Business travels took a solid hit during the COVID-19 pandemic. But it has now bounced back and is about to surpass 2019’s numbers.
Ravi Shankar, an equity analyst from Morgan Stanley, says, “Most interesting is that nearly half of the respondents expect 2023 budgets to increase versus 2019 overall. And of those that expect an increase in budgets, the majority believe 2023 budgets will be between 6% to 10% higher than 2019.”
Chances are, you or your employees have some business traveling scheduled this year too. And anything you spend on meals can be converted into tax benefits. Did I mention you get to skip a lot of paperwork too?
Enter per diem allowance.
In this article, we will cover per diem, especially meal allowance and incidental expenses. You will get to know how it can apply to your business and what benefits you will get out of it.
Per diem is a Latin word that translates to “by the day.” In business context , however, it refers to daily allowance given to employees to cover their daily expenses during business travel. This allowance covers lodging, meals, and any incidental expenses (tips, for example). As stated above, you can deduct these expenses from your taxes at least partially. Also, you don’t have to reimburse any amount over per diem rate in case your employee spends more than allocated daily allowance.
Having a per diem allowance gives your employees’ some flexibility too. Instead of going for the most affordable options, they can choose to travel and dine comfortably (and it can make them 13% more productive).
Also, if your per diem rate matches the federal per diem rate, your employees don’t get taxed on that amount.
The General Service Administration considers the local fooding and lodging expenses and sets official per diem rates for lodging and food and incidental expenses.
For the year 2023, the federal lodging rate is $98 and M&IE (meal and incidental expenses) rate is $59(the M&IE per diem tier for FY 2023 is $59-$79).
Usually, in locations with high cost of living, the M&IE per diem rate skews toward the higher end of the official per diem tier. For instance, in New York City, the total meal and incidental expenses are split as:
- $18 for breakfast
- $20 for lunch
- $36 for dinner
- $5 incidental expenses
Usually, the first or the last day of business travel doesn’t consume the entire day. Therefore, you can offer a special meal allowance per diem rate (for those two days only), which is 75% of standard meal allowance per diem rate. For instance, the per diem rate of meal allowance on the first day of NYC is $59.25.
If an employee doesn’t use the entire per diem amount, they can keep the remaining amount without any tax liability.
But what happens when you are self-employed?
The IRS views you as both an employer and an employee. Therefore, you don’t get to enjoy the benefit of lodging per diem rate. However, you can use meal allowance per diem. In that case, you should keep records of expenses with required details(date, location, purpose of the trip) clearly mentioned.
You, as an employer, can set your per diem rate the same as, or lower or higher than the GSA rate. Depending on which way you want to go, you will have different tax implications.
As an employer, you can deduct any cost incurred due to per diem payment as a business expense. However, if you are paying more than the GSA standard for a specific location, then excess amount will be taxed.
In the similar way, you employees also pay taxes on the excess amount over the official per diem rate. Per diem amount is not taxable only if they receive lodging and meal allowances equal or less than the official rate.
Tip: By offering per diem rates you can effectively increase your employees’ take home pay slightly without raising their payroll or income tax liabilities.
However, your employees must produce an expense report first. Without it, the IRS will not consider any per diem allowances tax free, no matter the amount. This expense report must include:
- The business purpose of the trip
- The date and place of the trip
- Receipts (meal allowances don’t require receipts though)
Tip: Feel free to go through this IRS per diem payment guide for employers. Ask your accountants if you still are unsure.
We have already covered how per diem can benefit both your employees and your taxes. However, the list doesn’t end there. You will get to enjoy the following perks even if you pay above the set per diem rate.
- Easier budgeting: Budgeting can be a real headache sometimes. A set per diem rate can at least simplify your travel expense budget allocation. Knowing how much you have to allot for each employee makes it easier to create a clear budget and keep records.
- Less paperwork: Imagine the amount of paperwork you would deal with after a business trip if you don’t offer a set meal allowance rate. Each employee would submit sufficient proof of expenses for each day of travel. That’s a lot of bills to go through, right? Not to mention, you have to spend hours carefully updating your books to reflect those spending too.
By offering per diem rate, you eliminate all those troubles immediately.
- Smarter spending: As an employer, you don’t have to worry about employees overspending during trips when you know how much they can spend. On the other hand, your employees can spend less than the allotted amount and pocket the rest. So, per diem rate is a win-win for both parties.
You have a few options when it comes to managing employee expense reimbursements for per diem spending:
The first option you have is handing over your employees the total amount (per diem allowance * total days of travel) before their trip. It will relieve you from all the paperwork. Once your employees return, you keep the expense report for tax record keeping and be done with it.
However, this lump sum approach can backfire if your employees have to extend their travel dates. In that situation, they would have to pay out of their pockets, and you would have to reimburse the excess amount (and do paperworks) on their arrival.
Prepaid purchasing cards can be another effective way to give per diem meal allowances and lodging allowances. The upside is that when your employees make their per diem spendings, records of those transactions go directly to your accounts department.
However, if your employee overspends in unavoidable situations, you have to get the excess amount (over per diem amount) back directly from the employee or adjust from their next paycheck.
The most common way to reimburse per diem expenses is by having employees fill out a report after their trip. Your employees pay for their expenses using personal cards and then submit receipts with the expense report. Then you reimburse the employee (based on per diem allowance calculation) via a separate check or include the money in the employee’s paycheck the next time.
With this method, you won't run into a situation where your employee is out of funds during their trips (or overspend). But your employees must be able to cover their expenses out of pocket first before you reimburse them.
If you are considering offering a per diem allowance for meal and lodging, you need to do some ground work first. For starters, figure out whether you want to follow the standard per diem rates. If those rates don't feel not right, you can always set your own rates (keep taxes in mind though).
Next, decide how you want to pay your per diem allowances. Re-read the previous section to understand pros and cons of all three ways: delivering an upfront stipend check, issuing a prepaid purchasing card, or reimbursing employees after the trip.
Once a decision has been made and systems are in place, you want to document your per diem policies. Ideally, you should share it with your employee right when you are hiring them.
Rick Hammell, CEO of Elements Global Services, agrees with this approach:
“For employers to communicate policies surrounding compensation effectively, they first must create an overall strategy that is implemented from top leadership all the way to an entry-level employee”
Experts such as Hammell also think you should take account of employees’ concerns while creating these policies. After all, they are the ones who would be traveling and might face problems that you might not think of on your own. Therefore, be open-minded and willing to answer your employees’ questions.
Here is what Hammell advices:
“Make sure employees are aware of how additional pay decisions are made, and if employees have questions or concerns, leadership is available to answer those”
Both lodging and meal allowance based on a set per diem rate can simplify your expenses and help you with taxes. It’s convenient for both you and your employees who go on business trips.
If you want to make your business finances even more simplified, having immaculate books is one of the best approaches to take. And there is where Fincent can help. It auto-updates and categorizes your transactions, generates accurate reports, and offers an overall picture of your financial trajectory. Feel free to book a demo to know about this application.
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