What is Per Diem and How is it Calculated?

Whether or not you’re in business, you have likely heard the term “per diem.” But do you really know what it means? This Latin phrase translates to “by the day.” But for businesses, per diem is a set amount of money that an employee is paid for expenses incurred during work. This phrase is used most when talking about expenses for travel. 

What travel expenses does per diem cover?

The most common travel expenses include meals, gas, transportation, lodging, tips, and other incidentals. Of course, each business is different and other items may be covered, such as cell phone bills or WiFi costs. A company will usually set a maximum per diem amount that an employee can spend per day traveling on business to cover those costs. 

How is per diem calculated on travel days?

As an example, the federal government sets a maximum per diem rate for its employees in three categories, those being lodging, food, and incidentals (i.e., tips, etc.). The General Services Administration (GSA) sets a standard per diem rate for federal travel customers within the lower 48 Continental United States (CONUS). Meals are broken down by what they should cost for three standard meals per day: breakfast, lunch, and dinner. Per diem for incidentals includes any fees or tips for meals, baggage handlers, and other hotel staff who receive tips. 

The federal maximum per diem rate and GSA standard rates are not law, only recommendations. The actual rate applied to per diem varies depending on your location. The cost of living and doing business is much higher in high-traffic destinations like New York City and Chicago versus rural places such as Montana, Idaho, and the Dakotas. 

Another factor in figuring out per diem rates on travel days is the length of the business trip. Travel may be anywhere from a day or week to longer than 180 days. Per diem is calculated as a daily rate; however, when a trip lasts over 30 days, an employee will usually receive no more than 75% of the standard daily rate. And for trips longer than 180 days, that number falls to 55% of the average rate.

To calculate per diem, check with the current Federal and GSA recommended rates.

How is per diem paid out to employees?

One of the most significant benefits of per diem is that employees are not forced to collect receipts for every meal or incidental they spend money on. They are simply reimbursed the agreed-upon per diem allotment. This cuts out on unnecessary paperwork, thus saving both employee and employer time and energy.

When it comes time for per diem reimbursement, it is up to the employer to decide which method they prefer. One option is to issue a per diem check before the employee begins traveling. This way, the employee has direct access to the necessary funds and doesn’t have to wait to be reimbursed for money they spend out of their own pocket.

The second option is when the employer issues a separate check after the trip. Remember that this check is not taxable and does not include FICA payments. 

To make traveling and using per diem easier than ever, CLC has introduced a new virtual per diem card that allows companies to issue the Trip Card with a set amount of money on it for business travel expenses. Learn more about the Trip Card and the advantages it can offer here. 

Partner with CLC Lodging to help streamline your business’s employee travel management.