Per diem is a term often used in the business world, particularly when it comes to travel expenses. It is a Latin term that means “per day” and refers to a daily allowance provided to employees, contractors, or other individuals while they are on official business travel. It is intended to cover the cost of lodging, meals, and incidental expenses incurred by travelers.
In this article, we will explore its definition, calculation, and tax implications. By understanding per diem, you can master the art of managing expenses while on official business travel.
The Technical Definition of Per Diem
Basically, it is a payment made to an individual for their expenses while on official business travel. As mentioned before, it is intended to cover the cost of lodging, meals, and incidental expenses that the traveler incurs while away from home. Per diem is often used to reimburse employees who travel for work, but it can also be used to pay contractors or other individuals who are working on a temporary basis.
It is provided as a flat rate that is determined by the employer or organization providing the payment. The per diem rate is intended to cover all of the traveler’s expenses while they are away from home, so they do not need to submit receipts for individual expenses.
The Calculation of Per Diem
The calculation of per diem can vary depending on the employer or organization providing the payment. In general, it is calculated based on the location and duration of the traveler’s trip. The rate is typically higher for locations with a higher cost of living, such as major cities or tourist destinations.
To calculate it, the employer or organization will typically use a per diem calculator or lookup table. These tools will provide a daily rate that is based on the traveler’s location and the purpose of their travel. It typically includes a portion of all their expenses.
For example, if a traveler goes to New York City for three days on official business, their per diem rate might be $300. The traveler would receive a total of $900 for their trip, which they could use to cover their expenses while they are away from home.
The length of the work trip is also taken into account when determining per diem charges for travel days. The length of time away from home can range from a few hours to more than a year and a half. When a journey lasts longer than 30 days, an employee will often receive no more than 75% of the ordinary daily rate because per diem is determined on a daily basis. The standard rate drops to 55% for stays longer than 180 days.
Per Diem vs. Actual Expenses
Per diem is often used as an alternative to reimbursing employees for their actual expenses while on official business travel. This can be beneficial for both the employer and the employee, as it simplifies the process and provides a predictable expense for the employer.
However, some employees may prefer to be actually reimbursed, especially if they are able to find lower-cost lodging or meals. In these cases, the employer may allow the employee to submit receipts for their actual expenses up to a certain limit.
It is important to note that employees cannot receive both per diem and reimbursement for their actual expenses for the same trip. Employees who receive them are not eligible for reimbursement for the same expenses.
Per Diem and Taxes
Per diem payments are generally considered taxable income for the recipient. However, if they are equal to or less than the federal per diem rate, it may be considered a nontaxable reimbursement for expenses. The federal per diem rate is determined by the General Services Administration (GSA) and varies depending on the location and time of year.
In order to qualify for nontaxable reimbursement, the per diem payment must be used for the traveler’s actual expenses while on official business travel. The excess amount is considered taxable income if the per diem payment exceeds the actual expenses.
Per diem is a daily allowance provided to employees, contractors, or other individuals to cover their expenses while on official business travel. It is intended to cover the cost of lodging, meals, and incidental expenses incurred by travelers. It is typically calculated based on the location and duration of the traveler’s trip and is often used as an alternative to reimbursing employees for their actual expenses. Overall, to master per diem, it is important to understand its definition, calculation, and tax implications, all of which we were able to tackle above.
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