Per Diem (Latin for “by day”) is a financial term referring to a daily allowance provided for various expenditures such as travel, meals, lodging, and incidental out-of-pocket expenses incurred while conducting business transactions. The allowance is calculated on a daily basis and can be paid either as an advance or reimbursement after the expenses have been incurred.
Types of Per Diem
Travel Per Diem
This type includes daily allowances for:
- Lodging: Hotel or other accommodation costs.
- Meals and Incidental Expenses (M&IE): Costs for meals, tips, and other small daily expenses.
Entertainment Per Diem
This covers daily allowances specifically designated for entertaining clients or business associates.
Employee Compensation
Some employees are compensated on a per diem basis, meaning they receive a set daily rate instead of a traditional salary. This is common in temporary or gig work.
Special Considerations
IRS Per Diem Rates
The Internal Revenue Service (IRS) publishes annual per diem rates that businesses and employees can use for substantiating travel expenses without keeping detailed receipts. These rates vary based on the location and type of expense. The IRS divides M&IE into high and low-cost localities to better reflect the cost of living in different areas.
Calculation and Compliance
To ensure compliance, businesses must adhere to the specified rates and guidelines published by the IRS. They must provide the per diem allowance reasonably approximating the expenses expected to be incurred.
Examples
- Business Trip: An employee is attending a conference in a high-cost city. The company provides a per diem of $200 for lodging and $75 for meals and incidental expenses.
- Consultants: A consultant working on a short-term project might receive a per diem of $150 to cover daily expenses associated with their work.
Historical Context
The concept of per diem allowances has historical roots in the need to manage and track expenses efficiently, especially in scenarios involving travel. Over time, various organizations, including government bodies, have standardized these allowances to streamline expense reporting and reimbursement processes.
Applicability
Per Diem allowances are widely applicable in various sectors, including:
- Corporate Sector: For employees traveling to different locations for business purposes.
- Government and Public Sector: For public officials and workers conducting official duties away from home.
- Freelance and Gig Economy: For temporary workers and consultants reimbursed on a daily basis.
Comparisons
Per Diem vs. Actual Expense Reimbursement
- Per Diem: Simplifies record-keeping by providing a fixed daily rate.
- Actual Expense Reimbursement: Requires detailed receipts and documentation of all expenses.
Related Terms
- Reimbursement: Repayment for expenses incurred.
- Allowance: A fixed amount allocated for specific expenses.
- Stipend: A regular fixed sum paid as a salary or allowance.
FAQs
What expenses does a per diem cover?
How is per diem taxed?
Can employees receive both a salary and per diem?
References
- Internal Revenue Service (IRS) - Per Diem Rates
- U.S. General Services Administration (GSA) - Per Diem Rates
Summary
Per Diem is an effective and straightforward way to handle travel and daily expenses for employees and businesses. By understanding its types, applications, and compliance requirements, organizations can streamline expense management and ensure transparency and accountability in financial transactions.
