Per Diem

Daily allowances, known as per diem (which means "by the day" in Latin), are payments given to employees to cover costs during business trips. These costs usually include accommodations, meals, and other incidental expenses like tips and service fees.

What is per diem?

Per diem can also refer to a pay structure where employees are paid for each day worked instead of receiving a regular salary. This is common for temporary or short-term workers, such as substitute teachers and travel nurses.

How do per diems work?

Per diems are great for employees who travel frequently for work because business trip expenses can add up quickly. Companies use different policies to cover these costs:

  • Company credit cards: Some companies give employees credit cards to cover direct business expenses, so employees don’t have to pay out of pocket.
  • Full or partial expense coverage: Some employers reimburse all expenses, while others provide per diem payments for specific costs like lodging, food, and incidentals.
  • Fixed amounts: Many companies offer a set daily rate to cover a portion of an employee’s expenses.

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Handling per diem reimbursements

When employees travel for work, they receive per diem to cover daily expenses like meals and lodging. Employees might get their per diem through a company credit card, an expense report, or a check given before the trip. Usually, employees are reimbursed after the trip once they submit an expense report. Sometimes, the entire per diem amount is given in advance, depending on how long the trip lasts.

Let’s look at a real-time example for this:

Company: Global Consultants Inc.

Scenario: Employee Travel for Business Meetings

Setting up per diem rates

  1. Establishing Rates:some text
    • Global Consultants Inc. sets a per diem rate for business travel based on the U.S. General Services Administration (GSA) guidelines.
    • Example Rates:some text
      • Lodging: $150 per night
      • Meals and Incidental Expenses (M&IE): $60 per day

Employee travel

  1. Business Trip Details:some text
    • Employee: John Smith
    • Destination: New York City
    • Duration: 3 days (2 nights)

Calculating per diem reimbursement

  1. Per Diem Calculation:some text
    • Lodging: 2 nights x $150 = $300
    • M&IE: 3 days x $60 = $180
    • Total Per Diem Reimbursement: $300 (lodging) + $180 (M&IE) = $480

Reimbursement process

  1. Advance Payment or Reimbursement:some text
    • Advance: The company may provide John with an advance payment of $480 before his trip.
    • Reimbursement: Alternatively, John can submit an expense report upon returning, and the company reimburses him $480.
  2. Expense Report Submission:some text
    • John completes an expense report detailing his travel dates and destination.
    • He attaches any necessary receipts for lodging if required by company policy (though per diem generally doesn’t require receipts for meals).

Accounting and compliance

  1. Accounting Entries:some text
    • The accounting department records the per diem reimbursement as a travel expense.
    • Example Entry:some text
      • Debit: Travel Expense $480
      • Credit: Cash/Bank $480
  2. Tax Compliance:some text
    • The per diem payments are reviewed to ensure they align with IRS guidelines to remain non-taxable.
    • If per diem rates exceed the GSA guidelines, the excess amount may be taxable.

In this example, Global Consultants Inc. efficiently handles per diem reimbursements by setting clear rates, calculating the reimbursement accurately, and ensuring compliance with accounting and tax regulations. This process simplifies travel expense management for both the employee and the company.

Know more: 6 reasons you shouldn’t wait to catch up on Bookkeeping.

Benefits of per diem

  • Easier budgeting: Per diem rates help managers easily budget travel costs by knowing the exact amount to allocate for each employee’s trip.
  • Less paperwork: Predetermined per diem rates reduce the paperwork needed for business travel expenses, making it simpler for both employees and accountants if a check or charge card is used.
  • Smarter spending: Employees can keep any leftover per diem money if they spend less than the allocated amount. Companies benefit, too, as they don’t have to worry about employees exceeding their budget with set per diem rates.

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