What is a Per Diem and how it works?

A well-defined business travel policy can help eliminate confusion and frustration for employees. Simplifying the reporting and approval process can streamline operations. In the pursuit of simplification, many companies choose to adopt a per diem approach for travel expenses rather than requiring itemized receipts. So, what exactly is a per diem, how does it work, and what per diem policies are needed to reap the full benefits? 

What Is a Per Diem? 

The per diem meaning originates from the Latin phrase meaning "by the day." Per diem is a daily stipend designated to cover expenses incurred by employees during business travel. This allowance encompasses various costs such as: 

• Meals and snacks 
• Hotel stays 
• Airfare 
• Rental cars or taxis 
• Parking fees 
• Incidentals, such as tips, internet fees, and business-related supplies 

Employees who travel for business receive a predetermined daily sum to meet their essential needs without requiring explicit approval for expense reimbursement. Some companies choose a per diem fee for all expenses while others provide a per diem meal allowance only. 

Most companies set per diem rates based on federal per diem rates published by the General Services Administration (GSA). The GSA rates provide per diem guidelines for lodging, meals, and incidental expenses across more than 10,000 cities and counties within the U.S. Per diem rates differ across locations, taking into account average costs of living and travel expenses. The Internal Revenue Service (IRS) also publishes per diem rates, which they update annually. For international travel, the U.S. Department of State provides benchmarks to help you ensure your employees are being fairly reimbursed for their business expenses when traveling abroad. 

Companies may also set per diem rates based on policies, such as setting rates for a particular class of hotel or airfare. For example, per diem rates might be set based on economy or business class rates, but not account for first-class travel for employees. Some organizations also specify certain expenses that are not covered by a per diem, such as alcohol or personal expenses. 

How Does Per Diem Work? 

When an employee goes on a business trip, they can claim an allowance for each day they are away. They usually do not need to provide itemized receipts, as the per diem rate is meant to cover everything.  

You calculate the total reimbursement by multiplying the per diem rate times the number of days spent on the trip. For example, let’s say an employee is going on a 3-day business trip and the company’s per diem rate is $150 per day. The total per diem would be 3 x $150 or $450 for the three-day trip. 

Partial Days and Unused Per Diem 

Different companies have different policies regarding per diem allowances for partial days of travel and unused per diem. For partial travel days, the per diem rate may be prorated based on the time spent on the trip. For partial days or days where expenses were less than the per diem, employees are allowed to keep any of the allowance that is not spent. Other organizations require employees to return the difference between the allowance and actual travel and entertainment expenses. 

What Is Per Diem Accounting? 

When employees go on a business trip and incur eligible expenses, they need to follow company procedures for accounting and reporting. 

In most cases, employees will need to track their expenses during the trip and specify any additional expenses that are not covered by the per diem rates. At the end of the trip, the employee submits an expense report to the accounting team which includes information about the trip, dates and destination, purpose, and expense breakdown. Typically, employees are not required to submit detailed receipts, although this can also vary based on company policies. 

After review and approval, employees are reimbursed for the eligible expenses in addition to the normal wages they earn while traveling. Some companies choose to issue employees a per diem payment before travel that they can use to pay for the trip. This amount would be noted and deducted from the expense report when filed. 

Expense management software helps effectively enforce and manage per diem programs. A sophisticated solution creates an efficient workflow, allows employees to quickly enter expenses on the go, and streamlines the approval process. At the same time, the software creates a complete audit trail and stored records for future review. 

What Is Per Diem Work? 

Expenses reimbursement for travel should not be confused with per diem work. Per diem work refers to a daily rate that is paid as a flat fee for work or services. This type of payment structure is generally used for contracted specialists or temporary workers and is adjusted based on skills and services. 

Benefits of Per Diem Beyond the Numbers 

There are several key benefits for both employers and employees using a per diem method of reimbursement. 

Keeping It Simple 

Without having to track every expense and provide itemized receipts, both the reporting and approval processes are easier. This eliminates much of the administrative burden. Finance teams spend less time tracking down missing or lost receipts or verifying the accuracy of expense reports. 

An automated system to track expenses can significantly reduce the amount of data entry and human error that creeps into manual processing. 

Coupling a reporting platform with an accounting system using AI and automation can streamline straight-through processing to approve per diem reports. 

Increasing Policy Compliance 

By capping expenses at a reasonable rate, employees are encouraged to work within company guidelines and not submit requests for additional reimbursement. At the same time, there is no incentive to inflate expenses, such as adding additional miles to the use of a personal vehicle. 

Cost Savings 

By providing a per diem rate, employees know ahead of time that if they spend more than the per diem rate, it will come out of their pocket. As such, they are less likely to spend lavishly, be less than forthright about actual expenses, or engage in fraud. 

What Are the Downsides of Per Diem? 

There is a potential downside to deploying a per diem model for reimbursement. Employees may look at the per diem rate as part of their income or a way to increase their earnings. They may cut corners to keep more of the per diem rate for themselves. 

This may not always be a downside. If an employee opts to stay in a slightly lower-priced hotel, for example, it likely will not affect the quality of their work. However, if they skip sharing a meal with a high-value client when that’s the standard practice, it may undermine the relationship. 

Per diem may also incentivize an employee to travel more frequently, perhaps leading to unnecessary expenses. For example, they may choose to meet a contact in person over a meal rather than do a video chat. 

Per Diem Policies for Success 

Creating formal per diem policies and publishing them for employees is a critical first step. Your policies need to be clear and consistent. You also need to be aware of changes in the travel environment. With travel expenses rising, companies need to analyse their per diem rates at least annually to ensure they are keeping pace with inflation and actual costs in the marketplace. 

Other best practices for managing per diem include: 

• Basing per diem rates on current federal guidelines for geographic areas 
• Allowing exceptions to standard rates for high-cost cities, such as major metropolitan areas 
• Enforce rate consistency across employees and business units 
• Setting partial receipt requirements for lodging over certain thresholds 
• Not requiring detailed meal receipts within per diem allowance 
• Adjusting policies based on finance expense analysis 
• Providing convenient expense submission channels 
• Auditing policy compliance through random expense checks 
• Incentivizing employees to remain within per diem budgets 
• Requiring employees to get pre-approvals 

Incorporating Per Diem Into Your Financial Strategy 

Having the right tools and applications to manage your employee expenses and reimbursements is crucial with business travel. 

SAP Concur is the leading solution for integrating travel and expenses, helping organizations and employees streamline the reporting and approval process. By integrating near real-time data and AI to analyse transactions, businesses will know where and how spending occurs to provide greater transparency into spending. 

Contact SAP Concur to see how we can help you simplify the per diem process and automate your employee expense reimbursement.