Business travel is pretty standard among most companies. Offsite meetings with clients, industry conferences, and educational seminars can all require travel to different places.
Determining how to properly reimburse employees and take advantage of per diem tax exemptions is a delicate balance. If you misunderstand the tax implications, you could cost your business money.
In this article, we'll straighten the record on per diem expenses and how to track them properly. You'll learn how to establish a travel policy that benefits your employees and business.
What Is Per Diem?
So, how does per diem work, and what is it?
Per diem is a Latin phrase that means "by the day." In the business sense, it refers to the daily costs incurred by an employee on a company-sponsored trip. Per diem expenses include meals, lodging, and incidental charges, like waitstaff tips.
Offering your employees per diem is good practice. When you provide daily allowances, your team doesn't need to use their own money for business travel. Instead, they'll rely on the funds you give them. You can provide them cash beforehand or reimburse them for actual expenses once they submit their expense report.
Employers who provide per diem reimbursement over established rates must report the additional amount as taxable income. Both employees and employers pay income tax on the excess amount. That's why most companies limit travel expenses to established daily rates.
How Does Per Diem Pertain To Startups?
Startups can benefit from incorporating per diem into their travel policy. Setting predefined limits for employee expenses allows you to control travel costs. You won't need to worry about team members spending more than you'd like on meals and hotel rooms. Instead, they'll stick within your set budget.
A per diem policy makes it easier to streamline your financial management processes. Your employees will follow specific steps for business travel. There will be fewer questions you need to answer.
Another benefit of using per diem is the tax advantage. Businesses can deduct 100% of lodging costs and 50% of meal expenditures if they are less than the set per diem rates. Meal expenditures made between December 31, 2020, and January 1, 2023, may qualify for a 100% deduction.
To remain compliant with IRS guidelines, employees must submit expense reports detailing their costs within 60 days of their trip. Expense reports should include copies of receipts or other documentary evidence.
Types Of Per Diem Rates
There are four main types of per diem rates. They include federal, state, foreign, and industry per diem rates. You'll base the per diem rate you use on the location the employee travels to.
Federal Per Diem Rates
The General Services Administration (GSA) sets per diem rates annually for business travel within the continental U.S. All government employers use the rates when determining how much federal employees can claim for lodging, meals, and incidentals. Many private employers also rely on the GSA's rate schedule. The GSA considers each location's cost of living when setting rates.
The per diem rates set by the Department of Defense (DoD) apply for business travel to Alaska, Hawaii, or U.S. territories.
State Per Diem Rates
States don't typically set their own per diem rates. Instead, the GSA sets per diem rates for travel within the contiguous United States. State per diem rates can differ depending on the city. For instance, you might find a per diem rate for the state of California and different amounts for the city of Los Angeles.
Foreign Per Diem Rates
Employers who send their team members abroad follow the rates set by the Department of State. Select the country from the dropdown menu to determine how much your employees can claim. Some countries have special rates for different cities or regions.
Industry Per Diem Rates
The transportation industry has its own per diem meal rates, which the IRS sets. If your company is responsible for transporting goods or people via airplane, bus, truck, ship, or similar means, employees are eligible for $69 in daily meals. If they travel outside the U.S., the rate increases to $74 daily.
Per Diem Allowances And Expenses
Determining how you'll account for per diem in your accounting books is an important decision. There are two options: including them as employee wages or as a company expense.
Companies that include per diem as employee wages pass the tax burden onto their team members. The organization can claim a deduction for the entire amount of the expense. This method is common among businesses that don't require employees to submit expense reports or cover costs in excess of federal per diem rates.
If your organization complies with federal per diem rates, you'll likely claim them as a deductible expense on your taxes. You won't include them in employee wages. Your team will need to submit an expense report for all per diem costs that include the business purpose of their trip, the date of travel, and the location they went to.
Compliance And Best Practices For Per Diem
Compliance with the IRS rules concerning per diem is critical. If you don't adhere to IRS guidelines, you'll miss out on deductions that can reduce your annual tax expense.
1. Clarify Your Travel Policy
Make sure you establish a clear travel policy for employees. Your policy should include specific per diem rates for locations they go to. For example, sales representatives often meet with important clients. You can include your client's locations in your travel policy, along with daily per diem rates.
2. Require Employees to Identify Business Travel Purposes
The IRS requires employers to show business purposes for employee travel. Attending an industry conference will meet their standard. However, paying for an employee's family vacation to Hawaii probably won't. Asking employees to describe their reason for travel is a good idea. You can also ask managers to provide their approval for the trip.
3. Consider Corporate Credit Cards
Some companies provide their employees with corporate credit cards to use for travel. Whenever they make a purchase on their trip, they use their card. Corporate credit cards make it easier to track expenses. You'll be able to review credit card statements to determine where your employees used their cards for per diem costs.
If you decide to use corporate credit cards, your employees will still need to document their travel. Expense reports that include the trip's business purpose, date, time, and amount are helpful. You should also ask them to submit receipts for their expenses, which provides greater documentation.
4. Set Spending Limits for Employee Travel
It's a good idea to set spending limits for employee travel. That way, everyone understands what you are willing to pay for employee travel. If you have employees who travel regularly, consider meeting with them to discuss your reimbursement policies. Team members who understand your rules won't incur unexpected costs you don't want to pay for.
5. Audit Employee Business Travel Expenses
To avoid mistakes that cost your business, frequently review and audit your employees' business travel expenses. If travel in your company is typical, set time aside each quarter to assess per diem payments. Doing so helps you keep your organization compliant with IRS per diem rules.
Modern Solutions For Per Diem Management
In the past, per diem management could get pretty complicated. Paper receipts, manager approvals, and manual tracking were necessary. These days, there are accounting tools that automate the employee reimbursement process. Software can also store employee receipts, saving time and energy when doing business taxes.
Professional per diem software can ease the burden of travel expense management. Explore software solutions that can simplify the per diem process for you.
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