How To Calculate Per Diem

Comprehensive Guide: How to Calculate Per Diem in 2024

Per diem (Latin for “per day”) refers to the daily allowance companies provide employees to cover business travel expenses. Understanding how to calculate per diem correctly ensures compliance with IRS regulations while properly compensating employees for travel-related costs.

What Is Per Diem?

Per diem rates are standardized allowances that cover:

• Lodging expenses (hotel, motel, etc.)
• Meals and incidental expenses (M&IE)
• Transportation costs (in some cases)

The U.S. General Services Administration (GSA) sets per diem rates for domestic travel, while the U.S. Department of State establishes rates for international travel.

Current Per Diem Rates (2024)

Location Type	Lodging Rate	M&IE Rate	Total Per Diem
Continental U.S. (CONUS)	$166	$64	$230
Alaska, Hawaii, and U.S. Territories	$251	$79	$330
Foreign Countries (varies by location)	$100-$300	$50-$100	$150-$400

Step-by-Step Per Diem Calculation

1. Determine the location type

   Identify whether the travel is domestic (CONUS or non-CONUS) or international. CONUS rates apply to the 48 contiguous states and D.C., while Alaska, Hawaii, and U.S. territories have higher rates.

2. Check the travel dates

   Calculate the total number of travel days, including partial days. The first and last travel days often receive reduced rates (typically 75% of the full per diem).

3. Apply the correct rates
   • Full day rate: 100% of the per diem
   • Partial day rate: 75% of the per diem (for first/last days if travel occurs before noon)
4. Include incidental expenses (if applicable)

   Incidental expenses cover fees and tips for services like baggage handling and hotel staff. These are often included in the M&IE rate but can be itemized separately.

5. Calculate the total

   Sum the rates for all travel days, applying the correct percentages for partial days.

Special Considerations

Several factors can affect per diem calculations:

• High-cost localities: Certain cities (e.g., New York, San Francisco) have higher per diem rates. The GSA publishes a per diem rates lookup tool for specific locations.
• First and last day rules: If travel begins or ends before 12:00 PM, the per diem is reduced to 75% of the full rate. This applies to both lodging and M&IE.
• Incidental expenses: These are optional but often included. The standard incidental expense rate is $5 per day for domestic travel.
• Extended stays (30+ days): For long-term travel, the per diem rate may be reduced to 75% of the standard rate after 30 days.

Per Diem vs. Actual Expenses

Companies may choose between per diem allowances and reimbursing actual expenses. Here’s a comparison:

	Per Diem	Actual Expenses
Administrative Burden	Low (standardized rates)	High (requires receipts and approvals)
Tax Implications	Non-taxable if within IRS limits	May be taxable if exceeding limits
Employee Convenience	Simple, no receipts needed	Requires tracking all expenses
Cost Control	Predictable budgeting	Variable costs
IRS Compliance	Easy to comply with published rates	Requires detailed documentation

Common Mistakes to Avoid

• Using outdated rates: Per diem rates are updated annually (October 1 for federal rates). Always verify the current rates on the GSA website.
• Misapplying first/last day rules: Forgetting to reduce the rate for partial travel days can lead to overpayment.
• Ignoring high-cost localities: Using the standard CONUS rate for high-cost cities (e.g., Boston, Chicago) may under-reimburse employees.
• Overlooking incidental expenses: Failing to account for incidental expenses can result in employees paying out-of-pocket for tips and fees.
• Incorrect tax reporting: Per diem payments exceeding IRS limits may be considered taxable income.

Best Practices for Employers

1. Automate calculations: Use tools like the calculator above to ensure accuracy and reduce administrative errors.
2. Educate employees: Provide clear guidelines on per diem policies, including how to handle partial days and incidental expenses.
3. Regularly update rates: Subscribe to GSA or Department of State updates to stay informed about rate changes.
4. Document everything: Maintain records of travel dates, locations, and per diem payments for auditing purposes.
5. Consider exceptions: Allow for reasonable exceptions (e.g., higher lodging costs in peak seasons) with proper approval.

Per Diem for International Travel

International per diem rates vary significantly by country. The U.S. Department of State publishes rates for foreign travel, which include:

• Lodging: Varies by city (e.g., Tokyo: $300, Paris: $250, Mexico City: $180).
• M&IE: Typically ranges from $50 to $100 per day, depending on the cost of living.

For example, the per diem rate for London in 2024 is:

• Lodging: $280
• M&IE: $90
• Total: $370 per day

Always check the Department of State’s per diem rates for the most current international rates.

Tax Implications of Per Diem Payments

The IRS considers per diem payments non-taxable if they:

• Do not exceed the federal per diem rate.
• Are for ordinary and necessary business expenses.
• Are properly substantiated (e.g., travel dates and locations).

If per diem payments exceed IRS limits, the excess may be taxable. Employers should consult IRS Publication 1542 for detailed guidance.

Frequently Asked Questions

Q: Can per diem rates be negotiated?

A: While federal rates are standardized, private companies may set their own rates, provided they comply with IRS guidelines for non-taxable reimbursements.

Q: Are per diem payments required by law?

A: No, per diem payments are not legally required. However, the Fair Labor Standards Act (FLSA) requires that employees be reimbursed for business expenses that would bring their earnings below minimum wage.

Q: How are per diem rates determined?

A: The GSA conducts annual surveys of hotel and meal costs in various locations to set per diem rates. Rates are designed to cover 80% of travel expenses in a given area.

Q: Can employees keep unused per diem funds?

A: Yes, per diem is intended to cover estimated expenses. If an employee spends less than the allowance, they retain the difference (unless company policy states otherwise).

Conclusion

Calculating per diem accurately ensures fair compensation for employees while maintaining compliance with tax regulations. By understanding the rules—such as location-specific rates, partial-day adjustments, and incidental expenses—employers can streamline travel reimbursements and avoid common pitfalls.

For the most up-to-date information, always refer to official sources like the GSA and the IRS. Using tools like the calculator above can simplify the process and reduce errors in per diem calculations.