The Complete Guide to Per Diem: What Is Per Diem and How It Works

Per diem is one of those terms people hear right before a business trip or on a new job contract, and many are too embarrassed to ask what is per diem. In simple terms, it’s a way for companies to cover your travel costs without making you save every single receipt.

But behind that simple idea are rules from the Internal Revenue Service (IRS), different reimbursement methods, and real tax implications if a company gets it wrong. This guide answers what is per diem, how it works in practice, and how organizations can use it effectively without turning expense reports into a full‑time job.

TIP: Want to see what Sloneek can do in payroll management? Check out the module.

Understanding What Is Per Diem

Per diem (Latin for “per day”) is a fixed daily allowance that employers pay employees to cover specific business travel expenses while they’re away from their tax home on a business trip. Instead of reimbursing every coffee, taxi, and hotel receipt, the employer simply pays the flat daily rate.

In the United States, private companies are not legally required to use specific rates, but most peg their allowances to the widely accepted benchmarks set by three federal agencies. Employers typically update their internal policies each fiscal year to align with the new federal per diem rate. By adopting these federal government rates, particularly the standard GSA rates, businesses ensure their allowances remain fair and compliant:

• The General Services Administration (GSA): Publishes official federal rates for domestic travel within the continental U.S., accounting for varying costs of living in different cities.
• The Department of State: Sets international per diem and daily subsistence allowance rates.
• The Department of Defense: Publishes tables under the Joint Travel Regulations for uniformed service members and some civilian employees.

Types of Per Diem

Per diem can be structured in a few different ways, depending on what an employer wants to cover.

• Meals and Incidental Expenses (M&IE): Covers breakfast, lunch, dinner, tips to hotel staff, and small incidental expenses like baggage handling. Companies often set a specific per diem meal allowance to standardize meal per diem reimbursement and accurately control daily meal expenses.
• Lodging Per Diem: Covers the nightly room cost and related lodging taxes, capping what an employee can spend on a hotel. Providing clear allowances for lodging helps businesses accurately forecast lodging expenses and easily manage fluctuating hotel expenses.
• Combined Per Diem: Bundles both lodging and M&IE into one flat daily rate. This single per diem rate simplifies accounting compared to tracking multiple different per diem rates for separate categories.
• Role‑Based Per Diem: In some fields like healthcare (e.g., travel nurses) or education (e.g., substitute teachers), “per diem” refers to a daily pay structure for temporary work rather than a travel allowance. For instance, in healthcare industries, a per diem employee like per diem nurses or temporary nursing staff might have a flexible employment arrangement based on daily or hourly rates rather than standard employee classifications.

Applications of Per Diem

Per diem shows up in several scenarios where employees incur short‑term work expenses:

• Corporate Business Travel: Used for sales teams, consultants, and project staff navigating different cost-of-living areas during routine work travel to predictably manage employee travel expenses.
• Government Contractors: Companies pursuing federal contracting opportunities and small-business set-asides frequently anchor their policies to federal rates to stay aligned with strict government policy and regulations.
• International Travel: Global companies use international benchmarks to manage currency exchange rates fluctuations and comply with local tax or labor laws.
• Remote Work and Hybrid Scenarios: Used for team offsites, retreats, client meetings, or temporary reassignments common in modern remote work scenarios.

Federal and Government Use Cases

For workers dealing with federal real property or managing real property disposal, determining the correct allowance can require specialized tools. Employees might use tools like the Census Geocoder to pinpoint exact locations for rate lookups or need to search for a government form to properly log their specific locality rates.

The Pros and Cons of Per Diem

Using a daily allowance solves real problems for both employers and employees, but it isn’t a perfect fit for every situation.

Accounting Methods for Per Diem

How per diem is recorded dictates whether it is taxed as income. To keep per diem tax-free for the employee and deductible for the business, it must follow specific IRS guidelines.

The Accountable Plan

For a per diem to be non-taxable, it must fall under an IRS “Accountable Plan.”

This requires that the allowance:

• Is paid only for bona fide business trip days.
• Requires employees to document the time, place, and business purpose of the travel.
• Requires employees to return any excess advances paid out.

If these conditions aren’t met (a Non-Accountable Plan), the IRS treats the per diem as taxable wages, increasing both the employee’s tax obligations and the employer’s payroll taxes.

The High-Low Method

Instead of looking up the exact GSA rate for every single city, the IRS allows employers to use the High-Low Method for domestic travel. The IRS designates certain expensive cities as “high-cost localities” and groups the rest of the country into a standard bucket. Employers only have to manage two reimbursement rates, making administration significantly easier.

Best Practices & Tools for Managing Per Diem

Organizations that use per diem successfully treat it as a system, not just a payout.

1. Define a Clear Business Travel Policy

A written policy should spell out exactly who is eligible, the difference between full days and travel days (which usually pay a reduced rate), what is covered, and safety requirements for travel arrangements.

2. Maintain Strong Documentation

Even though per diem reduces the need for meal receipts, companies must still require basic itineraries, trip approvals, and clear records of dates, locations, and the business purpose of the travel to satisfy IRS accountable plan rules.

3. Use Travel and Expense (T&E) Software

Modern software makes managing per diem effortless. Dedicated T&E platforms can automatically pull the correct federal rates based on the destination and travel dates. Furthermore, mobile apps allow travelers to see their daily allowance in real-time, while integrated corporate virtual credit cards help clearly separate personal spending from your standard business credit card. Using robust expense management software streamlines client reimbursements.

Specialized travel expense management software ensures all expense records for employee expenses comply with strict reimbursement policies. Depending on your operational demands, you might pay a flat fee per user per month for a highly customizable solution. These platforms offer a high level of customization and advanced features, sometimes even providing a secure single-tenant solution for large enterprises