Per diem refers to a reimbursement system that many companies and organizations use to compensate their employees for travel-related expenses.
This article aims to provide a comprehensive understanding of per diem, including its definition, role in various industries, comparison with actual expense reimbursement, as well as its legal and tax implications.
What does per diem mean?
Per diem, derived from the Latin phrase “per diem,” meaning “for each day,” is a daily allowance provided to employees to cover business travel expenses such as meals, lodging, and other incidental costs incurred during business trips.
The purpose of per diem is to simplify and standardize business expense reimbursement by providing employees with a fixed daily amount.
Per diems (also referred to as lump sums) plays a crucial role in ensuring that employees are adequately compensated for their out-of-pocket expenses.
By offering employees a fixed amount of money in the form of a daily rate, companies can avoid the hassle of reimbursing them for every individual expense, which can be time-consuming and prone to errors.
Instead, per diem payments allow for a streamlined process, making it easier for both employees and employers to manage travel expenses.
Types of per diem payments
Lump sum reimbursements are specifically designated to cover three distinct categories of expenses, and it’s important to note that they do not encompass transportation costs or mileage reimbursements. Lump sums solely addresses the following types of expenditures:
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Lodging – This includes expenses related to accommodations, such as hotel stays.
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Meals – Per diem can be used to offset the meal costs incurred during business travel.
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Incidental expenses – These encompass various smaller costs, such as dry cleaning or minor incidentals.
When employees require reimbursement for all three categories, they receive the full per diem allowance. However, if employees do not have to pay for lodging because they stay with family or in other non-reimbursable arrangements, you can provide a reduced per diem rate that covers only the other two categories of expenses – M&IE.
This ensures that employees are still fairly compensated for their meals and incidentals.
You have the flexibility to offer per diem payments in advance, before the employee embarks on their business travel, or as a reimbursement after the trip has concluded.
Employees are obligated to submit their travel expense reports and include information such as:
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Date, time, and location of expenses,
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The total amount of expenses incurred,
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A description of the business purpose for each expenditure.
As for the process of payment, employees are provided with the fixed rate without the need for you to approve or deny individual spending. In most cases, employees are allowed to retain any unused per diem funds, providing them with flexibility in managing their expenses.
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How do per diem reimbursements work?
Per diem rates are typically based on the location and duration of the business trip. Different cities and countries have varying costs of living, which is taken into account when determining the per diem rate.
For example, traveling for business purposes to a major metropolitan city with high living costs may have a higher per diem rate compared to a trip to a smaller town.
Here’s a breakdown of the process.
Calculating per diem rates
When it comes to determining per diem rates, several factors come into play. The location, local and company travel regulations, duration of the trip, and the employee’s job function all play a role in this calculation.
1. Setting lump sums
The first step in the per diem reimbursement process is to establish the per diem rates. These rates can vary based on factors such as the destination, the purpose of the trip, and the organization’s policies.
Rates are typically determined for specific expense categories, including lodging, meals, and incidentals.
2. Identifying eligible expenses:
It’s crucial to define which expenses are eligible for per diem reimbursement. As said, common categories include:
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Lodging
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Meals
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Incidentals
3. Calculating the per diem amount:
To calculate the per diem reimbursement amount for a specific trip, follow these steps:
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Determine the per diem rate: Look up the applicable per diem rates for the destination and expense categories. Rates can be found on government websites, tax authorities’ platforms, or internal company policies.
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Multiply by the number of days: Multiply the per diem rate by the number of days the employee will be on the business trip. This provides the total per diem allowance for that trip.
4. Daily allowance:
Employees receive a daily allowance based on the per diem rates. For example, if the per diem rate for meals is £50, and an employee is on a 3-day trip, they would receive £150 as their daily allowance for meals.
5. Submission of expenses:
With per diem reimbursements, employees do not need to submit individual receipts for each expense. Instead, they receive the predetermined daily allowance, simplifying the expense reporting process.
6. Compliance and documentation:
Although per diem reimbursements reduce the administrative burden on employees, it’s essential to maintain compliance with company policies and tax regulations. Finance professionals should ensure that employees adhere to per diem guidelines, including not exceeding the daily allowance.
7. Reconciliation:
After the business trip, employees should provide a summary of their travel dates and the number of days they were eligible for per diem reimbursement. Finance teams can then calculate the total reimbursement amount based on this information.
8. Automation and software:
Many organizations use AI-driven expense management software to automate the per diem reimbursement process. These tools can calculate per diem amounts, track travel dates, and ensure compliance with policies, reducing the risk of errors and improving efficiency.
9. Tax considerations:
Finance professionals should be aware of tax implications related to per diem reimbursements. In some countries, per diem payments may be subject to taxation, and proper documentation and reporting are necessary to comply with tax laws.
10. Regular updates:
per diem rates can change, so it’s essential to regularly update rates based on government guidelines or company policies to ensure accurate reimbursements.
As you can see, per diem reimbursements provide a structured and simplified way to compensate employees for business-related expenses during trips.
Yokoy Compliance Center
Stay up-to-date with rules and regulations around per diem rates, mileage allowances, proof of receipt, and VAT rates, while Yokoy keeps you audit-ready across countries.
Factors influencing per diem amounts
Several factors influence the lump sum amounts that employees receive. One of the primary factors is the cost of living in the location where the business trip takes place. Destinations with a higher cost of living, such as major cities or tourist hotspots, generally have higher per diem rates to account for the increased expenses employees may incur.
Another factor that comes into play is the purpose of the trip. Different types of trips may require different levels of per diem reimbursement, although Per Diems only apply to official travel, not to leisure trips.
For instance, a business trip that involves attending conferences or meetings may have higher per diem rates compared to a trip solely focused on internal team meetings. The rates will also vary when overnight stay is required, but is not influenced by lodging rates, as these are usually covered by the company as pre-trip expenses.
Furthermore, an employee’s position within the organization can also influence the per diem amount received. Employees with more senior roles and responsibilities may be eligible for higher per diem rates. This is to account for their increased level of authority and potential entertaining expenses that may arise during their business travels.
It is important for organizations to carefully consider these factors when establishing their per diem policies. By doing so, they can ensure that employees are fairly compensated for their expenses and that the reimbursement rates align with the specific circumstances of each trip.
Per diem vs. actual expense reimbursement
Pros and cons of per diem
Per diem reimbursement offers several advantages. It simplifies the expense reporting process, eliminates the need for employees to track and submit individual receipts, and provides a predictable and consistent reimbursement amount.
However, one potential drawback is that employees may need to be frugal with their expenses to stay within the per diem limit, which can be challenging in high-cost locations.
Benefits of per diem reimbursements
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Simplicity: This reimbursement system eliminates the need for employees to collect and submit receipts for every meal, transportation, and incidental expense. This simplifies the reporting of employee expenses,
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Predictability: Finance professionals can budget with greater accuracy, as the rates are fixed and predefined.
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Time savings: Employees and finance teams save time on expense reporting and approval processes.
Challenges of per diem
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Potential for overpayment: Employees may receive more than their actual expenses if the Per Diem rate exceeds what they spend.
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Lack of expense visibility: Finance professionals have limited visibility into individual expenses, making it challenging to identify overspending or non-compliance.
Pros and cons of employee expense reimbursements
Actual expense reimbursement, on the other hand, allows employees to be reimbursed for their exact expenses, regardless of the location or spending limits. This can be advantageous in situations where costs vary significantly, such as international travel or when attending high-profile events.
However, actual expense reimbursement may result in a more complex and time-consuming reimbursement process for employees and employers alike.
Benefits of actual expense reimbursement
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Accurate reimbursement: Employees are reimbursed precisely for what they spend, reducing the risk of overpayment.
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Expense visibility: Finance professionals gain granular visibility into expenses, allowing for better control and analysis.
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Compliance assurance: Detailed documentation ensures compliance with company policies and tax regulations.
Challenges of actual expense reimbursement
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Administrative burden: Processing numerous receipts and expense reports can be time-consuming and prone to errors.
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Complexity: Employees may find it cumbersome to collect and submit receipts for every expense, potentially leading to delayed reimbursement.
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Selecting the right approach for reimbursing employees
The choice between per diem payments and actual expense reimbursement depends on your organization’s specific needs, policies, and objectives. Consider the following factors when making your decision:
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Expense volume: If your employees frequently incur expenses, actual expense reimbursement may provide better control and accuracy.
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Policy compliance: If strict adherence to expense policies and tax regulations is crucial, actual expense reimbursement offers detailed documentation for compliance assurance.
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Simplicity vs. accuracy: Per diem offers simplicity, while actual expense reimbursement provides accuracy. Choose the balance that aligns with your organization’s priorities.
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Technology integration: Consider how automation and AI-driven expense management software can streamline either method, reducing manual work and errors.
To illustrate the impact of these approaches, let’s look at two hypothetical scenarios:
Scenario 1: Per Diem
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Company A implements per diem and reduces expense report processing time by 30%.
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The company saves £50,000 annually in administrative costs.
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However, an audit reveals £20,000 in overpayments due to fixed per diem rates exceeding actual expenses.
Scenario 2: Actual Expense Reimbursement
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Company B opts for actual expense reimbursement with automated expense management.
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Compliance violations decrease by 25%, resulting in £10,000 in tax savings.
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Employees appreciate accurate reimbursements, leading to increased job satisfaction.
Legal and tax implications of per diem
Guidelines for per diem
Taxation and regulatory guidelines for per diem vary by region, and it’s essential to examine the specific legal and tax implications of per diem in Europe, Switzerland (CH), and the United Kingdom (UK). Each of these regions has its set of rules and standards that employers and employees must adhere to when dealing with per diem allowances.
For example, in Germany, there are Per Diem rates defined by the German government, which outline permissible limits for meal and lodging reimbursements that come with no tax implications. However, any amounts surpassing these limits are regarded as taxable income for the employee.
If the employee receives meal from the company/employer or already paid together with the accommodation, the meal should be deducted from the daily allowance.
The deductions for each meal may vary:
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Breakfast – 20% deductible
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Lunch – 40% deductible
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Dinner – 40% deductible
Employees are allowed to receive Per Diem for single day trip. According to German regulation, the employee must travel more than 8 hours to receive Per Diem for the one-day business trip.
If the employee travels:
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More than or equal to 8 hours, then the employee is entitled to receive reduced Per Diem rate of 14€.
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Less than or equal to 8 hours, the employee is not entitled to receive any Per Diem.
Per Diem rates are highly influenced by the location, duration of the business trip. German government has a set of rules and may vary based on each business trip.
You can learn more about per diem rates in different countries in our Compliance center.
Legal considerations for employers and employees
Compliance with labor laws and tax regulations is paramount for employers and employees in Europe, Switzerland, and the UK when it comes to per diem reimbursement.
Establishing clear policies and procedures is essential to navigate the intricacies of regional regulations successfully. Employees must also be aware of their rights and responsibilities concerning per diem, including its impact on taxation, documentation requirements, and any restrictions related to personal expenses while traveling in these specific regions.
Yokoy Compliance Center
Stay up-to-date with rules and regulations around per diem rates, mileage allowances, proof of receipt, and VAT rates, while Yokoy keeps you audit-ready across countries.