The ultimate per diem guide: Everything employers and employees need to know

Per diem is a daily allowance that employers provide to employees to cover business-related travel expenses. Rather than requiring employees to track every meal receipt and incidental expense, the per diem approach offers a simplified process to travel expense management by providing a fixed daily rate for specific categories of expenses.

In the context of business travel, per diem serves as a predetermined reimbursement amount that covers essential travel costs like meals, lodging, and incidental expenses during work-related trips. This eliminates the need for detailed expense tracking while ensuring employees are compensated costs incurred during business travel.

It's worth noting that "per diem employee" can also refer to temporary or on-call workers paid on a daily basis, but this guide focuses exclusively on per diem as it relates to business travel expense management and the policies that govern these payments.

What per diem rights do employees have?

To create compliant policies, businesses need to understand employee per diem rights. While federal law doesn't mandate private employers to provide per diem payments, once a company does establish a per diem policy, several important employee rights come into play.

Employees have the right to receive per diem payments according to the company's established policy without discrimination or favoritism. If your organization offers per diem to some employees for business travel, the policy must be applied consistently across similar roles and situations. This means you can't arbitrarily decide to provide per diem to senior executives while denying it to other employees.

Workers also have the right to clear, written information about per diem policies, including eligible expenses, daily rates, documentation requirements, and restrictions. Employees shouldn't have to guess about per diem procedures or discover policy details after they've already paid for travel.

When per diem funds go unused, employee rights depend on the policy the company has established. Some businesses require employees to return unused funds, while others allow workers to keep the difference. Regardless of how your policy is structured, employees have the right to know upfront which approach your organization follows.

For any business with a per diem policy, employees have the right to receive per diem reimbursements in a timely manner that follow your company's established procedures. State laws may provide additional protections for employee per diem rights, particularly around timely payment requirements and expense reimbursement obligations.

The IRS has established rules around per diem payments that help determine how employers need to structure their travel policies and handle tax implications. The key is following what the IRS calls an accountable plan, which has three elements including business purpose, adequate accounting, and return of excess amounts. Following this plan is part of ensuring reimbursements are non-taxable for employees and deductible for employers.

First, the business purpose requirement means per diem payments must relate to legitimate business travel away from the employee's workplace. The IRS defines "away from home" as travel that requires the employee to be away from their home longer than an ordinary day's work and necessitates sleep or rest.

Second, adequate accounting requires employees to provide reasonable documentation of the time, place, and business purpose of their travel within a reasonable timeframe, which is typically 60 days. While per diem simplifies expense tracking, you still need to maintain records proving the business nature of the travel. Third, employees must return any excess per diem amounts within a reasonable period, usually within 120 days after the expense was incurred. This requirement varies depending on how your per diem policy is structured.

Are per diem payments taxable income?

Whether or not per diem payments are taxable depends on if your organization follows IRS accountable plan rules and stays within federal per diem rate limits. Under an accountable plan, per diem payments up to the federal per diem rate for the travel location are excluded from the employee's gross income.

This means employees don't pay income tax on these amounts, and employers don't pay payroll taxes like Social Security, Medicare, or unemployment taxes on per diem payments. The tax savings can be significant for organizations with frequent travelers.

Under IRS guidelines, per diem payments can be treated as non-taxable reimbursements rather than additional compensation, but only once they meet any of the following requirements:

• An employee files an expense report that includes the date, time, place, amount, and business purpose of the expense
• The employee is given a flat amount and no expense report is required
• The per diem amount doesn’t exceed the federal per diem rate

The timing of taxes also matters for compliance reasons. Per diem payments that exceed federal rates must be included in wages for the payroll period when the excess payment is made, not when the travel occurs.

Per diem payments under non-accountable plans are always taxable wages, regardless of the amount. This happens when employees aren't required to provide the business purpose of their travel, don't need to return excess amounts, or when the plan doesn't meet other accountable plan requirements.

Some employers choose to "gross up" per diem payments to cover the additional tax burden when amounts exceed federal rates. While this approach ensures employees receive the intended benefit, it increases the total cost and creates additional payroll tax obligations for the employer.

What is the federal per diem rate?

The federal per diem rate serves as a benchmark for most business travel policies and is the maximum amount federal employees can receive for travel expenses without additional documentation. The General Services Administration (GSA) sets these rates annually based on market research and cost-of-living analysis.

Federal per diem rates consist of two components, including meals and incidental expenses (M&IE) and lodging. The M&IE rate covers breakfast, lunch, dinner, and incidental expenses, while the lodging rate covers overnight accommodations. These rates are separate because they can vary based on local costs.

For fiscal year 2025, the standard CONUS (Continental United States) rate is $68 per day for M&IE and $110 per night for lodging, according to the U.S. GSA. However, high-cost areas receive significantly higher rates. For instance, San Francisco's M&IE rate is nearly $100 per day, while lodging rates in cities like New York often surpass $300 per night.

How to navigate state laws for employee per diem rights

State laws can complicate per diem management, as individual states may have specific requirements for expense reimbursements, payment timing, and employee protections. While federal tax law governs the tax treatment of per diem payments, state employment laws often dictate the procedural requirements for reimbursement policies.

California, for example, requires employers to reimburse employees for all necessary business expenses, which can include travel costs covered by per diem. The state also mandates that reimbursements be made within a reasonable timeframe, typically within 30 days of expense submission. In addition to California, other states including Illinois and Massachusetts, require employers to pay reimbursements for business expenses.

State laws can also vary in documentation requirements, including how and when employees need to be notified of any policy changes, as well as how unused funds should be treated. For employers with employees in multiple states, navigating these various laws and regulations can be complicated but essential for compliance. Be sure to familiarize yourself with local per diem employee rights before creating a per diem policy.

Federal law doesn't require private employers to provide per diem payments to employees for business travel. Unlike overtime pay or minimum wage requirements, per diem is generally considered a voluntary benefit that companies can choose to offer. However, once you establish a per diem policy, you're legally obligated to follow it consistently and fairly.

Nonetheless, these requirements can change state-by-state. Some states require employers to reimburse employees for necessary business expenses, which can include travel costs that per diem typically covers. In these jurisdictions, while you may not have to use a per diem payment policy, you must provide some form of reasonable reimbursement for business travel expenses. Per diem may also be required for certain industries and employment contracts, including under Union agreements or if your business is a government contractor working on a federal project.

Company policy and state wage laws typically determine the timing of per diem payments, once you've committed to providing them. Most organizations provide per diem either as an advance before travel begins or as reimbursement after travel is completed and documented.

Understanding the different ways to structure per diem payments helps you choose the approach that best fits the needs of your business and employees. Each method offers advantages and challenges that impact compliance and employee satisfaction.

Fixed allowance

Fixed allowance per diem gives employees a predetermined daily amount that covers all eligible travel expenses, regardless of the costs incurred. This approach is the simplest for both administrators and travelers, as employees receive the same amount for each travel day without needing to track individual expenses.

Under a fixed allowance per diem, employees typically receive the full per diem amount whether they spend it all or not. This method can work well for businesses with predictable travel patterns or when employees frequently visit the same locations. It's also best for companies that want to minimize expense report processing time and reduce documentation needs.

However, fixed allowances can create challenges in markets with highly variable costs or when travel requirements change unexpectedly. Employees may struggle to cover necessary expenses in high-cost locations if the fixed rate is too low, while generous fixed rates might allow for unnecessary spending in lower-cost areas.

Partial allowance

​​Partial allowance per diem covers specific travel expenses while requiring employees to document and submit receipts for others. This hybrid approach often gives employees fixed daily amounts for meals and incidental expenses while requiring actual expense reporting for lodging, transportation, or other costs. This approach can balance efficiency with cost control, allowing for quick approval of small expenses while maintaining oversight of larger costs.

The challenge with partial allowance lies in clearly communicating which expenses are covered by fixed amounts versus actual expense reimbursement. Employees need detailed guidance about documentation requirements and expense categories to ensure policy and tax compliance.

Out-of-pocket

Out-of-pocket per diem requires employees to personally pay for all travel expenses and then be reimbursed up to the approved per diem limits. Under this process, employees submit expense reports after travel with receipts and documentation. This gives employers control over costs and places the initial financial burden on employees during travel. The per diem limits serve as maximum reimbursement amounts rather than automatic payments, allowing employers to see actual travel spending patterns.

However, out-of-pocket per diem can create cash flow challenges for employees, particularly those with limited personal financial resources or frequent travel schedules. The administrative burden is also higher for both employees and accounting teams, as detailed expense reports and receipt management are essential for reimbursement.

Corporate card

Corporate card per diem combines company-provided credit cards with per diem spending limits to streamline the payment and expense management processes. Employees use corporate credit cards for travel expenses within established per diem limits, eliminating the need for personal expense advances and complex reimbursement procedures.

Modern corporate card programs can embed expense policies into each card, allowing businesses to enforce per diem limits in real-time. For instance, transactions that exceed daily allowances can be automatically declined or unusual spending patterns can be flagged for review. This approach gives businesses complete spending control while simplifying the administrative tasks of expense report processing.

Corporate card programs provide detailed transaction data for expense management and tax compliance while maintaining employee convenience. They can automatically capture data, reducing documentation requirements and speeding up expense report reconciliation processes.

Integration with expense management software allows corporate card per diem programs to automatically categorize transactions, generate receipts, and sync with real-time budgets. These automations significantly reduce the manual effort required for per diem management while improving compliance and reporting accuracy.

Business travel expenses vary significantly from trip to trip, and per diem eliminates that uncertainty by defining exactly what's covered and establishing clear spending parameters for your organization. Most per diem policies focus on essential travel costs, or the expenses that accumulate when employees are away from home conducting business. Understanding what's typically covered helps you build a policy that works effectively for your team while maintaining compliance and cost control.

Lodging

Lodging per diem covers hotels, extended-stay accommodations, and other overnight housing during business travel, including base room rates, applicable taxes, and standard fees like resort fees and occupancy taxes. Effective company policies set rates that differ based on the locality, as a hotel room in Manhattan costs significantly more than one in a smaller city.

Meals

Per diem for meals covers breakfast, lunch, and dinner expenses during business travel, and many companies follow federal guidelines that adjust rates by location. Many policies include gratuities and service charges, though you'll need to establish clear guidelines about alcohol purchases and tip percentages.

Incidental expenses

Incidental expenses include small costs that accumulate during business travel, such as tips for hotel staff and dry cleaning. The federal per diem standards typically allocates about $5 per day for incidentals. These expenses are individually small and often impractical to track with receipts, making them well-suited for fixed per diem allowances.

Transportation

Transportation reimbursement varies among organizations. Some companies include local transportation costs, including taxis, rideshares, and public transit, within daily per diem allowances, while others manage these as separate reimbursable expenses. Ground transportation between airports, hotels, and business locations typically qualifies for per diem coverage, though rental cars often require separate policies due to insurance considerations and higher costs.

Personal vehicle mileage usually falls under mileage reimbursement policies and the IRS standard mileage reimbursement rather than per diem structures. A mileage reimbursement calculator can streamline the process of covering business travel in a personal vehicle.

Airfare

Airfare can be challenging for per diem policies since flight costs fluctuate based on booking timing, routes, and travel class. Most companies manage airfare separately from per diem because fixed daily rates can't accommodate the wide cost variations in air travel. If you're considering including airfare in per diem calculations, you'll need to carefully balance adequate coverage with budget control to avoid either employee frustration or cost overruns.

Parking fees

Parking per diem covers business-related parking expenses, such as hotel parking, rental car parking at business locations, and airport parking for personal vehicles. Many companies create maximum daily parking allowances or require employees to choose cost-effective parking options when possible.

While per diem covers essential travel expenses, setting category restrictions prevents confusion and keeps budgets predictable. Ensuring both employers and employees understand what’s included allows everyone to confidently navigate per diem policies.

Personal expenses are one of the most significant categories of expenses that are typically excluded from per diem reimbursement. Entertainment, shopping, spa services, and leisure activities remain the employee's responsibility, even during business travel. Per diem also doesn't cover expenses for family members or friends who might accompany the traveler.

Communication costs above basic business needs often fall outside per diem coverage. While reasonable phone and internet expenses might be included, companies often don't cover costs that fall outside of those expenses. While business equipment and supplies can be covered by a business, they typically fall outside of per diem reimbursement policies.

Alcohol creates policy variations among organizations. Many companies exclude alcohol entirely, while others allow it within meal allowances with specific limits. Entertainment involving alcohol can require separate documentation and approval.

It’s important to create an effective per diem policy to not violate employee per diem rights. Creating an effective policy requires paying attention to legal requirements, employee needs, and administrative feasibility. Your policy becomes a binding commitment once it’s established, so it's crucial to get the details right.

Establish clear eligibility and application procedures

Clear eligibility eliminates confusion and ensures consistent application across your organization. Start by defining exactly who and what qualifies for per diem. Specify the minimum distance from home office or duration of travel to trigger per diem eligibility, and establish whether part-time employees, contractors, or temporary workers receive the same benefits.

Application procedures should also be straightforward and well-documented. Determine whether employees need pre-approval for per diem or if it's automatically applied to approved travel. Establish deadlines for submitting per diem requests and specify what information must be provided, such as travel dates, destinations, business purpose, and estimated expenses.

Determine compliant rates

Setting compliant per diem rates requires balancing federal guidelines, local cost variations, and your organization's budget constraints. Start with federal per diem rates as your baseline, as these provide defensible amounts that satisfy IRS requirements for non-taxable treatment. Research the federal rates for cities where your employees travel, and consider whether you'll match these rates or adjust them.

Different locations can require different rates, and rate tiers can help account for these varying costs. Some companies set rates at 75% to 125% of federal amounts based on their cost management goals and employee support. Regardless of the rates your business establishes, be sure to clearly share how the rates are set, and specify how often you'll review and update rates.

Design expense reporting workflows

Effective reporting workflows reduce administrative burden while maintaining necessary documentation for compliance and tax purposes. Determine the documentation your policy requires, which can range from minimal reporting to detailed expense tracking.

For fixed per diem policies, design simple reporting that captures travel dates, destinations, and business purposes without requiring individual expense receipts. Expense management software can allow businesses to implement per diem amounts based on the employee and their location, reducing manual calculations and potential errors. Establish clear timelines for expense report submission and reimbursement processing to ensure employees receive payments promptly.

Reporting workflows can be streamlined with modern expense management tools, allowing expenses to be routed to the right approvers based on amount, category, or other parameters. These can reduce any delays in the reimbursement process and ensure expenses receive the right oversight.

Communicate changes to per diem policies

Clear communication ensures employees understand their rights and responsibilities under your policy. Develop policy documentation that explains eligibility, rate structures, application procedures, and reporting requirements in plain language. If any changes are made to the policy, provide notice of 30 to 60 days before changes take effect, and explain the business reasons behind policy modifications.

Once your business creates a per diem policy, it needs to be properly managed. Managing it well involves ongoing attention to documentation, processes, compliance, and technology. Successful per diem management combines clear processes with the right tools and regular oversight to reduce errors and maintain compliance.

Determine documentation requirements

Be sure that documentation requirements balance IRS compliance with efficiency. If per diem payments are under federal rates, your business needs less documentation than traditional expense reimbursement, but you still need to maintain records showing the purpose of the business trip.

Necessary documentation can include travel itineraries showing business meetings, destinations, and travel dates, plus proof of overnight travel like hotel reservations. Business purpose documentation, such as client names or project descriptions, establishes the business connection required for tax compliance. Be sure to also establish clear documentation retention policies, which are typically three years for IRS requirements.

Establish process to manage per diem expense reports

Approval workflows and other processes can streamline the expense reporting process by minimizing administrative tasks while maintaining control over expenses.. Establish clear approval hierarchies based on the expense category and amount, and create standardized timelines for approvals.

Implement procedures to address unusual situations like travel delays or emergency travel that doesn't follow normal approval processes and can increase travel costs. Expense management software can be invaluable in these situations as it can be used to make new travel arrangements that remain within company policy.

Ensure policies are compliant and manage risk

Regular compliance reviews can help find issues before they become expensive problems. By scheduling policy reviews, your business can be sure your per diem rates and policies align with federal guidelines and state laws.

Along with regular audits, establish internal controls that prevent compliance mistakes. This can include creating procedures that flag expenses that lack proper documentation or unusual travel patterns that may indicate travel outside of business purposes. With the right expense management tools, businesses can automate these processes.

Implement tools for per diem management

Software and other tools can simplify per diem management while improving compliance and employee satisfaction with the per diem process. Modern expense management platforms offer streamlined mechanisms to implement per diem policies, including policy enforcement rules and integration with travel management software.

Look for solutions that provide real-time policy guidance to employees, as this can help prevent out-of-policy spending. The best platforms alert travelers when they're selecting hotels or flights that violate established expense policies, preventing violations before they occur. With these tools, employees can submit expenses and receipts through mobile apps. This can automate expense reporting and ensures employees don’t need to sift through receipts and charges after they return from travel.

Integration capabilities with other software can set certain expense management platforms apart from competitors. Platforms that connect with your existing accounting automation software, payroll software, and travel booking create seamless flows of data that reduce data entry and improve accuracy.

Per diem compliance mistakes can exceed the cost of implementing the right controls, and they can include financial penalties, tax liabilities, and audit complications. The most expensive mistakes are often a result of seemingly minor oversights, such as inadequate documentation, inconsistent policy application, or failure to monitor compliance over time. In many cases preventing compliance problems requires proactive, rather than reactive, management.

Effectively manage per diem documentation

Failing to maintain proper documentation can be a costly compliance mistake, but easily avoidable. If you can't demonstrate that expenses meet accountable plan requirements with the right documentation, the IRS can reclassify per diem payments as taxable wages, resulting in back taxes, penalties, and interest charges for both the company and employees.

Centralized documentation solutions can capture all required information each time an expense occurs. This includes travel authorization forms, itineraries showing business purpose, proof of overnight travel, and receipts that tie per diem payments to specific business activities. Digital platforms are the most effective because they can enforce required fields and maintain automatic backups of critical records.

Once you have a place to maintain documentation, establish which documentation is required for each type of business travel. International travel, extended trips, and unusual circumstances often require additional documentation that employees might overlook. To prevent any missing documentation, implement quality control processes before finalizing per diem payments.

Address policy inconsistencies and enforcement issues

Applying a policy inconsistently can create a legal liability and undermine employee trust in your per diem program. When employees receive different treatment, it can lead to discrimination claims, labor disputes, and IRS challenges to your policy's business purpose.

Documenting your policy application decisions can help demonstrate consistent reasoning. When you approve exceptions or handle unusual situations, create written records explaining the business justification and to create a precedent for future cases. This documentation ensures that policies are applied evenly, and protects against claims of arbitrary decision-making.

Establishing clear escalation procedures can help address issues when they occur. Front-line managers shouldn't make per diem decisions without any guidance, as this can lead to inconsistent policy enforcement. Centralize policy interpretation through HR or finance teams that can ensure consistent application across the organization.

Brex’s spend management software enables your business to effectively manage per diem employee rights, from streamlining the expense reporting process to ensuring your business remains in compliance with federal regulations.

With the Brex corporate card, your business can implement per diem policies that match the needs of your business and employees. Cards can be issued with fixed or partial allowances, or you can embed custom expense policies that limit spending based on the location, amount, category, or nearly any other parameter. If you want to exclude alcohol from per diem spending, those expenses can be blocked before they happen.

The spend policies embedded into each business credit card can require receipts to be uploaded with every purchase, ensuring that your business maintains the proper documentation to remain in compliance. And with Brex, receipts can be automatically generated along with expense memos and other attendees. If an employee manually uploads a receipt to Brex, Brex’s optical character recognition (OCR) technology extracts data from each receipt, saving employees from manually inputting each expense.

Brex AI then categorizes expenses and matches them to outstanding receipts, all without manual input. Each expense is reviewed by Brex AI; in-policy spending is automatically approved while unusual expenses are routed to approvers for manual review, streamlining the expense reporting process for both managers and employees.

Brex enables businesses to embed expense policies into each card, and with the Brex travel and expense management software, travel policies can be integrated directly into the platform where travel is booked. This allows employees to book travel confidently without second-guessing policy compliance, while accounting teams know employees are getting the best rates without constant oversight.

Triage Staffing, a staffing agency, lacked spending oversight and had issues with employees booking out-of-policy travel, which led to surprise bills. Once they added Brex to their financial stack, those issues stopped. “With Brex, we knew that we could empower employees with better visibility into their Brex card spend and real-time access to the policy data they need,” said Natalie Dircks, Senior Accountant at Triage Staffing. “Now, Triage employees do all their booking through Brex travel with safeguards to ensure compliance. Plus, our managers and department heads can easily create budgets and spend limits in Brex.”

Employees across Triage Staffing are seeing time-savings as a result of using Brex, and the accounting team is no exception. “We used to spend 25-30 hours a month managing expenses on our old credit card platform. We estimate we're down to 15 hours or less with Brex,” said Natalie.

Join Triage Staffing and take control of your per diem management. Sign up for Brex today.