Let’s Talk About Per Diem

Learn how per diem ties together with the gig economy

If an employee travels for business they’re adapted to incurred expenses being covered by their employer. Knowing what is being covered by the employer and why it is being covered can be a little a tricky to figure out…

 

 
This article discusses per diem; how it’s different from expense reimbursement, when per diem is implemented, the federal per diem rates, per diem employment, and how per diem ties together with the gig economy.

Per diem is Latin for “Per Day”. Employers that have employees that travel may pay them a per day rate in addition current pay. The employer establishes an allowance based off expenses their employees may incur while travelling. These expenses may include, hotels, food, transportation, and other incidental fees such as tips.
 
One example of per diem, is when a company opens a new location, sends the head of HR to hire employees at the new location, and pays the head of HR a per diem rate to cover expenses above and beyond their current salary. Per diem is best suited for small to midsize companies that don’t have employee positions already in place for handling documentation that comes with actual expense reimbursement (discussed further in this article).

Each county will have a different rate established by the government in association with per diem. Every year the per diem rate is decided by the General Service Administration for locations in the continental United States, non-foreign rates are set by the Department of Defense and applies to Alaska, Guam, Hawaii, and Puerto Rico.
 
This per diem rate is what government employees are subject to when travelling. Most companies abide by the federal per diem rate. If a company chooses, they can offer more per diem, but any excess above the federal per diem rate is qualified to be taxable income under W-2 employment. (Check out your per diem rate https://www.gsa.gov/travel/plan-book/per-diem-rates).

Per diem is considered in accordance with business expenses so therefore tax free until it goes above the federal per diem rate for a person’s area. If an employee has left over per diem given to them but not spent it is considered taxable as wages. If no per diem is offered by an employer a W-2 employee may deduct up to 50% of the federal per diem rate and any other acceptable expenses according to perdiem101 website. Perdiem101’s website also states that anyone in the transportation industry may deduct up to 80% of the federal per diem rate. If not given per diem by the employer the employee can submit an expense report for reimbursement.
 
It is not required by the IRS for an employee to submit an expense report. If an expense report is not submitted by an employee than the employer has to record the per diem as taxable income.

What is Actual Expense Reimbursement and When is it Implemented?

Actual expense reimbursement is when the employee collects receipts for expenses incurred while travelling (food, lodging, transportation, etc.). Actual expense reimbursement is very self-explanatory. The disadvantage compared to per diem is that it requires more paperwork/documentation and requires more extensive labor. The only other real downside to expense reimbursement is it may cost more to reimburse compared to calculating beforehand and being giving a per diem.
 
Actual expense reimbursement is better suited for mid to large sized companies because they can handle the cost of labor for expense reimbursement. If a company uses expense reimbursement it will show up on an employee's W-2 under box 12, code L. If any money wasn’t used and an employee was reimbursed more than what the expenses were, it will be taxable as wages.

What is Per Diem Employment?

Per Diem employment is where the employer pays a daily rate for employees that are hired on an as needed basis, and will be paid per diem as their form of payment. This only applies to any temporary work, such as substitute teaching and healthcare workers that get called into work due to emergency understaffing or someone on vacation. These workers are very flexible and usually aren’t putting in 40 hour weeks. Per diem employees are not offered benefits but are still on a W-2. Hospitals have a huge staff, meaning it is a daily occurrence for someone not to show up or be sick.
 
This is why hospitals take advantage of per diem employees, having per diem employees on standby allows having a fully staffed hospital. An employer usually will notify the per diem employee of their schedule on a regular basis (weekly, bi-weekly etc.). If a per diem employee becomes unreliable, simply taking them off the schedule can present problems….
 
The employee can file for unemployment and probably get it, raising the employer's unemployment tax rate. To avoid this as an employer, make sure per diem employees are treated respectfully, have policies in place for expectations/guidelines, and make sure to have lots of documentation.

Gig Economy- Independent Contractors vs. Per Diem Employment

Per diem is going to become more obsolete over the next decade or so. The gig economy is thriving, especially in the healthcare industry. Independent contractors make up around 15% of the workforce. The healthcare industry is the most evident change in the gig economy movement so far. The flexibility of temporary work is appealing to both the employer and the contractor.
 
With the new surge in hospitals hiring contractors comes a change in the way healthcare is managed and delivered, making execution more efficient. Per diem is mainly the benefit of getting supplemented for incurred expenses that an independent contractor (1099) would not be supplemented for. Independent contractors can still write off expenses such as traveling expenses, cell phone, parking, and supplies relating to their work.
 
Contractors aren’t supplemented fully for these write offs, such as W-2 employees getting per diem. Most contractors would argue it’s worth it due to the freedom being in business for themselves it brings.
 
Knowing why you get as much or as little per diem for travelling, is a critical insight to know. Some people aren’t even aware that if your per diem is more than the federal tax rate you are subject to pay taxes on it. Don’t let your employees or employer take advantage of you!

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Paul Aemisegeo is the Founder & CEO of PayrollMart. He works with employers and entrepreneurs to help them with all things pertaining to their employees, specifically in the areas of payroll, employee benefits, workers compensation and retirement plans.