Managing Per Diem Expenses: Best Practices & Benefits

Introduction

Imagine you are on a business trip: meeting people, giving presentations, and attending seminars. You also manage your daily expenses -- food, accommodation and travel. And by the end of the day, you have a bunch of receipts and a headache in trying to account for every expense. Sounds familiar? This is a common problem many business travelers face.

Per diem expenses are the cure for this chaos. Per diem, a Latin term meaning "per day, " is an allowance given to the employees daily to spend on travel. Instead of accounting and submitting every receipt along with the meal and incidental expenses, the employee is paid a fixed amount per day as they travel. This makes the process much easier and more predictable and, therefore, less of a hassle to travel.

Understanding per diem expenses benefits both employees and employers. Correctly applied per diem policies produce some tax advantages that help both the employee and employer reduce respective financial burdens. By knowing the ropes when it comes to per diem expenses, businesses can make the entire process easier, more compliant and satisfying for a traveling workforce.

What are Per Diem Expenses?

Per diem allowances are daily allowances made by employers to offset expenses that an employee may incur in work-related travel. Essentially, these allowances ease the hassle of reimbursement by advancing personnel a flat amount for refreshments, accommodation, and other incidentals without being tasked to account for every penny spent. The amount of per diem is pegged on government stipulations or corporate policies, usually varying with location in most cases.

Components

1. Meals: This is the cost of breakfast, lunch, and dinner while away from home. The meal per diem varies depending on the destination and available dining choices.

2. Lodging: This element includes expenses incurred for hotels or other accommodations. Usually, the rate paid for lodging is pegged to the average prices charged by various categories of hotels at each specific travel location.

3. Incidental Expenses: These are the small expenses incurred while traveling, which include the tips to service personnel, laundry, and local transporting in the destination city—for instance, taxi fares or resultant public transport. These expenses will generally be paid under a single incidental allowance.

The case of the per diem allowance is not new but has evolved over the years because of the increase in business trips. Initially, employees must account for every penny spent on their journey. This involved excellent paperwork, requiring much time and, at the same time, took long before workers could get reimbursed.

 The per diem allowance has thus made it easy for employees to manage their costs and for employers to project and control travel budgets with a precise and uniform style of dealing with travel expenses. In this very way, it has also formed the base of contemporary business travel that brings ease, equity, and efficiency to all concerned.

How Per Diem Rates are Determined

Government Rates

• The National Joint Council(NJC) sets per diem rates for federal government employees in Canada. Many other partners join the NJC in helping develop appropriate and harmonized travel expense allowances. 
• These rates are based on detailed cost-of-living analyses in various regions across the country and internationally to compensate employees appropriately for their travels.
• The NJC periodically reviews these rates to accommodate the fluctuation in local economies, seasonal variations of prices of any commodity, and changes in currency exchange rates. 

Corporate Policies

While government agencies follow standardized guidelines on their per diem rates, private companies can be more flexible. In most cases, companies base their per diem rates on:

• Benchmarking: Many companies use a base that often comes from government rates, like the NJC ones, and then modify them according to their needs.
• Industry standards: Companies also follow the prevailing per diem rates in their respective industry to be competitive and comparative.
•  Internal Budgeting: Businesses review their financial situation and the budgets for travel to decide on the per diem rates that will be high enough to keep the employee alive but low enough to be viable for the company itself.
• Employee Feedback: Many organizations conduct employee surveys to determine actual costs incurred while traveling, adjusting their per diem rates accordingly.

It is from the consideration of these elements that businesses gear their per diem policies toward attaining a fair balance between controlled expenditure and satisfied employees.

Factors That Influence Rates

The following are some of the factors that help determine per diem rates and make them fair to use and easy to administer:  

1. Geographic Location: This can vary significantly between cities and regions. For example, per diem rates for major cities like Toronto or Vancouver will be higher than those for smaller towns because of the difference in the cost of living.

 2. Type of Travel: Even the type of travel may affect per diem rates. Most of the time, international travelers command a higher per diem allowance, primarily because of  more expenses. 

3. Length of Stay: The per diem rates could decrease the longer one is supposed to stay because the personnel can, through negotiation with service providers, secure a more affordable day-to-day rate on prolonged accommodations or gain cheaper food alternatives over time. Contrarily, shorter travel may attract higher per diem to offset immediate and mostly costlier short-period expenses. 

4. Seasonal Variations: When peak seasons of travel or special events occur, costs of lodging and meals will rise; due to these short-term changes in costs, per diem rates have to be onsite accordingly. 

Benefits of Per Diem Expenses

For Employees

• Streamlined expense management: According to per diem allowances, employees are not required to keep records of every lunch, cab ride, or small expense. some text
  • It reduces the hassle and burden of handling multiple receipts and managing minor costs, making the whole process of dealing with traveling expenses much more accessible.

• Predictability: The per diem rates allow the worker to have an idea of how much allowance he would get and, hence, how to manage it better. some text
  • This gives predictability to the workers to budget their daily expenses without major concerns about out-of-pocket costs. 

• Convenience: To that effect, a lump sum paid daily alleviates the headache of employees submitting detailed expense reports and then waiting to be reimbursed. some text
  • Instead, they have precisely known allowances for everything, thus making the entire process of handling business travel expenses easier.

For Employers

• Streamlined Reimbursement Processes: The per diem allowances standardize most of the reimbursement processes, hence eliminating the need for detailed review and approval of various expense reports that employees may be entitled to. 

• Budget Control: With preset fixed per diem rates, an employer will be better placed to project and consequently control travel expenses easily. 

Challenges and Considerations

Compliance Issues

• Comply with the IRS: Your per diem rates and practices must be according to the guidelines provided by the Internal Revenue Service (or CRA, in Canada); otherwise, per diem payments are considered taxable income and therefore subject to fines and increased taxes on both sides.

• Staying Current: Per diem rates and rules change periodically. Employers need to keep pace with the evolving guidelines and should change their policies accordingly to meet compliance and avoid potential litigation.

Fairness

• Adequate allowances: Too low per diem rates can leave employees out of pocket, consequently affecting their willingness to work. On the other hand, too high a rate may trigger overspending. 
• Consistency: This factor is essential in ensuring that all employees are given per diem rates that are fair and consistent, regardless of whether they are part of the management or regular staff of the company. some text
  • The equity and trust evidenced in the treatment among all workers must be maintained.

Documentation

• Proper Records: Employers must maintain records of the dates of travel, places visited, and business purposes to support the per diem payments in case of audit.
• Receipts for Accommodation: It is necessary that the employee clearly understands this and saves all such documents to curtail the need for compliance or other records.
• Budgeting Challenges Fluctuating Costs: Employers must regularly review and update per diem rates to conform with prevailing current prices, sometimes a complex and highly time-consuming task.

Employee Understanding

• Clear Communication: The per diem policy should be clear to the employees concerning what is covered, how much, and how. ‍
• Managing Expectations: Employees' expectations may vary when considering per diem allowances. some text
  • Employers should communicate open-mindedly the reasons behind such per diem rates and address any resulting concerns to manage expectations. ‍
• Monitoring and Adjusting Policies Regular Reviews: The employer, once in a while, is required to review the per diem policies for fairness, compliance, and relevance to the actual travel cost. 

What’s Next?

It is time for scrutiny and adjustment of your per diem policies to ensure it is evident in language, fair, and updated. Go for all available best practices, like those described above, and bring their application to life, such as implementing automation applicable to such expenses, to mention just one use—in this flowerpot of best practices, on travel and expense management automation software. Pursue the sayings and suggestions of employees to make the effectiveness of your per diem process better.

 For more information and resources, visit GSA Per Diem Rates. Some of the software tools include Rydoo, Concur, and Zoho Expense.