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Financial literacy
9 min

What Is Per Diem? A Small Business Guide to Rates, Policies and Payments

Learn what per diem is, how rates and taxes work, and how to pay traveling employees with less paperwork.

Published at | Updated:

Key takeaways

  • Per diem is a fixed daily allowance that covers travel costs like lodging, meals, and incidentals without itemized receipts.
  • Many businesses base per diem on federal government rates that change by destination.
  • Per diem usually stays tax-free when it matches federal rates and employees file a simple expense report.
  • A clear policy and a modern payment tool make per diem easy to run.

What is per diem?

Per diem comes from Latin and means by the day. In business, it’s a fixed daily allowance you give employees for travel costs.

Instead of collecting every receipt, you pay a set amount for each day someone is on the road. It covers the usual costs of being away from home, like a hotel room and meals.

Per diem keeps travel simple for everyone. Your team knows their daily budget upfront, and you spend less time sorting through paperwork when they get back. For more terms like this, see our small business dictionary.

You may also hear per diem used to describe a type of job. A per diem worker is someone paid by the day, often on an as-needed basis. Think of a nurse or a substitute teacher. That’s a different meaning from the travel allowance this guide covers.

To qualify for tax-friendly treatment, the trip usually has to be business travel away from your tax home. The Internal Revenue Service (IRS) sets the rules here. Its business travel rules explain when a trip counts.

What does per diem cover?

Per diem is built to cover the everyday costs of a work trip. It usually breaks down into three parts.

  • Lodging: the cost of a hotel or other place to stay overnight.
  • Meals: breakfast, lunch, and dinner while traveling.
  • Incidentals: small extras like tips for hotel staff or baggage handlers.

Meals and incidental expenses are often grouped together as one figure called M&IE. You’ll see this term on federal rate tables, so it helps to know it.

It’s just as important to know what per diem leaves out. It doesn’t cover transportation costs like flights, train tickets, rental cars, or gas.

Those travel costs are handled separately, usually as their own reimbursement. Per diem is meant for daily living expenses on the trip, not for getting to and from the destination.

How does per diem work?

The day-to-day flow is refreshingly simple. Here’s how a typical per diem setup runs from start to finish.

  1. Set the daily allowance. You pick a per diem amount that fits the trip and the destination.
  2. Pay the employee. You can pay the allowance before the trip as an advance or after the trip as a reimbursement.
  3. Collect a simple expense report. The employee confirms the dates, location, and business purpose of the travel.

Here’s a quick example. Say an employee travels for three days and your rate is $80 a day for meals and incidentals. You’d provide $240 to cover those days.

Because per diem is a flat rate, employees don’t need to save every receipt. They also usually keep any part of the allowance they don’t spend. That’s a nice perk of the flat-rate approach.

For the details on travel expenses and recordkeeping, the IRS Publication 463 is a helpful reference. It also covers the standard meal allowance in plain terms.

How are per diem rates determined?

Most businesses don’t invent per diem rates from scratch. They lean on figures set by the federal government, which take the guesswork out of the process.

The General Services Administration (GSA) sets per diem rates for destinations within the continental United States, known as CONUS. These rates change by location, since a hotel in a big city costs more than one in a small town.

For travel outside the lower 48 states, other agencies set the rates. The Department of Defense covers Alaska, Hawaii, and U.S. territories, while the State Department sets rates for foreign countries. You can find each on the GSA per diem rates page.

The IRS also publishes special per diem rates each year, and they take effect on October 1. You can use these instead of looking up each city. See the IRS special per diem rates for the current figures.

One helpful rule to remember involves the first and last days of a trip. On travel days, you pay only 75% of the meals and incidentals rate, per IRS Publication 463. The employee isn’t away for the full day.

Standard per diem rate

The standard rate is a single flat figure that applies to most locations in the country. It’s the simplest option to work with.

Any city that doesn’t have its own specific GSA rate falls under this standard amount. For a business that travels to smaller towns, one rate often covers most trips, which keeps your admin light.

High-low method

The high-low method is a two-tier shortcut for businesses that want fewer rates to track. Instead of looking up hundreds of cities, you use just two figures.

  • A higher rate for a set list of high-cost cities and areas.

  • A lower rate for every other location in the continental U.S.

This approach is popular because it’s easy to apply. You check whether a destination is on the high-cost list, then pick one of the two rates. The IRS updates both amounts each year.

Is per diem taxable?

This is where many owners get nervous, but the rules are clearer than they seem. In most cases, per diem is tax-free for your employees.

Per diem stays tax-free when two things are true.

  • The amount is at or below the federal rate for that location.

  • The employee files a simple expense report within 60 days of the trip.

When you meet both conditions, the payment isn’t treated as wages. That means it isn’t reported as taxable income, and it doesn’t show up on the employee’s paycheck as earnings.

Per diem becomes taxable in a few situations. Knowing them upfront helps you avoid a surprise at tax time.

  • You pay more than the federal rate. The extra amount above the rate counts as taxable wages.

  • The employee doesn’t file a timely expense report. Without the report, the whole payment can become taxable.

  • You pay a flat amount with no connection to actual travel days or a business purpose.

When per diem is taxable, the excess is reported as wages on the employee’s Form W-2. That means it’s treated like any other pay for tax purposes.

For answers straight from the source, the IRS per diem FAQ walks through substantiation and tax treatment. It’s worth a read before you finalize your approach. If you want the bigger picture, our tax season guide can help.

How to set a per diem policy for your business

A written per diem policy takes the confusion out of travel spending. It tells your team what to expect and keeps your records clean for tax time. Here’s a simple framework to follow.

Choose your per diem rates

Start by deciding which rates you’ll use. The easiest path is to adopt the federal GSA figures for each destination, since they’re already set and widely accepted.

If you’d rather keep things even simpler, use the high-low method or the standard rate. Just remember that paying above the federal rate can create taxable income for your employees.

Require simple expense reports

Ask employees to submit a short expense report after each trip. You don’t need a pile of receipts, just a few key details.

  • The dates and location of the travel.

  • The business purpose of the trip.

  • The number of days the per diem covered.

Collecting these within 60 days keeps the payment tax-free and your books audit-ready. A quick form or a shared template usually does the job.

Decide how to pay employees

Finally, choose when and how to pay the allowance. You can pay before the trip as an advance, so employees aren’t out of pocket. You can also pay after the trip as a reimbursement.

Whichever you pick, aim for a method that’s fast and easy to track. Paying digitally beats writing checks, and it gives you a clear record of every payment. For related pay questions, see our take on underpaying key employees.

Simplify per diem payments with Melio

Paying employees back for travel shouldn’t eat up your week. Between setting rates, collecting reports, and getting money out the door, per diem admin adds up fast.

Melio lets you pay employees and vendors digitally, so you keep tight control of cash flow while cutting the paperwork. You choose when payments go out, which helps you hold onto your money longer without paying anyone late.

Ready to make travel payments simpler? Sign up for Melio and pay your team and vendors from one place.

FAQs on per diem

Here are quick answers to the questions small business owners ask most about per diem.

What does per diem mean for a job?

When per diem describes a job, it means the person is paid by the day rather than a fixed salary. These roles are often as-needed, like a per diem nurse or a substitute teacher who works when called in.

What is an example of a per diem?

Say an employee travels to a client for two days and your rate is $75 a day. You’d give them $150 to cover meals and lodging, and they wouldn’t need to save receipts.

Do employees have to return unused per diem?

Usually not. Because per diem is a flat daily allowance, employees typically keep whatever they don’t spend. That holds as long as the amount stays at or below the federal rate.

What is the difference between per diem and reimbursement?

Per diem is a fixed daily amount paid without itemized receipts. A reimbursement pays employees back for exact costs they’ve documented with receipts. Per diem is simpler to run, while reimbursement tracks actual spending to the dollar.

This content is for informational purposes only and should not be considered financial, legal, tax, or accounting advice. Melio does not provide professional advisory services. Always consult a qualified professional before making financial or business decisions.

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