its perks, but it may not be the best fit for every company. Here are some downsides to consider.

• Can be inflexible: Because per diem is a fixed amount, it may not be enough to fully cover travel costs. This could lead to additional out-of-pocket expenses for employees.
• Less accurate: Employees aren’t required to submit receipts for meals, which means business owners have no way to verify how money was spent. This could make it difficult to identify fraudulent expenses.

Per diem isn’t just about business expenses. Per diem can also refer to daily compensation received by some workers.

A per diem employee is hired on an as-needed basis, usually to fill in for regular full-time employees.

Per diem work is common in industries that require staffing flexibility, such as health care, education and construction.

For example, a hospital may hire per diem nurses to fill in for regular nurses who are out sick or on vacation.

Per diem employees typically work on an intermittent basis, with no guaranteed minimum hours per week. Their schedules vary from week to week or even from day to day, depending on the employer.

Employment rules, like overtime pay and minimum wage requirements, still apply for per diem employees.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer at The Penny Hoarder. She focuses on small businesses, retirement, investing and taxes.