Are Employers Required To Pay Per Diem For Travel? Yes, while federal law doesn’t mandate per diem, employers generally must reimburse travel expenses to avoid legal issues, and many find per diem a simple and trustworthy solution. TRAVELS.EDU.VN offers seamless travel planning, ensuring employees are fairly compensated. Discover efficient travel solutions, employee compensation strategies, and expense reimbursement practices.
1. When Are Employers Legally Obligated To Offer Per Diem?
Technically, employers aren’t strictly “legally obligated” to provide per diem. The Fair Labor Standards Act (FLSA) and the Department of Labor don’t have any federal statutes mandating per diem for business-related travel expenses. However, employers are generally required to reimburse employees for these travel costs in some capacity. Failure to do so could lead to legal complications, especially if it results in violations of overtime pay laws or reduces wages below the federal minimum wage.
2. Why Do Businesses Opt To Pay Per Diem To Employees?
Most private-sector companies prefer using per diem for two primary reasons:
- Simplicity: It streamlines the expense reimbursement process.
- Trust: It fosters a sense of trust between employers and employees.
The General Services Administration (GSA) releases updated rates each fiscal year, outlining the standard daily rates for federal employees in the continental United States (CONUS). The IRS considers these rates as the “gold standard” or the benchmark for non-taxable employee income. Consequently, many private organizations have adopted these allowances as their own standard.
3. How Is The Per Diem Rate Calculated?
The GSA’s per diem allowances largely hinge on the destination’s geographical location and the local cost of living. The GSA differentiates between lodging and meals & incidental expenses (M&IE). This coverage changes monthly and varies from city to city to reflect the cost of living and higher rates in popular tourist areas during peak seasons.
For instance, as of 2025, the lodging rate in Los Angeles, California, is $191 per day, while M&IE is $86. In contrast, Omaha, Nebraska, has a significantly lower lodging rate of $122, and M&IE totals $80 per day.
Regardless of the industry, whether it’s healthcare or manufacturing, per diem is generally applicable whenever employees travel for work.
Note: Per diem rates for locations outside of the CONUS are determined by other agencies. The Department of Defense sets rates for U.S. territories, while the State Department manages all foreign travel rates.
While most travel departments rely on the GSA-established per diem amount, there are alternative methods to cover travel expenses while employees are working. Here are four of the most common per diem systems:
4. What Are The Different Types Of Per Diem Compensation Models?
- Fixed Rate Per Diem
- Partial Per Diem
- Actual Expenses
- Company Credit Cards
4.1. Fixed Per Diem Rate
The fixed daily rate is the most fundamental type of per diem. This involves paying employees a set daily rate to cover all expenses, including lodging, meals, flights, and mileage. It’s important to note that the fixed rate doesn’t necessarily have to align with the GSA’s defined daily allowance. Company policy can establish a per diem rate that’s either higher or lower than these recommendations.
However, the IRS will consider any amount exceeding the GSA rate as taxable income for the employee. Companies can also decide whether to pay this rate in advance or after the employee’s return.
4.2. Partial Per Diem
Some employers opt not to cover all M&IE expenses. Instead, they offer a pre-determined partial coverage for the trip, such as $120 for meals. In this case, the employee is responsible for incidentals like tips and taxi fares, which they can later seek reimbursement for.
The partial per diem structure is often used for single-day trips or longer trips where lodging isn’t required, such as when an employee stays with family or owns a home in the local area.
4.3. Actual Expenses
The actual expenses method represents the most flexible business travel structure for employees. Under this model, employees don’t receive cash or a company credit card in advance. Instead, they incur their usual lodging and meal expenses, collect receipts, and request reimbursement for those expenses after the trip. However, this approach has its drawbacks and can disrupt budgeting.
4.4. Company Credit Cards
The final option is the pre-paid company credit card. As the name suggests, each traveling employee receives a pre-loaded corporate credit card for the duration of the trip. This strategy provides HR with greater oversight when monitoring expenditures for business trips.
5. Which Per Diem Structure Is Most Suitable For Employers?
Each of these per diem structures offers its own set of advantages and disadvantages. Otherwise, major corporations and small businesses wouldn’t still be using them every day. Let’s consider when each structure is most beneficial for employers:
Type of Per Diem Structure
Best Use Cases
Fixed
Ideal for typical business trips within the U.S. where lodging and meal costs are relatively predictable. This structure provides employees with some flexibility and personalization in allocating their budget between lodging and meals.
Partial
A viable option for business trips where incidentals aren’t necessary, but the employee is willing to cover those expenses out-of-pocket. This might include scenarios such as tipping at an upscale bar or choosing a taxi ride for a short distance.
Actual Expenses
This approach is better suited for international trips where travel, lodging, and meal rates are challenging to estimate in advance. It can also be useful when opting for a luxury option could significantly improve the chances of securing a business deal, like meeting an investor at a high-end restaurant instead of a casual deli.
Company Credit Cards
Company cards are most effective for larger companies that require strict control over their travel budgets. These cards provide oversight into employee spending and streamline the process of compiling detailed expense reports.
This brings us to an essential question that every employer should be able to answer: When employees are traveling for work, what does the daily per diem allowance cover?
6. What Expenses Are Typically Covered By Per Diem?
Per diem isn’t intended to be an all-inclusive, fully funded trip for employees. Generally, HR departments approve a standard rate of pay for all travel days, based on GSA guidelines, which covers both lodging and M&IE. Employees are also usually entitled to 75% coverage on the first and last day of a trip.
When employees traveling by air inquire about what their per diem covers, here’s a more detailed breakdown:
6.1. Meals
The standard M&IE rate for CONUS is set to increase to $68 in 2025, with a range of $68–$92 for non-standard areas. Employees have considerable freedom in deciding how and where to spend this money, as long as they stay within budget. For example, an employee who chooses budget-friendly lodging might have more money to spend on dinner at an upscale restaurant. Conversely, an employee booking a five-star hotel may prefer fast food or takeout options for meals.
6.2. Lodging
A significant portion of an employee’s per diem budget is allocated to lodging, whether it’s booking a mid-range hotel or motel for the duration of their stay. For day trips, only an M&IE allowance is necessary. Lodging expenses are also excluded if the employee stays with family or friends at their destination.
6.3. Incidental Expenses
Incidental expenses are smaller fees or gratuities (tips) paid for services during a business trip.
These expenses may include:
- Laundry and dry cleaning
- Tipping servers and bellhops
- Cab and shuttle fares
- ATM fees
- Valet services
- Car rentals
- Tolls
Each company and HR department has its own specific policies regarding which incidentals it will approve or reimburse.
6.4. Travel Costs
Whether it’s a single-day business trip to a neighboring state or a week-long stay on the opposite coast, per diem may also cover travel costs.
6.4.1. Airfare
For long-distance trips, employees can request reimbursement for airfare and associated expenses, such as shuttles and taxis. However, there are often limitations on what the company will cover. For example, some policies require booking tickets at least 14 days in advance and may only cover economy class seats. Any optional upgrades would be the employee’s responsibility. Some companies will book airline tickets for their employees.
6.4.2. Privately Owned Vehicle (POV) Mileage
If the destination is within driving distance, employees can request reimbursement for the miles driven during the trip. As of 2024, the IRS set the rate at $0.67 per mile, or approximately $335 for a 500-mile round trip. This per-mile rate is used instead of reimbursing for gas tank fill-ups.
7. What Is Not Included In Per Diem?
Full-time employees typically collect receipts during their business trips to submit an expense report and qualify for reimbursement. However, this assumes that the employee can account for their spending, and the HR or travel department can verify its relevance to business.
Per diem generally does not cover:
- Souvenirs
- Entertainment
- Alcohol (must be deducted from the receipt)
- Room service
- Postcards
- First-class plane tickets
- Any lodging or meals that exceed the per diem rate
While these exclusions are standard, private companies have the flexibility to set their own employee policies.
8. Is Per Diem Considered Wages By The IRS?
One of the most frequently asked questions regarding per diem, from both employees and employers, is the tax-related aspect.
Is per diem considered wages?
The answer is, it depends.
Let’s take a closer look at when per diem may be subject to taxation by the IRS.
8.1. When Is Per Diem Not Taxable?
This is where adhering to the GSA’s locality-based per diem payments becomes advantageous. Generally, if the employee doesn’t exceed the standard daily allowance, it is not considered income. It’s not regarded as employee wages, meaning it’s not subject to taxation. As an employer, you wouldn’t withhold payroll taxes or include it on the employee’s W2 as wages.
However, employees must meet another requirement to maintain their tax-free per diem rates: submitting an expense report.
8.2. What Is An Expense Report?
An expense report is a traveling employee’s record of how they spent their per diem allowance during a business trip.
This report must:
- Include lodging and meal receipts (to demonstrate that spending was at or below budget)
- Specify the precise date and time of the trip
- Explain the purpose of traveling
- Be submitted within 60 days of the employee’s return
Assuming the employee remained within budget and submitted a complete expense report on time, you would not need to report it as income on the employee’s W-2.
8.3. When Is Per Diem Taxable?
Employers can’t coerce employees into submitting an expense report by withholding their per diem pay. However, for the employee’s benefit, submitting an expense report is crucial during tax season.
This is because per diem is taxable and subject to payroll tax or income tax withholding if:
- The employee doesn’t submit a report at all, which means per diem would be classified as taxable income.
- The filed expense report is missing essential information, such as receipts, dates, times, and locations.
- The employee’s lodging and M&IE expenses exceed the GSA’s suggested per-day rate for the locality (the excess amount is taxable).
- The employer doesn’t require the submission of expense reports.
Unless the situation meets one of these criteria, the IRS doesn’t consider per diem as wages, and therefore, employees won’t have to pay tax on it.
9. What Are Per Diem Alternatives?
If per diem doesn’t suit your needs, here are other ways to handle travel expenses:
- Reimbursement: Employees pay upfront and get reimbursed later with receipts.
- Corporate Cards: Direct payment using company-issued credit cards for transparency.
- Direct Billing: Hotels and vendors bill the company directly, reducing employee burden.
- Travel Packages: Fixed-cost packages covering flights, hotels, and meals for budget control.
Choose the best option to meet your business’s specific needs.
10. TRAVELS.EDU.VN: Your Partner In Stress-Free Napa Valley Travel Planning
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Frequently Asked Questions (FAQs) About Per Diem
- Is per diem mandatory for employers? No, federal law does not require per diem, but employers typically must reimburse travel expenses.
- What does per diem typically cover? It usually includes meals, lodging, and incidental expenses like tips and transportation.
- How are per diem rates determined? The GSA sets rates based on location and cost of living.
- Is per diem taxable? Not if it stays within GSA guidelines and employees submit expense reports.
- What are the different types of per diem? Fixed, partial, actual expenses, and company credit cards.
- Can employers set their own per diem rates? Yes, but amounts exceeding GSA rates may be taxable.
- What happens if an employee exceeds the per diem rate? The excess amount may be considered taxable income.
- What should be included in an expense report? Receipts, dates, times, and the purpose of the trip.
- What if an employee doesn’t submit an expense report? The entire per diem amount may be taxable.
- Are there alternatives to per diem? Yes, like reimbursements, company cards, and direct billing.
By understanding the intricacies of per diem and its related aspects, you can ensure compliance and streamline your travel expense management processes.
