How are Per Diem Rates Used?
Per Diem rates are used to estimate how much business travel should reasonably cost. This estimate is necessary so businesses can reimburse employees for business travel. The IRS also uses Per Diem to determine how much is reasonable when deducting business travel expenses from your taxable wages. For federal employees and the IRS, Per Diem may be used if you meet 3 conditions:
- You travel away from your official duty station;
- You incur expenses while traveling; and
- You are traveling for 12 hours or more.
Why not track the actual expenses and avoid Per Diem altogether? There are three reasons why Per Diem rates are used: simplicity, fairness, and cost savings.
Per Diem is an estimate of actual costs. Private companies are free to reimburse their employees using any method they choose, including tracking actual expenses. The federal government reimburses employees using Per Diem and the IRS allows taxpayers to use Per Diem or actual expenses when deducting travel expenses from their taxable wages. Under certain, limited conditions, federal agencies may authorize actual cost reimbursement for federal employees. These conditions are outlined in FTR §301-11.300 to §301-11.306
More: IRS Per Diem Rates
Using the GSA Per Diem rate greatly simplifies the accounting and reporting process for both the traveler and the IRS or other business that needs to verify expenses. Checking individual receipts for each and every meal is time consuming, tedious, and unnecessary.
The IRS’s goal is to allow the deduction of only “ordinary and necessary” business travel expenses. This term is subjective and difficult to enforce constantly. To solve this problem, Per Diem is used to quantify what is considered an acceptable expense when traveling to different regions across the country and around the world. A standardized Per Diem rate prevents someone from buying lavish expenses on the government’s dime while, at the same time, allowing employees to purchase more expensive items if the choose. Employees may spend more than Per Diem. The excess simply comes out of the employee’s pocket.
A fixed reimbursement amount passes cost savings along to the traveling. This encourages the traveler to save money whenever possible. If every expense is paid by the employer then the employee has no incentive look for the best deal. If a traveler is diligent about their spending, he or she may even make money from Per Diem.