Per diem is a Latin phrase that means "for each day." Per means "for each" and diem means "day" in Latin.
People often use the phrase per diem when talking about employee classifications and business travel expenses. You might have heard of a “per diem employee” or a “per diem meal allowance.”
Let’s take a closer look at the different types of per diem, including:
- What per diem employees are
- What per diem means when it comes to travel expenses
Per Diem Employees
Per diem employees work on an as-needed basis. While per diem means "for each day" and not "as-needed," a per diem role applies to someone who may be needed one day but not the next.
Per diem workers' schedules can vary significantly from week to week. They don't have guaranteed hours and usually aren't eligible for benefits. They're paid per diem rates for the days they work, rather than hourly wages or salaries.
How much a per diem employee works is determined by the employer’s needs and the employee’s availability.
Some people make a career out of per diem jobs and work with multiple employers at once. Others do per diem work on the side to make extra money. Businesses tend to use per diem workers when primary staff members are sick or on vacation, or when the company needs more help during a busy season.
Per diem work is typical in the construction, education (substitute teachers), and healthcare industries.
Per Diem vs. Independent Contractor
You might be thinking, “Per diem employees sound a lot like independent contractors.”
So, what’s the difference?
Although both types of workers operate on an “as-needed” basis, there are some key differences when it comes to taxes, benefits, and worker protections.
First of all, per diem employees are actual employees. As employees, your per diem workers receive W-2 income, and their taxes are automatically withheld from their paychecks. As a business owner, you pay taxes for your employees.
Your per diem employees are also entitled to minimum wage, overtime pay, and any benefits other employees on your payroll enjoy.
Alternatively, independent contractors are not employees. They receive 1099 NEC income, which is the IRS document that accounts for non-employee compensation.
Unlike your employees, you do not pay FICA taxes on the compensation that you pay out to contractors. Additionally, contractors are not entitled to the same worker benefits and protections as your employees.
Here are some other key differences to help you correctly classify your employees:
- Per diem employees usually receive training, but you usually don’t train contractors
- Your employees only work for you (save for any approved side jobs), contractors can work for multiple clients
- You (the employer) have a right to control or direct the methods your employees use to complete tasks; with contractors you only have the right to direct or choose the outcome you want
Pros and Cons of Per Diem Work
Per diem labor can be an excellent option for some, and less ideal for others. Here are some pros and cons to consider before hiring per diem workers or accepting per diem work.
Pros of Per Diem Work for Employers
For employers, per diem workers provide extra help on an as-needed basis. Companies can pay for help when they need it, without committing to long-term employment for those helping hands.
Companies typically aren't obligated to offer their per diem workers benefits, saving quite a bit of money.
Cons of Per Diem Work for Employers
While companies that hire per diem employees save on benefits, they usually pay per diem employees at higher rates than their primary staff members.
Unlike traditional employees, who are obligated to come in according to their schedules, per diem workers can reject shifts. Hence, employers lack certainty around their staffing needs with per diem workers.
Pros of Per Diem Work for Workers
The flexibility of per diem employment appeals to many professionals in the construction, healthcare, and education fields. They can work when they want and refuse shifts when they don't.
This flexibility means that per diem workers can have a better work-life balance than traditional employees. They can also choose to work for various employers, which helps them build experience and quickly advance their careers.
Per diem rates are usually higher than hourly rates for full-time employees, so the per diem lifestyle can be lucrative.
Cons of Per Diem Work for Workers
If you find comfort in stability, per diem work may not be for you. The lifestyle comes with job uncertainty and periods without work. It’s even possible that you won’t get enough work to pay your bills.
You also never know when you'll be asked to work. If you’re a planner and want to know when you'll receive your next paycheck, a per diem role may be too stressful for you.
Additionally, because per diem employees generally don't get benefits, they have to pay for health insurance out-of-pocket. They're not eligible for paid time off for illness or vacation, either. In the per diem world, a day off means a day without pay.
Per Diem and Business Travel Expenses
Per diem in the context of business travel refers to the amount of money employees can spend on daily travel expenses, like hotels and meals.
For example, your company's travel policy says that you're allowed a $64 per diem meal allowance when traveling to New York City on business. That means that you can spend up to $64 each day on meals.
Companies set per diem rates for business travel because the IRS places limits on how much a company can write off to lower their tax burdens. If an employee wants to spend more than the per diem rate on a meal or hotel, they would be reimbursed for the per diem amount and pay the rest out of pocket.
Giving employees daily allowances for meals and lodging during business travel also simplifies accounting for companies.
If an employee does not have access to a corporate credit card, they pay for business expenses out of pocket and the company reimburses them after.
There are two types of reimbursement plans: accountable and non-accountable. Each plan has its own regulations and tax implications.
When using an accountable plan, there is no legal limit on the daily amount spent. Expenses can be reimbursed as long as they are business-related and properly documented.
However, if it chooses to do so, a company can decide to set an upper threshold limit on reimbursement through an accountable plan.
Accountable Reimbursement Plans
An accountable plan is when a business reimburses employees or provides them an allowance under the following conditions:
- The expenses are business expenses
- The reimbursement must be for something an employee could deduct on their taxes
- The expenses are substantiated, usually by itemized receipts
- Employees must return any difference in total allowance and substantiated spending within a reasonable time frame
To qualify as an accountable plan, the allowance or reimbursement must meet all of the requirements above. Any amount paid to an employee on an accountable plan is not recorded as income or reported on a W-2.
Non-Accountable Reimbursement Plans
On the other hand, any reimbursement or allowance paid to an employee that does not meet the qualifications for an accountable plan is considered part of a non-accountable plan.
Non-accountable plans do not require employees to submit receipts. Additionally, if an employee spends less than their daily allowance, they can keep the remaining amount.
Amounts paid to employees under a non-accountable plan are included as wages on their W-2 form and subject to income tax withholdings.
So, are there standard per diem rates for meals, incidental expenses, and lodging while traveling for work? Yes, but they can vary by location.
Keep reading to learn about per diem rates, according to the General Services Administration (GSA).
The GSA's Per Diem Rate
The GSA is a federal agency responsible for supporting other federal agencies. Every year it sets per diem rates for federal employees.
Private companies often use the GSA's rates as benchmarks. Their rates match the maximum amount the IRS lets businesses claim in expenses for travel-related purchases.
Companies can reimburse employees for more than the GSA's per diem rate. However, employees will owe taxes on the excess amount refunded.
For the 2021 fiscal year, the GSA's general per diem rate is $55 for meals and $96 for hotels. However, the GSA sets specific rates for various destinations. Per diem rates are higher in places where the cost of living is more expensive than the areas used to set the general per diem rate.
For example, the GSA's per diem rates for business travel to Los Angeles are $181 for lodging and $66 for meals and incidental expenses (MI&E).
The MI&E breaks down as such:
- $16 for breakfast
- $17 for lunch
- $28 for dinner
- $5 for incidental expenses
There’s an additional $49.50 for MI&E on the first and last day of travel. The GSA calculates this amount as 75% of the total per diem rate for non-travel days.
You can search per diem rates by destination on the GSA's website.
Final Thoughts: What Does Per Diem Mean?
When talking about per diem work, the phrase means employment on an as-needed basis that is typically paid daily, rather than per shift, hour, or annually.
In the context of business travel, per diem refers to allowances for meals, hotels, and incidental expenses that employers reimburse for employees when they travel for work.
Hourly can help you keep track of your per diem employees, ensure you pay them, and help you with legal compliance. Start your 14-day free trial of Hourly today.