Per Diem is a Latin term meaning “per day” and is commonly used in business and employment contexts to refer to a daily allowance or fixed amount of money provided to employees to cover daily expenses incurred while traveling for work. This allowance typically covers expenses such as meals, lodging, and incidental costs. Per diem is often used to simplify the reimbursement process, ensuring that employees are compensated for their travel-related expenses without the need for detailed expense reports or receipts for each individual item.

Key Concepts of Per Diem

1. Definition:
   • Per Diem: A daily allowance provided by an employer to an employee to cover expenses while traveling for work. This allowance is intended to cover specific costs, such as meals, lodging, and other incidental expenses, during business trips.
2. Types of Per Diem:
   • Meals and Incidental Expenses (M&IE): This type of per diem covers meals, tips, and other small daily expenses incurred during travel, such as transportation within the destination city.
   • Lodging: Some employers may provide a separate per diem for lodging expenses, or they might reimburse actual lodging costs based on receipts.
   • Combined Per Diem: In some cases, a combined per diem rate covers both lodging and meals/incidental expenses.
3. How Per Diem Works:
   • Daily Rate: The per diem amount is usually a fixed daily rate that is set by the employer or in accordance with government guidelines, such as those provided by the General Services Administration (GSA) in the United States.
   • Reimbursement vs. Advance: Per diem can be provided as an advance before the trip or as a reimbursement after the trip, depending on the company’s policy. When provided as an advance, employees do not need to submit receipts for covered expenses, as long as they stay within the per diem limits.
   • No Detailed Receipts Needed: Employees receiving per diem typically do not need to provide detailed receipts for meals or lodging, simplifying the expense reporting process. They simply receive the per diem amount for each day of travel.
4. Calculation of Per Diem:
   • Government Rates: In the U.S., the GSA sets per diem rates for different locations, which vary based on the cost of living and average prices in those areas. For example, a high-cost city like New York might have a higher per diem rate compared to a smaller town.
   • Employer-Set Rates: Employers may set their own per diem rates, which could be higher or lower than government rates, depending on company policies and budget considerations.
5. Tax Implications:
   • Tax-Free: Per diem payments are generally not considered taxable income if they do not exceed the IRS or government-set limits and if they are used for legitimate business travel expenses. The employee must be traveling away from their tax home (the general area of their regular place of business) for the payments to be tax-free.
   • Excess Per Diem: If the per diem amount exceeds the IRS-set limit or the employee does not substantiate their travel with dates and locations, the excess amount may be considered taxable income.
6. Advantages of Per Diem:
   • Simplified Expense Reporting: Per diem simplifies the process of reimbursing employees for travel expenses, reducing the administrative burden on both the employee and the employer.
   • Predictable Costs: For employers, using per diem allows for more predictable and controlled travel expenses, as the costs are standardized across the company.
   • Employee Convenience: Employees benefit from not needing to track and submit individual receipts for meals and lodging, making it easier to manage travel expenses.
7. Disadvantages of Per Diem:
   • Inflexibility: Per diem rates may not always cover actual expenses in high-cost areas, leading employees to pay out-of-pocket. Conversely, in lower-cost areas, the per diem might exceed actual expenses, which could lead to inefficiencies.
   • Potential for Abuse: Some employees might attempt to pocket the difference between the per diem and actual expenses by cutting corners or choosing cheaper options, which could lead to ethical concerns.
8. Examples of Per Diem Use:
   • Business Travel: An employee traveling to a conference in San Francisco might receive a per diem of $300 per day, which includes $200 for lodging and $100 for meals and incidental expenses. They use the per diem to cover their hotel stay, meals, and other small expenses without needing to submit detailed receipts.
   • Field Work: A construction company sends workers to a remote job site and provides them with a per diem of $75 per day for meals and $150 for lodging. The workers use this amount to cover their daily expenses during the project.
9. Setting Per Diem Rates:
   • Location-Based Rates: Employers often set per diem rates based on the location of travel, considering factors like the cost of living, local meal prices, and hotel rates.
   • Time of Year: Per diem rates may vary depending on the season, with higher rates in peak travel periods when lodging and meal costs are typically higher.
10. Per Diem in Different Contexts:
    • Government Employees: Government workers often receive per diem when traveling on official business, with rates set by the government based on the destination.
    • Contractors and Consultants: Independent contractors and consultants may negotiate per diem as part of their contracts when working on-site for clients.

Per Diem is a daily allowance provided to employees to cover expenses incurred during business travel, such as meals, lodging, and incidental costs. It simplifies the reimbursement process by providing a fixed amount, eliminating the need for detailed receipts. Per diem rates are typically set by employers or government guidelines and can vary based on the travel location and cost of living. While it offers convenience and predictability, per diem also requires careful management to ensure that it adequately covers expenses without being overly generous or insufficient.