Controlling costs and expenses is critical to the success of any business in the mid-market. Since you only want to bear the costs that are profitable, reducing business travel is becoming a growing trend. Many companies use virtual media (telephone or video conferencing) to interact with customers, but when the business situation is more complex or you are establishing a new relationship, face-to-face communication may be the only viable option.
When travel expenses are needed, what can your midsize company do with its limited budget? All businesses use one of two methods: a fixed per diem (for example, 00 per day for accommodation and $50 for meals) or actual expenses, in which a business traveler must provide receipts to report the actual cost and then request a refund. Both approaches have advantages and disadvantages, and one method may be better used for specific costs than the other.
In this article, we’ll start with understanding your goals, customer service expectations, and your company’s travel needs. Then, we’ll consider the advantages and disadvantages of using a per diem to control spending.
- What Does Per Diem Means?
- How Per Diems and Actual Expenses Differ?
- Are Per Diem Reimbursements Taxable?
What Does Per Diem Means?
If you still haven’t figured out what “per diem” means, refer to Latin. “Per” stands for the Latin “for everyone” and “diem” means “day”. When talking about travel expenses and reimbursements, you may have heard of “employee per diems” or “food per diems”. Simply put, “per diem” is the amount of money employees can spend on day-to-day travel expenses such as hotels and meals. For better illustration, imagine that your company’s travel policy states that you are allowed to pay $55 per day when you travel to California for business. This means you can spend up to $55 a day on food.
Companies set per diem rates for business travel because the IRS places limits on how much a company can write off. This allows you to significantly save on taxes. If an employee wants to spend more money on food or hotel accommodation during a business trip, they will be reimbursed for the amount, stated in the expense policy, and the rest will be paid out of their own pocket.
How Per Diems and Actual Expenses Differ?
When reporting expenses, you can pick one of two approaches: set per diem amount or use actual expenses, in which the business traveler provides checks to report the actual cost of expenses. However, both approaches have their benefits and limitations. Having a per diem allows employees to avoid collecting tons of checks and bills. As long as the travel expenses are below the per diem, there is no need to show any proof of payment. It also allows you, as a business owner, to better understand the various travel expenses presented to your company. In other words, it will be easier for you to plan your further travel expenses.
However, per diems can also cause some problems. Firstly, it can become difficult to establish a flat rate of per diem for travel when prices for similar services may vary in different corners of the world. For example, a mid-sized hotel in the United States can cost $150 per night. However, the same establishment in London can cost twice as much. Adjusting daily allowances for different countries or even cities is very inconvenient and time-consuming. No one wants their employee to be forced to restrict food options for a particular customer due to daily subsistence restrictions. In such cases, the daily per diem rate can be inconvenient and you should use the usual cost scheme prescribed in your travel expense policy. What is more, per diems don’t cover mileage expenses.
Needless to say that in both ways you’ll need additional software to help travelers and accountants work with expense reports. The Expense Sensei app allows employees to create, manage and submit expenses in a few clicks just on the go. They are able to create and send reports choosing multiple categories of expenses. In case your company use per diems, the app allows providing reimbursements in advance.
Are Per Diem Reimbursements Taxable?
Per diems are not considered wages and therefore are not taxed if they meet certain conditions. However, there may be a few occasions when you will be charged taxes. For example, if the employee has exceeded the specified amount, or when the expense report doesn’t include all the needed information. In such cases per diem will be considered as a workers’ salary and will be taxable.
In the context of business travel, per diem refers to allowances for meals, room service, hotels, and incidental expenses that employers compensate. Most importantly, per diems reduce the need for travelers to keep receipts for purchases. If employees spend less than the daily subsistence allowance, it is approved without documentation. This typically promotes discretion as it forces employees to make appropriate spendings for a specific amount. This approach puts less pressure on employees and provides greater confidence and predictability in travel planning.