What is Per Diem Allowance?

A per diem allowance, often simply called "per diem," is a daily allowance of money that an organization provides to an individual, typically an employee, to cover living expenses incurred while traveling on the employer's business. Derived from the Latin phrase "per day" or "for each day," this specific sum aims to simplify expense management for both the traveler and the employer.

Understanding Per Diem

Per diem is a fixed amount paid per day to cover various costs associated with business travel. This allowance can be designed to cover part or all of the expenses an individual incurs while away from their usual place of work, thereby eliminating the need for detailed expense tracking for every minor expenditure.

What Does Per Diem Cover?

The primary purpose of a per diem allowance is to cover typical living expenses encountered during business travel. While the specifics can vary by organization and location, these allowances commonly cover:

• Meals: Including breakfast, lunch, and dinner costs.
• Lodging: Expenses for hotel or other accommodation.
• Incidental Expenses: Minor costs such as tips, laundry services, or transportation within the travel destination (e.g., local taxis, public transport fares).

Key Benefits of Per Diem

Utilizing a per diem system offers several advantages for both employers and employees, making it a widely adopted practice:

• Simplified Expense Reporting: Employees do not need to save and submit individual receipts for minor expenses like meals or local transport, significantly streamlining the reimbursement process.
• Cost Control for Employers: Organizations can better budget and control travel costs by setting predefined daily limits that align with their financial policies.
• Predictability for Employees: Travelers know exactly how much they have available for daily expenses, allowing for better personal budgeting and financial management during their trips.
• Tax Efficiency: In many jurisdictions, per diem payments, particularly when within government-set limits (like those established by the IRS in the U.S.), are often not considered taxable income for the employee, provided they are for legitimate business expenses.

How Per Diem Rates Are Determined

Per diem rates are not arbitrary; they are often based on a variety of factors to ensure fairness and adequacy, reflecting the actual cost of living and doing business in different areas:

• Location: Rates typically vary significantly based on the cost of living and specific expenses in different cities or countries. High-cost areas will naturally have higher per diem rates to adequately cover expenses.
• Organization Policy: Companies establish their own policies, which may align with, exceed, or fall below government-set rates, depending on their industry, budget, and specific needs.
• Duration of Travel: Some policies may adjust rates for extended trips or differentiate between short-term and long-term assignments.
• Government Guidelines: Many governments publish standard per diem rates for various locations, which serve as widely adopted benchmarks for both private organizations and for determining tax-exempt allowances for federal employees. For example, the U.S. General Services Administration (GSA) publishes widely referenced per diem rates.

Practical Application

Consider an employee traveling from a low-cost area to a major metropolitan city for a three-day conference. Instead of the employee submitting individual receipts for each meal, coffee, or local transport, the company would provide a fixed per diem rate for each of those three days. This rate would be based on the specific per diem rate set for that particular high-cost city. The employee then manages their expenses within that disbursed allowance.

For instance, a company might use a table similar to this to determine daily rates:

Note: These figures are illustrative and subject to actual GSA or organizational rates, which can fluctuate.

Per diem allowances streamline the process of compensating employees for business travel expenses, making it an efficient and widely adopted practice across various industries.