A Simplified Guide to Per Diem: 4 Ways it Works

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Traveling for business is full of small details that must fall into place for the big picture to be successful. From the itinerary to the travel arrangements and lodging, it’s all equally important. 

Managing these expenses can be streamlined when you use a per diem, which is why so many businesses prefer this method. But the first time you approach setting one up, it can seem complicated. 

No need to worry, though! We have all the info here in this guide to simplify the concept and make it easy for you to switch to per diems in your business.

1. What a Per Diem Covers

Per diems are part of multiple industries, including government, military, and healthcare. They’re popular because they combine multiple travel expenses into one daily rate, making it easier to keep track of expenditures and cut down receipts.

The United States government regulates the minimum rates. They change each fiscal year (October 1) and vary by zip code

The daily rate of a per diem covers the basics: lodging, meals, and incidental expenses. However, if they choose to use their allowance on things such as tips and gratuities or laundry services, they can, as long as it’s within the per diem limits.

2. How Per Diems are Tracked

Large companies want to make their workflows as easy as possible because that is what is cost-effective. So you can assume from the outset that per diems are going to be more manageable than other tracking systems.

When employees traditionally spend money on a business trip, they save their receipts and submit them for reimbursement. 

Envision ten people on a trip, with three meals per day, lodging, and incidentals. That’s a lot of approval requests, to begin with, and even more receipts to collect. Those numbers increase with medium and large companies. 

Streamlining Expense Reports

Obviously, going through the receipts, processing them, and reimbursing individually is a time-consuming use of resources. Per diems greatly reduce this workload. 

Instead, your company assigns a set per diem rate (use the government guidelines to ensure you’re meeting the minimum requirements), and your employees are given that amount to spend on their trip. 

If they spend more or buy something that isn’t included in what the per diem covers, that is an expense that comes out of their pocket. Otherwise, their business costs are taken care of, and you don’t have to handle approval for every purchase and reimbursement request.

3. How Expense Reports Are Completed

When the trip is over, each employee has a deadline by which they have to complete an expense report. They don’t need to attach receipts, but they have to include some basic info in the company report.

This must include the date, place, and times of the trip. It also has to show the purpose of the trip and if they used their per diem for lodging or only meals and incidentals.

Remind each employee that they only have 60 days to complete the expense reports before they become taxable income.

4. How Per Diems are Taxed

Employees don’t have to submit receipts, but you’ll still have to keep a record of expenses. This is vital because of the tax implications. Per diem taxation can backfire on the employee if your expense report isn’t completed correctly.

Since per diems aren’t part of the standard paycheck, the receiver should not be taxed on them. But if your flat amount is more than what the IRS rates are or the expenses weren’t filed timely, they could be taxed. 

On your end, if you neglect to include information in the report, the employee will have to pay the taxes when they file their income tax return.


Conclusion

It’s clear to see why per diems are the preferred method of business expense tracking for the government and big companies. 

Setting up your first per diem system can be complicated, but the rest is cost-effective and time-saving once it’s in place. You’ll need to revamp your current travel management policies and make sure you’re following the government guidelines.

With those steps taken care of, you’re ready to start using per diems in your business. Iron out the bugs, and you’ll never want to go back to an approval/reimbursement procedure for travel expenses again.

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