Per diem pay is a daily stipend that traveling employees receive in addition to regular pay. An employee’s per diem can cover food, lodging, and other “incidental expenses” incurred on the road. These expenses might include laundry service, transportation by subway or taxi, or printing and faxing from the hotel’s business center. The employee uses his or her discretion to determine what counts as an incidental expense, in contrast with a reimbursement system, in which the company has to approve expenses. The employee can keep any money not spent.
The per diem rate that a company pays its employees typically depends on the travel destination. Large cities, such as New York or San Francisco, are more costly than smaller cities, such as Boise or Topeka, and the per diem rate should reflects the higher cost of living.
Are there legal requirements for per diem pay?
The U.S. government sets standard rates once a year for cities in the U.S. and abroad, updated in October. Per diem rates are based on the average market rates for lodging and food in each city. Employers can use these rates as a guideline when determining its per diem policy, but the company’s rate can be higher or lower, based on its needs. Employers can look up the rates for specific locations at the U.S. General Services Administration website by entering the zip code.
Though an employee does not have to file a detailed expense report for reimbursement, the employee must still file a basic expense report with the company. This report describes the dates and purpose of the trip, along with lodging receipts if the per diem rate was for a meals-only plan, according to the Internal Revenue Service.
Per diem payments are not part of the employee’s wages if the payment equals or is less than the federal per diem rate, and the employee gives an expense report to the employer. In most cases, the IRS does not tax the per diem pay that employees receive, and per diem pay will show separately from taxable wages on the W-2 form. If the company pays a per diem rate that exceeds the federal standard rate, though, the employee will have to pay taxes on the excess amount. He’ll have to pay taxes on the full amount if he does not file the standard expense report with his company within 60 days.
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