A per diem benefit is a fixed daily allowance you pay employees to cover business travel expenses like meals, lodging, and incidental costs, rather than requiring detailed expense receipts. The term "per diem" literally means "per day" in Latin, reflecting how these allowances work: you provide a set amount for each day of travel, regardless of actual expenses incurred.
Per diem benefits simplify expense reimbursement dramatically. Instead of collecting receipts for every meal and hotel charge, then processing expense reports and reimbursements, you simply pay the daily rate and avoid administrative hassle. Employees know exactly how much they'll receive and can manage their spending accordingly.
The federal government establishes standard per diem rates through the General Services Administration (GSA), providing safe harbor amounts that simplify tax reporting and reduce IRS scrutiny. Many private sector employers adopt these rates for their own policies, though you're free to set your own amounts based on your budget and business needs.
How Per Diem Benefits Work in Practice
You send an employee to a conference in another city for three days. Instead of them paying for hotels and meals out of pocket, then submitting expense reports with receipts for reimbursement, you provide the GSA per diem rate for that location: perhaps $200 per day for meals and incidental expenses, plus separate lodging reimbursement or direct payment. Your employee receives $600 total (3 days × $200), manages their own meal and incidental spending within that budget, and submits no detailed accounting of where every dollar went.
The simplicity benefits both parties. You avoid processing numerous small transactions and reconciling receipts against corporate card charges. Your employee avoids the administrative burden of tracking and reporting every coffee, meal, and taxi ride. The relationship becomes cleaner: here's your allowance, spend it wisely, and focus on your business purpose for traveling.
Some organizations provide the full per diem rate regardless of actual expenses, allowing employees to pocket any unspent amounts. This creates incentive to spend frugally. Other organizations require employees to account for unused per diem funds, treating the allowance more like an advance than a flat payment. The first approach is simpler and more common, treating per diem as true compensation for travel inconvenience.
Federal Per Diem Rates and IRS Treatment
The GSA publishes standard per diem rates annually for cities and counties across the United States. These rates vary significantly by location, reflecting different costs of living and lodging prices. Major cities like New York, San Francisco, and Washington DC have much higher rates than rural areas.
As of fiscal year 2025, the standard CONUS (continental United States) per diem rate is $166 per day: $107 for lodging and $59 for meals and incidental expenses (M&IE). High-cost areas have significantly higher rates. Your employees traveling to Manhattan might receive $365 total per diem, while someone traveling to rural Oklahoma receives the standard $166.
When you reimburse employees at or below GSA rates, those reimbursements are generally non-taxable to the employee and don't require detailed substantiation beyond dates, locations, and business purposes of travel. This makes per diem benefits extremely tax-efficient compared to other forms of compensation or reimbursement.
If you pay above GSA rates, the excess becomes taxable income to the employee. For example, if you pay $100 per day M&IE in a location where GSA allows only $64, the extra $36 per day is taxable. Most employers simply stick to GSA rates to avoid this complexity.
The IRS requires substantiation of the time, place, and business purpose of travel, even when using per diem rates. Employees should document where and when they traveled and why. This documentation protects both you and them in case of audits, proving the travel was legitimate business expense rather than disguised compensation.
Designing Your Per Diem Policy
Decide whether to use GSA rates or establish your own. Adopting GSA rates provides safe harbor treatment and simplifies annual updates. Setting custom rates gives you budget control but requires ensuring they're reasonable for the locations where your employees travel.
Determine what expenses per diem covers. Most policies include meals, tips, and incidental expenses like taxis, dry cleaning, and personal toiletries in M&IE per diem. Lodging is typically either covered separately through direct payment or reimbursement with receipts, or included in a combined per diem that covers all travel costs.
Establish whether partial day travel receives full per diem. Common approaches include paying 75% of per diem for travel days when employees depart or return home, recognizing they likely eat some meals at home. Some policies simply pay full per diem for any day involving business travel regardless of departure or return times.
Document your policy in writing and ensure employees understand it before traveling. Surprises after people have already incurred expenses create frustration and potential reimbursement disputes. Clear policies prevent misunderstandings.
Advantages of Per Diem Benefits for Shift-Based Businesses
Simplified administration saves time for both managers and traveling employees. You're not processing expense reports with dozens of meal receipts. Employees aren't saving every Starbucks receipt and documenting every business meal. Everyone focuses on actual business purposes rather than expense accounting.
Budget predictability makes financial planning easier. You know exactly what travel will cost based on destinations and trip lengths. No surprises from employees who choose expensive restaurants or hotels. The fixed nature of per diem rates lets you accurately forecast travel costs.
Employee satisfaction often increases with per diem because the system feels fair and transparent. Everyone traveling to the same location gets the same rate. There's no suspicion that some people's expense reports get approved while others face scrutiny. The objectivity of per diem rates eliminates perceived favoritism.
For frontline managers or supervisors who travel to different locations, per diem benefits provide straightforward support without requiring them to navigate complex corporate card systems or expense reporting platforms. Many shift-based businesses lack sophisticated financial systems, making simple per diem arrangements practical necessity.
Challenges and Limitations
Inflexibility in varying locations can create problems. The per diem rate that's generous in one city might be inadequate in another. If you use a single flat rate for all travel rather than location-specific rates, you'll either overpay for travel to inexpensive areas or underpay for expensive ones.
Inadequate rates compared to actual costs in high-expense cities can create employee dissatisfaction and out-of-pocket expenses. If your per diem doesn't cover reasonable meal costs in the location where someone is traveling, they're effectively subsidizing business travel with their own money. This feels unfair and might discourage people from accepting travel assignments.
Administrative burden still exists for lodging if you separate that from M&IE per diem. Hotels require actual payment, so you're either booking and paying directly, reimbursing employees with receipts, or providing corporate cards. Per diem only fully eliminates receipt tracking if you combine lodging into the daily rate, which creates its own complexities.
Special Considerations for Frontline Workers
Transportation to multiple work locations sometimes blurs the line between commuting and business travel. Per diem benefits typically apply to temporary work locations away from home, not regular work locations an employee visits routinely. An area manager who visits five restaurant locations in their territory isn't on business travel in the same way a manager sent to another state for a week to open a new location is.
Overnight stays determine per diem eligibility in most policies. Often, the employee can eat at least one meal at home. Some organizations provide meal allowances for extended day trips involving unusual meal times, but these arrangements differ from traditional overnight per diem.
Training travel frequently involves per diem since you're sending employees away from home for learning purposes. Someone attending a multi-day training program in another city clearly qualifies for per diem benefits. This helps attract participants since they don't worry about travel expenses affecting their personal budgets.
Emergency situations might require immediate travel without time for planning. Having a clear per diem policy means your employee can book necessary travel knowing they'll be reimbursed appropriately, without waiting for advance approvals on specific expenses.
Integrating Per Diem with Other Travel Policies
Communication about per diem policies should reach all employees who might travel, ensuring everyone understands available support before circumstances require travel. Mobile-first communication tools that keep your distributed workforce informed ensure traveling employees know what to expect and how to access their per diem benefits regardless of where they are or their normal work location.
Your per diem benefit strategy should align with your broader approach to employee compensation and support. When travel is rare and unexpected, simple policies work best. If certain roles travel frequently, more sophisticated approaches might be warranted. The goal is supporting business-necessary travel without creating administrative burden or employee hardship, while maintaining tax compliance and budget control.
Be sure to consult with a licensed attorney or accountant before you make any decisions. All of this information is provided for educational purposes only.
