The concept of per diem is critical for entrepreneurs to know and understand when they start, operate and grow their business.
What is a daily allowance?
Per diem is a Latin phrase that translates as “per day”. In the modern sense, per diem refers to per diem, a standard rate, or a fixed amount of money that an employer provides to a part-time or full-time employee or contractor.
This covers food, lodging and other expenses during their absence, such as mileage reimbursement.
The per diem rate you set can help your business understand and determine travel reimbursement and compensation rates.
For businesses, you can understand per diem rates with a simple equation:
accommodation + food + contingencies = daily allowance
But how to determine each factor of this speed? What are the benefits and challenges of per diem payments? And where should you implement this strategy in your business?
How do daily allowances work?
People often travel for work, incur various expenses such as food, transportation and accommodation.
In this case, budgeting and modest spending can be difficult to assess. You want flexibility in this process, but you also want to be tax efficient. So how can you organize it?
What are the daily travel allowances?
Travel rates are daily allowances paid to employees for business purposes. By using travel allowances, employers can simplify the process of reimbursement of travel expenses for their employees.
Instead of requiring employees to provide individual receipts for food, lodging, and other expenses, an employer may provide a flat per diem allowance based on the employee’s destination and length of travel.
This travel policy reduces the administrative burden associated with processing individual expense reports and ensures that employees are adequately reimbursed for their travel expenses while traveling.
What are the criteria for using per diems?
The standard per diem includes accommodation, meals and incidental expenses. However, every situation is different and you will rarely find the same per diem for every job.
Fortunately, there are several standard criteria used to calculate per diems:
- The per diem rate varies depending on the destination of the trip, making it important in calculating the total amount of benefits.
- The duration of the trip also affects the daily allowance: the longer the stay, the higher the allowance.
- This rate should also take into account the purpose of the trip, just a monetary calculation of the usefulness of the trip.
- Finally, individual employer policies are standard for per diem travel.
Any owner of their company should carefully study the standard rates, even if they compete with them, to get a good idea of their individual per diem policy.
How are per diem rates set?
Per diem rates are usually set Internal Revenue Service (IRS) or General Services Administration (GSA).
The IRS per diem rates determine the maximum tax-free amount an employee can claim for travel expenses.
GSA per diem rates determine the maximum amount of reimbursement federal government employees can claim for travel expenses. These rates are based on the average cost of accommodation, meals and incidentals at a particular location.
The United States General Services Administration (GSA) provides per diem rates for domestic travel in the US and within the US. On the contrary, the State Department provides per diem rates for international business trips. You can always check their websites to find out the per diem rates for the place you are going to.
It is important to note that both rates are always subject to change and change annually depending on the results of the polls.
Connected:A Guide for Entrepreneurs to Reduce Travel Costs
What is an employee’s daily allowance?
Daily allowance workers are hired on an as-needed basis and are paid daily or hourly rates instead of salaries. This is commonly described as seasonal staffing.
These employees may work part-time or full-time, but are not considered permanent employees.
They are usually hired to meet short-term staffing needs, such as replacing a permanent employee on leave or vacation. For example, substitute teachers and mobile nurses are often paid per diems.
Per diem workers usually receive a higher hourly or daily rate than regular employees to make up for the lack of benefits such as health insurance, retirement benefits, or paid holidays.
Depending on their job responsibilities and performance, they may receive additional compensation, such as overtime pay or bonuses.
Employees receiving per diems are also responsible for their own taxes and their wages are not subject to payroll deductions.
What are the benefits of hiring daily employees?
While having a fixed allowance for employees can seem like a risky proposition, especially when it’s easy to get overcompensated, you can use this tool after proper research.
Optimization and security of the accounting process
Because of the flat benefit, there is no need to keep track of money spent or what it was spent on. All this is eliminated by the presence of a set amount of money that the employee must spend.
Per diems can even help with budgeting and financial planning by providing a predictable and consistent way to manage travel expenses.
Employers can set the per diem rate according to the location and duration of the trip. This can help them estimate the cost of business travel and include it in their overall budget process.
Less Documents
Per diem also simplifies the process of reimbursement to employees and reduces the amount of paperwork and documentation required by the accounting department.
It also reduces the risk of errors and fraud in the reimbursement process, as employees are less likely to submit false or inflated expense reports.
Connected: How per diem payments can simplify your accounting and taxes
Per diems are not taxed as wages
The good news for the employee is that the remuneration is tax-free if the per diem rate is within the IRS limit.
While the federal government is setting limits, this is good news for both parties. Employees do not need to report per diems as income on their tax returns, and they do not have to pay taxes on their payments.
Employees are not the only ones who benefit from the tax-free side. Per diems are tax deductible as business expenses, which can reduce their taxable income and save money in taxes.
What are the disadvantages of hiring daily workers?
Despite the benefits of hiring daily workers, there are some potential downsides to consider.
Employees receiving per diems may refuse to shift
Employees on per diems may be less interested in the company or its goals than full-time employees. They may be less inclined to do their best or fulfill their job responsibilities.
It can also create tension by having low-effort-per-day employees work with employees who are paid by the hour and with tips.
Connected: Selection and hiring of highly qualified employees
Per diem rates are often higher than standard wages
While per diem employees may receive a higher hourly or daily rate than full-time employees, the overall cost of hiring per diem employees may be higher due to additional costs such as recruitment, training, and supervision.
What is the difference between per diem and per diem rates?
Per diem workers are temporary or part-time workers hired as needed. Workers do not receive per diem wages simply because they are paid a one-time per diem rate.
In contrast, the per diem rate is the rate that employees receive for certain trips or activities.
How can you implement per diems in your business?
Daily allowances always work differently in every situation. Create a per diem policy that sets out per diem rules and guidelines that are specific to your company.
Test what works and what doesn’t. This policy should include maximum per diem rates, the types of expenses covered by the per diem and the conditions under which the per diem will be paid.
Once a per diem policy is in place, you must communicate it to all levels of staff, especially employees who travel on business. You should talk to management and discuss the per diem idea with your company administration.
You must also explain the policy in detail, including how per diem rates are calculated and what types of expenses are covered. You should also train employees on how to use the per diem system. This training should cover the calculation of per diem rates, the submission of per diem expenses and the use of the online system.
Connected: How investing in employee training benefits your business
Once the per diem is introduced, it is vital to monitor the system to make sure it is working effectively. This will help you identify any issues or areas for improvement. Don’t shy away from growth and don’t be afraid of failure, because failure is where you learn from.
Check other articles of the entrepreneur for more information on per diems, employees and other financial topics.