WHAT IS PER DIEM -

What is Per Diem?

Per diem refers to a daily allowance given to employees to manage expenses incurred during work-related travel. Originating from Latin, the phrase means "per day." This allowance is designed to cover costs such as accommodation, food, and other incidental expenses that an employee may face while conducting business away from their usual workplace. Employers often implement per diem policies to ease the financial strain on employees during travel, fostering a more equitable and stress-free experience.

Key Characteristics of Per Diem

• Lodging: This includes the costs associated with staying at hotels or other accommodations during the travel period.
• Meals: Per diem covers expenses related to meals, specifically breakfast, lunch, and dinner while the employee is away from their home base.
• Incidentals: Small miscellaneous expenses might arise during travel, such as tips, local transportation, or minor personal costs.

How Does Per Diem Work?

Per diem serves as a simple substitute for traditional reimbursement methods, where employees are reimbursed for their actual expenses. Instead, employees are given a fixed daily rate to cover their costs while traveling. This can be disbursed before departure or handled post-trip, based on the organization’s policy.

Despite providing a set amount, employers are still required to monitor expenses. Employees must submit an expense report outlining the following:

• Date, time, and location of the travel
• Detailed breakdown of expenses incurred
• Business purpose for each expense

This results in less detailed reporting compared to actual cost reimbursement. Employees typically retain any unused per diem funds, which can foster a sense of ownership over their travel budget.

Is Per Diem Taxable?

A crucial point for employers is understanding the tax implications of per diem allowances. Generally, per diem payments are not subject to payroll taxes. However, they can become tax-deductible under certain conditions. For instance:

• If an employee omits or falsifies details on their expense report, the per diem amount can be deemed taxable.
• Providing a set amount that exceeds IRS-approved limits can also lead to tax liabilities.

Employers should avoid listing per diem amounts in employees' W-2 forms unless they meet specific criteria set by the IRS.

FAQs

1. What is the purpose of offering per diem to employees?

Per diem simplifies the way businesses handle travel expense reimbursements, allowing employees to receive a fixed daily allowance for lodging, meals, and additional costs.

2. How does per diem work as a replacement for cost reimbursement?

Instead of paying back the exact costs an employee incurs during travel, businesses provide a predetermined daily rate, which eases administrative processes.

3. When can per diem be paid to employees?

Organizations can either provide per diem before the employee’s travel begins or afterward, ensuring flexibility in their financial operations.

4. Under what circumstances does per diem become tax-deductible?

Per diem payments can be deducted when there are omissions on expense reports or discrepancies in provided amounts either exceeding allowable limits or lacking supportive documentation.

5. What should employers avoid when reporting per diem on an employee’s W-2 form?

Employers should not include per diem payments in the W-2 form unless compliant with IRS guidelines regarding the reporting of wages and expenses.

"Utilizing per diem policies effectively not only streamlines processes but also ensures fair treatment of employees during business travel."

By keeping employees informed about per diem policies and associated tax implications, organizations can cultivate clarity and compliance within their teams.