What is a Per Diem?
Per diem is derived from a Latin word which means “per day” or “each day.” It is a fixed amount of reimbursement which is paid to students, athletes, and employees by an organization for various purposes. These include daily meals, temporary accommodation, and incidental events for work-related travel.
Are Per Diem and Reimbursement Payments the Same?
There is a need to understand the difference between per diem and reimbursement. To receive a reimbursement, an employee needs to present a detailed record of expenditures. However, per diem is much more simplified and requires less bookkeeping. In simple words, per diem eliminates the need to write hectic expenditure related reports as it is paid on a standard daily rate rather than the actual expenses that occur.
Categories of Per Diem
Per diem is categorized as (1) meals and incidental expenses, and (2) lodging.
All meals, including breakfast, lunch and dinner and room services including laundry fall under the ‘meals and incidental expenses’ category. On the other hand, the ‘lodging’ category covers temporary accommodations, such as hotels, apartments, and motel fares. It also varies by location considering that per diem is high in bigger cities where rates are higher. This difference is based mainly on the cost of living, which varies from city to city. Per diem is higher in cities where goods and services are expensive, and lower in cities where these are cheaper.
Is There a Need to Pay Taxes on Per Diem Allowance?
As per diem is not considered a ‘wage’, it is a non-taxable allowance. However, this is not a strict rule as there are certain circumstances and expenses in which it is taxable. For example, if an employee fails to produce the correct date, time, amount, and/or purpose of the expense in his report, or is paid more than the allowed Federal per diem rate, it will be considered as wages, which are hence taxable.
Can Per Diem Be Paid as a Replacement for Salary?
Although it sounds like a good idea to replace per diem with salary to avail tax evasions, in practicality it is not possible. This is because the policies surrounding per diem ensure that it cannot be labeled as wages.
Benefits of Per Diem Rate
Per diem is designed to achieve maximum productivity amongst the employees of an organization. It assists in minimizing the time that employees would otherwise use to calculate their expenses, keep track of their receipts, and other instruments of record keeping each time they return from traveling. It further encourages them to minimize their spending as any amount that is not used can be kept by the employees as a reward.
However, it isn’t just the employees who get to benefit from per diem. It also saves time and effort on the employers’ part as they do not need to conduct a thorough investigation of the expenditure reports submitted by the employees once they return. As a fixed rate is set beforehand, both the employer and employee know the amount being allotted for expenses beforehand.
