Do You Pay Employees Per Diem?

  

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If you have employees who travel away from home for business purposes, they may be eligible to be paid a per diem, or a daily rate to cover the expenses of traveling.  This includes lodging, meals, and incidentals.  There are maximum dollar limits allowed per day.  As long as employees are given this maximum amount or lower, the per diem is not taxable, and the employee does not need to substantiate the actual expenses by turning in receipts.  If the per diem allowance is over the maximum amount, any amount over the maximum amount is subject to payroll tax and substantiation.  There are two ways to pay per diem:

1) Regular Federal Per Diem Rate Method

For travel within the continental United States (CONUS), the General Services Administration (GSA) provides per diem rates for specific cities.  The GSA has just published updated maximum federal per diem rates for the CONUS list as of October 1, 2010.  The standard CONUS maximum per diem amount for all cities not otherwise listed will be $123.00 per day, which includes both lodging and meals and incidentals.  This has increased from the current rate of $116.00 per day. 

There are also per diem rates for employees who travel in non-foreign areas outside the continental U.S. (OCONUS), such as Alaska, Hawaii, Puerto Rico, and U.S. Territories.  The Department of Defense provides the OCONUS per diem rates.  For employees who travel to foreign countries, the Department of State sets these per diem rates. 

To look up per diem rates for CONUS, OCONUS, and foreign countries, visit www.gsa.gov  and click the “Per Diem Rates” link.

2) High Low Method

Because the federal per diem rates can change depending on the location and even the time of year, the IRS allows employers to use a simplified per diem amount, also known as the “high low” method.  There is one rate for all cities listed within CONUS, and one rate for all of the high cost localities within CONUS.  Currently the high low per diem amount is $163.00 per day and $258.00 per day for high cost localities.  We are expecting new rates very soon for October 1^st. 

Paying per diem correctly can be complex, and there are special rules for changing methods during the year.  See the IRS Publication 1542 for full instructions on using per diem rates.