Managing Per Diem Expenses: Best Practices & Benefits

Introduction

Imagine you are on a business trip: meeting people, giving presentations, and attending seminars. You also manage your daily expenses -- food, accommodation and travel. And by the end of the day, you have a bunch of receipts and a headache in trying to account for every expense. Sounds familiar? This is a common problem many business travelers face.

Per diem expenses are the cure for this chaos. Per diem, a Latin term meaning "per day, " is an allowance given to the employees daily to spend on travel. A fixed daily allowance can simplify reporting of covered meal and incidental amounts, but trip evidence and required receipts still apply. This makes the process much easier and more predictable and, therefore, less of a hassle to travel.

Understanding per diem expenses benefits both employees and employers. Correctly applied per diem policies do not guarantee tax savings; treatment depends on the applicable rules and employee circumstances. By knowing the ropes when it comes to per diem expenses, businesses can make the entire process easier, more compliant and satisfying for a traveling workforce.

What are Per Diem Expenses?

Per diem allowances are daily allowances made by employers to offset expenses that an employee may incur in work-related travel. Essentially, these allowances ease the hassle of reimbursement by advancing personnel a flat amount for covered meals and incidentals, with less itemized amount reporting. Trip evidence and applicable receipts and approvals still matter; lodging may follow separate reimbursement rules. The amount of per diem is pegged on the chosen corporate policy or government schedule, usually varying with location in most cases. Choosing a company allowance policy, applying government travel guidance and determining employee tax treatment are separate decisions.

Components

1. Meals: This is the cost of breakfast, lunch, and dinner while away from home. The meal per diem follows the applicable policy or schedule for the destination, expense category and travel date, not the employee's dining choices.

2. Lodging: This element includes expenses incurred for hotels or other accommodations. The chosen policy controls reimbursement. For US federal travelers, the GSA FAQ on lodging specifies actual lodging costs up to the maximum, with no transfer to meals.

3. Incidental Expenses: These are the small expenses incurred while traveling, but coverage depends on the policy. Under NJC definitions, incidentals include laundry and gratuities except taxi tips. US federal incidentals are fees and tips to porters, baggage carriers, hotel staff and staff on ships. Do not assume taxi fares or local public transport are covered incidentals; check the applicable policy.

The case of the per diem allowance is not new but has evolved over the years because of the increase in business trips. Initially, employees must account for every penny spent on their journey. This involved excellent paperwork, requiring much time and, at the same time, took long before workers could get reimbursed.

The per diem allowance has thus made it easy for employees to manage their costs and for employers to project and control travel budgets with a precise and uniform style of dealing with travel expenses. In this very way, it has also formed the base of contemporary business travel that brings ease, equity, and efficiency to all concerned.

How Per Diem Rates are Determined

Government Rates

The National Joint Council(NJC) travel directive applies to covered public service employees and other persons travelling on Canadian government business. Many other partners join the NJC in helping develop appropriate and harmonized travel expense allowances. GSA rates guide US federal CONUS reimbursement (the 48 contiguous states and District of Columbia), not universal private-company rules.
These rates should be selected from the applicable schedule by expense category and destination, using the version effective on the travel dates.
The NJC publishes allowance schedules with effective dates. Check NJC Appendix C and the applicable destination schedule for your travel dates.

Corporate Policies

While government agencies follow standardized guidelines on their per diem rates, private companies can be more flexible. In most cases, companies base their per diem rates on:

Benchmarking: Many companies use a base that often comes from government rates, like the NJC ones, and then modify them according to their needs. This is a policy choice; using a government rate does not itself establish tax-free treatment.
Industry standards: Companies also follow the prevailing per diem rates in their respective industry to be competitive and comparative.
Internal Budgeting: Businesses review their financial situation and the budgets for travel to decide on the per diem rates that will be high enough to keep the employee alive but low enough to be viable for the company itself.
Employee Feedback: Many organizations conduct employee surveys to determine actual costs incurred while traveling, adjusting their per diem rates accordingly.

It is from the consideration of these elements that businesses gear their per diem policies toward attaining a fair balance between controlled expenditure and satisfied employees.

Factors That Influence Rates

The following are some of the factors that help determine per diem rates and make them fair to use and easy to administer:

1. Geographic Location: This can vary significantly between cities and regions. Check the applicable destination, expense category and travel date in the chosen schedule. NJC domestic meal tables are not city-by-city rates.

2. Type of Travel: Even the type of travel may affect per diem rates. Check the applicable domestic or international policy or schedule rather than assuming a higher international allowance.

3. Length of Stay: The per diem rates could decrease under a company policy for longer stays because the personnel can, through negotiation with service providers, secure a more affordable day-to-day rate on prolonged accommodations or gain cheaper food alternatives over time. NJC meal/incidental reductions after 30 consecutive days and further meal reductions after 120 consecutive days at the same location apply when corporate residences or apartment hotels are available near the workplace, or the traveler chooses private accommodation.

4. Seasonal Variations: When peak seasons of travel or special events occur, costs of lodging and meals can rise; due to these short-term changes in costs, check the applicable schedule and any company-policy adjustment rather than changing rates automatically.

Benefits of Per Diem Expenses

For Employees

Streamlined expense management: Covered allowances can reduce itemized amount reporting; trip evidence, required receipts and approvals remain.
- It reduces the hassle and burden of handling multiple receipts and managing minor costs, making the whole process of dealing with traveling expenses much more accessible.

Predictability: The per diem rates allow the worker to have an idea of how much allowance he would get and, hence, how to manage it better. some text
- This gives predictability to the workers to budget their daily expenses without major concerns about out-of-pocket costs.

Convenience: To that effect, an advance of the covered allowance can reduce reimbursement delays; employees still submit trip evidence and required receipts for approval.
- Instead, they have precisely known allowances for covered costs, thus making the entire process of handling business travel expenses easier.

For Employers

Streamlined Reimbursement Processes: The per diem allowances standardize most of the reimbursement processes, reducing itemized amount review while retaining necessary trip-evidence checks and approvals.

Budget Control: With preset fixed per diem rates, an employer will be better placed to project and consequently control travel expenses easily.

Challenges and Considerations

Compliance Issues

US employee allowances: Under IRS Publication 15, accountable plans require paid or incurred allowable business expenses, no substitution for wages, substantiation within a reasonable period and return of excess over substantiated amounts within a reasonable period. Under the applicable fixed-allowance procedure, amounts within federal rates can be deemed accounted for; other trip evidence is still required. Unreturned excess over substantiated amounts is wages; the substantiated portion is not.
Canadian employers: Apply CRA travel guidance to the employee's situation: check employment-related travel, business purpose and a justifiable, reasonable amount. Using an NJC rate does not itself establish tax-free treatment.

Staying Current: Per diem rates and rules change periodically. Employers need to keep pace with the evolving guidelines and should change their policies accordingly to reflect the applicable rules.

Fairness

Adequate allowances: Too low per diem rates can leave employees out of pocket, consequently affecting their willingness to work. On the other hand, too high a rate may trigger overspending.
Consistency: This factor is essential in ensuring that all employees are given per diem rates that are fair and consistent, regardless of whether they are part of the management or regular staff of the company. some text
- The equity and trust evidenced in the treatment among all workers must be maintained.

Documentation

Policy reference: Record jurisdiction, worker/travel scope, chosen company policy or government reference, effective date and currency.
Covered costs: List meals, lodging, incidentals and transport separately, including how supplied meals affect the allowance under the chosen policy.
Trip evidence: Employers must maintain records of the dates of travel, places visited, and business purposes to support the per diem payments in case of audit. Send a rate-only submission back for missing trip evidence before approval.
Receipts and approval: Record required receipts and the approver. The GSA receipt guidance requires US federal lodging receipts or an agency-accepted explanation; private employers follow their policy and applicable substantiation rules.
Settlement and payroll: Record allowance paid, substantiated amount, excess return or tax treatment under the applicable rules, and payroll reviewer. For US accountable plans, return unsubstantiated excess within a reasonable period.

Employee Understanding

Clear Communication: The per diem policy should be clear to the employees concerning what is covered, how much, and how. ‍
Managing Expectations: Employees' expectations may vary when considering per diem allowances. some text
- Employers should communicate open-mindedly the reasons behind such per diem rates and address any resulting concerns to manage expectations. ‍
Monitoring and Adjusting Policies Regular Reviews: The employer, once in a while, is required to review the per diem policies for fairness, compliance, and relevance to the actual travel cost.

What’s Next?

It is time for scrutiny and adjustment of your per diem policies to ensure it is evident in language, fair, and updated. Go for all available best practices, like those described above, and bring their application to life, such as implementing automation applicable to such expenses, to mention just one use—in this flowerpot of best practices, on travel and expense management automation software. Pursue the sayings and suggestions of employees to make the effectiveness of your per diem process better.

For more information and resources, visit GSA Per Diem Rates. Some of the software tools include Rydoo, Concur, and Zoho Expense.