What Does Per Diem Mean and How Does It Work?




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February 9, 2022

This article is Tax Professional approved


As a business owner, chances are, you’ve heard the term "per diem" before—but what, exactly, does “per diem” mean? And, more importantly, what does it mean for your small business?

Let’s take a dive into all things per diem—what it is, how it works, and how to make it work in your business.

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This article is written by our friends at Gusto.

What does “per diem” mean—and how does it relate to small businesses?

“Per diem” is a Latin term that translates to “per day” or “by the day.” From a business perspective, you need to know about two different per diem scenarios: per diem employees and per diem travel expenses.

Per diem employees

Traditional employees are employed on an ongoing basis and generally have a set schedule and reliable hours. For example, full-time employees may work 9 am to 6 pm every Monday through Friday, while a part-time employee may work four afternoons per week, from 1 pm to 5 pm.

Per diem employees are, as the name suggests, employed by the day. Instead of following an ongoing employment contract, per diem employees are hired on a daily, as-needed basis. Generally, companies hire per diem employees when they need a little extra support, whether that’s to fill in a gap in coverage (for example, when an employee is sick or goes on vacation), support a team that’s short-staffed (for example, if an employee quits without warning), or tackle a big project.

While per diem employees are most well-known in the healthcare and education industries (for nurses and substitute teachers, respectively), small businesses also regularly hire per diem workers in a variety of roles and capacities. This includes administrative support, creative support, warehouse support, and event support.

Per diem reimbursements for travel expenses

COVID-19 has brought business travel to a halt. But when business-related travel ramps up again, per diem reimbursements are the maximum amount of money your company will reimburse employees for travel-related expenses for each day they travel. Per diem expenses are divided into three categories: lodging expenses, mileage expenses, and meal & incidental expenses (often abbreviated as M&IE).

For example, let’s say your maximum per diem rate is $175. That means, for every day your employee travels, you’ll reimburse them a maximum of $175 to cover travel-related costs, like lodging and meals. Per diem reimbursements work like a daily allowance for your employees.

How does per diem work?

Now that you know what per diem is, let’s jump into how each per diem scenario actually works.

How per diem employees work—and how you can make them work for your small business

When you hire a per diem employee, they generally have their per diem rate set ahead of time. And, unlike traditional hourly employees, it doesn’t matter whether they work one hour, three hours, or eight hours—they’re entitled to their full per diem rate, regardless of total hours worked. It’s also important to note that, even though per diem employees have a set daily rate, as a business owner, you still need to abide by all relevant labor laws, including those around minimum wage and overtime.

For example, let’s say you’re launching a new product, and you want to hire a per diem photographer to capture product photos to use in your marketing. If the photographer’s per diem rate is $350, you need to pay them the full $350—even if the shoot wraps up a few hours earlier than you anticipated.

Or, say you need to hire a per diem worker to clear out your warehouse space. You might think the job will take eight hours—but if the job ends up taking 11 hours, you need to pay the worker their per diem rate *plus *overtime pay for the extra three hours, just like you would an hourly employee.

Depending on the situation, hiring per diem can deliver major benefits to your business, including:

  • Only pay for the work you need. When you hire a full or part-time employee, you’re committing to giving them consistent work over the long term. But sometimes, you don’t need long-term support. When you hire per diem employees, you’re only paying for the labor you need when you need it. And when you no longer need the support? You no longer have to pay the per diem employee.
  • Get the coverage you need. On any given day, you need a certain amount of support to keep your business functional and operational. But your employees can’t be there 100 percent of the time; people get sick, take vacations, or need to take personal days. Per diem employees can help you fill in those gaps—and ensure that you have the coverage you need to keep your business moving forward every day, even when your employees can’t be there.
  • Save on labor, benefits, and overhead. There are certain costs associated with hiring employees on a full or part-time basis, including overhead (for example, equipment or program licensing fees) and benefits (like health insurance). Plus, if you don’t have enough work to justify bringing someone on board for the long term, hiring a full or part-time employee can create unnecessary labor costs for your small business when things are slow. With per diem employees, you only incur labor costs when you actually need the labor. And because they’re only there for the day (and aren’t full-time employees), per diem labor won’t incur the same kind of overhead or benefits costs as a traditional employee.

Per diem travel expenses and reimbursements

As mentioned, as an employer, you need to set a maximum per diem rate for your employee’s travel reimbursements. The U.S. General Services Administration (GSA) has set federal per diem rates to use as a guideline (rates vary by location). Business owners don’t have to use those rates, but if your company’s maximum per diem rate is above the GSA’s, anything above the GSA rate is considered taxable income. And that income must be reported on your employees’ W-2. For example, if the GSA’s maximum per diem rate is $150—but you set your maximum per diem rate at $200—the $50 difference is considered taxable income for the employee.

Some companies prefer the per diem method because it’s easier for their team. Instead of trying to keep track of receipts or track down their supervisor for approval on travel-related costs, they know exactly how much they have to spend on each business trip from the get-go. As long as they stay under their per diem allowance, they don’t need to worry about submitting receipts or their expense report being denied.

Using per diem for your small business? Things to keep in mind

If you’re considering hiring per diem employees to support your small business, here are a few things to keep in mind to make sure the experience is a successful one:

  • Treat per diem employees like regular employees. Just because per diem employees are with your business on an as-needed basis doesn’t mean they should be treated differently than any other employee. Treat per diem staff with respect and hold them to the same standards as the rest of your team—because you never know when you’ll need to hire them again. For example, let’s say you’re a floral designer and you’ve hired a per diem employee to help set up a wedding. You may want to hire that same employee to help set up future weddings. If you treat the per diem worker with the respect you’d offer a regular employee, chances are, they’ll happily work with you again.
  • Pay competitive rates. One of the cardinal rules of hiring is simple: if you want to attract the best talent, you need to offer competitive compensation. That rule applies to per diem employees as well. Research local per diem rates and make sure you’re offering competitive pay so you can secure the best per diem talent in your market.
  • Give per diem employees what they need to succeed. It doesn’t matter if you only need a per diem employee for a few hours or a single day—as an employer, you need to set them up for success. When someone starts a per diem assignment, walk them through exactly what you need. Get them up to speed on any internal processes or software they need to complete their duties successfully and take time to answer any questions they may have.
  • Support long-term per diem employees. While per diem employees work on an as-needed basis, some employers prefer to hire the same per diem employees whenever they need extra support. If a per diem employee works with your company long-term, make sure you take steps to invest in their growth like you would any other employee (for example, scheduling reviews or renegotiating their rates). Otherwise, they may choose to work on an as-needed basis for someone else.

And if you decide to use a per diem travel reimbursement, here are a few things to keep in mind to ensure the process goes smoothly:

  • Have your employees submit expense reports. Employees don’t need to keep receipts for per diem travel expenses—but they do need to submit an expense report outlining how they spent their per diem rate. Make sure to collect an expense report after any employee travel and keep it on hand in case of an IRS audit.
  • Consider providing per diem travel reimbursements before travel. For some employees, paying for their travel expenses out of pocket can prove challenging financially. If you can, consider giving your employees their per diem rate before they travel. That way, they have the cash to cover their travel expenses—and don’t have to worry about covering costs they may not be able to afford.

How Bench and Gusto can help

Like Bench, Gusto is committed to simplifying small business—they make mastering your company’s HR, payroll, and benefits simple. When it comes to per diem payments, Gusto’s payroll system makes it easy to reimburse per diem travel expenses or add per diem workers to your payroll. Learn more about Gusto.

Bench’s bookkeeping services can help you report and categorize per diem expenses properly, so you don’t miss out on any relevant tax deductions. Our year-round tax advisory service makes sure you’re well prepared for tax season—and when the time comes, we can also file your taxes for you.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
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