How Does Per Diem Payment Work?

Per Diem payments are, as the name suggests, made for daily expenditures of an employee while he or she is carrying out the business of the company. They are fixed amounts that are used to cover things like lodging, food, transportation, parking, auto rental, fuel, tolls, and other incidental expenses associated with business related travel. It is a way of setting a ceiling on expenditures that will be reimbursed by the company. For example, if the per diem amount allowed by the company for a hotel night is one hundred dollars, then the employee can book a room for more if he or she desires, but the reimbursement will be limited to the pre determined amount.

Since per diem payments are generally used to cover expenses, they are usually not taxable. The Internal Revenue Service, and some state tax authorities as well, place category limits on what a company can reimburse an employee for spending. Any amount of the per diem that exceeds the prescribed spending limit by the IRS or the state tax authority will be reported as income on the W2 form and will be taxable.

Normally per diem rates vary by different locations. It is much more expensive, for example, to stay in New York or Los Angeles than in Omaha or Reno. Hotel rates, food, auto rental, and other incidental charges all tend to be much higher. So the per diem rate should be higher as well. It is also standard practice to pay three quarters of the full rate for the day of departure and the day of return. The IRS publishes recommended rates for various cities and it is good to consult their publications to determine the rate and to have it be consistent with IRS limitations so that the employee does not have any tax consequences.