For understanding the meaning, working, and details of per-diem reimbursements and employees, read on.
What does Per Diem Mean?
The literal translation of per diem in English is “per-day”. HR frequently uses this Latin phrase to represent the per-day reimbursements or payments of their employees. As shown by its meaning, the term represents the payments made for each day’s work.
A per diem employee receives their payment based on the work performed on individual days, whereas the employer pays a full-time employee every month. In every country, the government per diem rates vary due to the deciding committee’s discretion.
HR decides on per diem for reimbursing an employee for the travel expenses during a business trip. These could be lodging, traveling, meals, and other services that the employee avails during the business trip.
Who Decides the Per Diem Rates?
Different authorities decide the amount that the employer pays. These range from the General Services Administration, State Department, to the Defense Department.
The Defense Department of the United States establishes the per diem rates for Puerto Rico, Guam, and Alaska. Similarly, the General Services Administration decides for the areas that fall under the Continental (CONUS) region of the United States. Individuals can check the GSA per diem for their state here.
The committee sets this rate every new fiscal year, effective from the first date of October. For any area that lies outside the United States’ borders, the State Department is to decide the rates. These are known as Outside Continental USA or OCONUS location rates.
Categories of Per-Day Reimbursements
If a business trip extends for over one day, the employee is paid according to the tariff of the motel, hotel, resort, or apartment. Depending on the cost of living in different states, the employer decides the per-day prices for their employee’s lodging. For calculating this reimbursement, the employer considers the rates prescribed by authorities like the GSA.
An employee bears the basic expenses of meals, laundry, and housekeeping services during a business trip. HR considers such expenses as incidental per-day expenses.
They calculate the total payment based on the country, state, city, and the detailed classifications that the government lays out. At the end of the payment term, the employer gives an allowance to compensate for the expenses borne by the employee during the business trip.
What Does Per Diem Mean for a Job?
If an employer hires a job-seeking candidate on a per-day basis, they hire the individual to serve as and when required by the company. Instead of working every day, a per diem employee occasionally works for the company when they call them in.
Accordingly, the employer credits their payment after considering two factors. These are the number of active days and the per-diem rates in the city where they are employed.
Getting a per diem job, meaning “per-day job,” can be a valuable alternative to part-time, full-time, and even freelancing jobs. Per-diem jobs are valuable but often overlooked part of the gig economy.
Another sub-classification is per diem reimbursement, where an employer pays an employee based on their work provided and certain expenses incurred by them on business trips. Besides their regular salary, the employer provides allowances to compensate for the employee-borne expenses during a business trip. This type of reimbursement is commonly known as travel per diem.
Every company has a unique policy for its per-day reimbursements and employees. The employer must mention their expectations as policies to paint a clear picture of the job for the aspiring candidates. The employer must provide the written policy details along with an NDA. Before drafting these types of policies, businesses must consider the following:
Full-time employees follow the schedule set by their employer during the training period while enjoying many employee benefits. However, businesses must adopt a flexible approach for deciding a training period for their per diem employees.
There must be proper communication on both sides to ensure the employee’s availability and the employer’s convenience. As such employees seek independence from the nine-to-five job routine, they might prove unreliable or unfit for the job.
Just like full-time employees, compliance regulations apply to these categories of employees as well. If they work at regular hours, the businesses can benefit from paying them as part-time or full-time employees instead.
Full-Time Employment Opportunities
Many candidates searching for per-day opportunities are usually seeking job flexibility. They are naturally inclined towards irregular, inconsistent, and more sporadic working schedules, which can make them unfit for full-time opportunities.
If the employers are looking to train their future full-time employees by initially hiring them on a per-day basis, they must mention their intent in the job posting itself.
How does Per Diem Work?
Compared with the traditionally implemented policy for tracking an employee’s expenses, the per-day strategy is easier to implement and manage. Instead of creating long lists of expenses and the corresponding reimbursements, the employers work around the government-prescribed rates to calculate the total payment to the employee. In the long run, this process saves time in terms of energy, effort, finances, and human resources.
Businesses have the liberty to set their prices that could be the same as the federal ones or lesser than it. If the rates are higher than the government-prescribed ones, the employee will have to consider it as taxable income on the W-2 form and comply accordingly.
Listed below are the parameters based on which the employer sets the rates for their employees:
- Cost of expenses at the destination of business
- Length of business travel
- Federal rates for the current fiscal year which are applicable from October 1 of every year
There are certain instances where the employer must refer to the GSA rates for their employees. These instances are listed below:
- When the employee travels for business outside the local station.
- If the employee travels away from the physical job location for business.
- When the employee needs to travel to a location excluded from the areas defined by the employer.
These rates are subject to the geographical location of the business destination. The employer reimbursing for a trip to Montana will pay a much lesser amount than the one reimbursing an employee’s business trip to New York.
From a logical and compliance standpoint, it is clear that the cost of traveling and lodging in these two states will have a substantial difference. Employers must adopt a similar method for deciding all reimbursement rates.
Government Per Diem Rates
The authorities set federal per diem rates every fiscal year for deciding the state-wise fixed rate of per-day reimbursements and service charges for employees. GSA decides the per diem California, Texas, and other state’s rates based on varying fiscal and monetary parameters. As mentioned above individuals can check the GSA per diem for their state here.
Is Per Diem Taxable?
Per-day payment is a non-taxable income if the employer and employee follow the prescribed criteria.
- Payments are less than or equal to the government per diem rates
- The employee must submit a complete expense report within 60 days of the business trip
The complete implementation of these procedures ensures the safety of the employees from the burden of tax implications. If either of these criteria is unfulfilled, the payment becomes taxable to the employee.
As employers calculate the payment of per-day employees based on the state prescribed amount, they must not demand the receipt of the expenses from the employees. As the calculation of annual income requires the basic mentioning of expenses, the employee is asked to submit an expense report to the employer. The employer cannot demand corresponding proofs for every expense listed in the submitted report.
Here is the list of basic information that a per diem employee must include in the expense report:
Categorization of Rates
The authorities can skim the report if it has proper segregation of Incidental and lodging expenses. For any amount that exceeds the federal rates, the employer will have to pay taxes as applicable.
Purpose of Business
A full-time employee must seek the permission of their employer before planning a business trip. After receiving authorization from the manager or concerned authority, the employer will provide the required resources to the employee. This will be based on the per-day rates as specified by federal or company policies.
If an employee frequently travels multiple locations, they must include every location of travel and the expenses incurred in those places. Based on the cost of living of every location, the employer will set a final rate for reimbursing the per-day travel expenses. Employers can use the IRS list of low and high-cost places for estimating the total cost of all business trips.
Dates, Locations, and Times
Depending on the month of travel, an employer can set a different rate for reimbursing business travel. Therefore, the basic expense report must include the details regarding the date and location of the travel. Additionally, the employer must also mention the time of arrival. The employer considers these points for considering the rates of your reimbursements.
Even if the employer doesn’t demand a basic expense report, the employee must voluntarily submit it within 60 days of working for the employer. By doing this, the income could be categorized as non-taxable.
Can an Employer Reclaim Paid Funds?
Yes. If the employer pays for the business trip before the travel, the employer may reclaim the unspent amount after the employee submits the basic expense report.
Per Diem vs. Part-Time Jobs
Per diem pay is restricted to the rates reimbursed by an employer if the employee travels outside the 50-miles radius of the company’s physical location. While the federal authorities update the CONUS rates annually, the State Department of the United States usually updates the OCONUS rates monthly.
The following subsection explains the difference between part-time or per diem work.
In this scenario, the employer expects the employee to work lesser or equal to the full-time hours. However, the number of days and availability of the employee depends on the individual. When compared to a part-time or full-time employee, the employees working under this status don’t receive the same employment benefits. The employer considers them as a substitute or additional help during periods that are particularly challenging from labor standpoint for the company.
There are no lower limits of monthly work for such employees. There could be 20 workdays in a month, while in other cases, there is a probability that the employer doesn’t call the employee even for a day.
The federal and state governments don’t play a deciding role in defining the part and full-time jobs in their region. It is upon a company’s Human Resources department to decide the requirements and conditions of a part-time job. The duration and payment of one part-time job could be the conditions for another full-time job. An employee must inquire about the necessary conditions during the interview. Depending on the rules of the company, an employer may expect the employee to work for ten to thirty hours per week. While some companies offer scaled-down employment benefits for part-time employees, others reserve such benefits for full-time employees only.
Travel reimbursements for full-time employees or payments based on the number of active days in the company are called per diem. While the employer can use the government per diem rates as a model for creating his own, many businesses stick to the federal rates. In this model of employment, the employer and the employee enjoy special benefits such as reduced paperwork formalities and freedom of deciding the work schedule, respectively.
We hope that this article was able to take you through the ins and outs to per-diem rules for businesses. Please reach out to us at @HarmonizeHQ if you require additional resources.