Per Diem

Per Diem is a fixed daily allowance paid to employees for meals, lodging, or incidental expenses during business travel, in place of individual receipts for each covered expense. It replaces receipt-by-receipt expense claims with a fixed daily amount for meals and incidentals, which removes the substantiation work for those categories.

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Your company reimburses employees for meals during travel using a per diem rate. Three employees traveling to the same city last month submitted three different amounts: one used the IRS rate, one used a company-set rate from 2021, and one submitted actuals. The inconsistency came out in a payroll audit. Per diem policies only work when everyone knows which rate applies and the system enforces it. Per diem is a daily allowance paid to employees to cover expenses incurred while traveling for business, most commonly meals, incidentals, or both. Instead of requiring itemized receipts for every meal and coffee, the company pays a fixed daily amount. If the employee spends less than the per diem, they keep the difference. If they spend more, the excess is their cost. For finance teams, per diem simplifies reimbursement and documentation, cuts the number of meal receipts subject to audit, and makes travel costs easier to forecast. The complication is that per diem rates aren't universal. The IRS publishes location-specific rates, companies can set their own lower or equal rates, and the accounting and tax treatment differs depending on whether the rate is at, above, or below the IRS threshold.

How per diem works

The IRS publishes standard per diem rates for the continental U.S. annually, with specific high-cost locality rates for cities where costs are well above average. The standard rate covers meals and incidentals. A separate lodging rate is also published, though many companies reimburse actual lodging costs instead of using a per diem for it. When a company pays per diem at or below the IRS rate, the reimbursement is not taxable to the employee and doesn't need to be reported on a W-2, provided the employee is traveling away from their tax home for business. When a company pays above the IRS rate, the excess is taxable compensation and must be included in payroll reporting. Companies that set their own per diem rates instead of adopting the IRS rates directly have a configuration and update problem: IRS rates change annually and sometimes mid-year for fuel-related incidentals, so a company rate set in 2021 may no longer match current IRS thresholds. The third model is actuals-based reimbursement with a per diem ceiling: employees submit receipts but are reimbursed only up to the daily cap. This hybrid needs more documentation than a flat per diem and more finance processing time, but companies that want exact costs for project billing prefer it.

High-cost localities, taxable excess

Per diem interacts with payroll and tax accounting in ways that aren't always visible in the expense management workflow. The core question is whether the company operates an accountable plan, an IRS-defined framework requiring that reimbursements have a business purpose, are substantiated, and that any excess is returned. Per diem reimbursements under an accountable plan at or below IRS rates need no meal receipts, which is the main administrative advantage. When a company pays per diem under a non-accountable plan, or pays above IRS rates without separating the excess, the full amount may have to run through payroll as compensation, adding payroll tax cost to what was meant to be a simple reimbursement. High-cost localities matter when employees travel to cities on the IRS's designated high-cost list, which changes annually. Applying the standard rate to a high-cost city shortchanges the employee and may push them to submit actuals above the cap, creating exceptions that need manual review. Applying the high-cost rate everywhere costs the company more than necessary in standard-cost cities. Finance needs a configuration that applies the correct rate based on destination, not one flat rate for every trip.

How platforms handle it

When evaluating expense management platforms for per diem support, the main question is whether rate application is manual or automated. In manual configurations, the employee picks a city and types in a per diem amount, which creates exactly the inconsistency described above. In automated configurations, the employee selects a destination and travel dates, and the platform applies the correct IRS rate for that location and period, including high-cost locality designations. Ask specifically: does the platform update IRS rates when they change mid-year, or only at the annual update? Does it handle partial-day travel (first and last days of a trip are typically reimbursed at 75% of the daily rate under IRS rules)? Can the company configure a rate that differs from the IRS standard, such as a lower company rate or a project-specific rate, and will the platform flag an employee-submitted amount that exceeds the applicable cap? Also ask how the platform handles per diem for international travel, where IRS rates don't apply and State Department rates are typically used instead.

Questions to ask

Does the expense platform automatically apply IRS location-specific rates, or does the employee manually enter their per diem amount without system validation?
Is the platform configured to handle partial-day per diem calculation for the first and last day of travel at 75% of the daily rate?
When the company per diem rate differs from the IRS rate, does the system flag submissions above the company cap without requiring it to exceed the IRS rate?
How are international per diem rates handled? Is there built-in support for State Department rates, or does each destination have to be configured manually?
Does payroll receive a flag when an employee receives a per diem above the applicable IRS rate, to ensure the excess is treated as taxable income?
Is the per diem rate configuration updated automatically when the IRS publishes mid-year adjustments, or does finance need to manually update the system?

Common mistakes

The first mistake is not updating per diem rates every year. The IRS publishes new rates each October for the fiscal year beginning October 1. Companies that don't update their internal rates, or their expense platform configuration, end up either under-reimbursing employees (if rates have gone up) or over-reimbursing relative to the IRS threshold, which creates a taxable income issue if the excess isn't captured. A calendar reminder and a named owner for the annual update remove this risk. The second mistake is letting employees submit actuals above the per diem cap without explicit manager approval and a documented business reason. When this is handled ad hoc (one manager approves, another doesn't), employees in the same department get different reimbursements for the same kind of trip. That causes morale problems and audit questions about whether the exceptions were reasonable. If actuals above the cap are sometimes appropriate, the policy should define when they are allowed, what documentation is required, and who must approve them, and the expense platform should route those exceptions to a second-level approver automatically. The expense management savings calculator estimates what fewer policy exceptions are worth in finance time.

Allowance, not shift work

Two unrelated meanings share the phrase. In healthcare and hospitality staffing, per diem describes a worker engaged day by day. In finance operations it means a fixed daily travel allowance. For US employers the General Services Administration publishes the federal per diem rates by location, and the IRS sets the conditions under which a per diem paid at or below those rates is not treated as wages.

Comparing expense tools

Expense tools separate on whether policy is enforced at the point of spend or checked afterwards by whoever reviews the report. Once per diem is settled as a requirement, read the Expense Management Software category guide for how the market splits, then weigh the Airbase profile against the Tipalti profile on that requirement rather than on the feature list. Our Airbase pricing breakdown records what the vendor publishes and what is quote-based. The Tipalti against Airbase comparison sets two of them side by side on the same criteria. Before you book demos, put your own numbers through the expense management savings calculator so the business case is written down before a vendor writes it for you.

Per Diem questions

How is per diem different from expense reimbursement?

Expense reimbursement is the broad category: any mechanism a company uses to pay employees back for business costs they incurred. Per diem is a specific type of expense reimbursement that uses a fixed daily rate instead of itemized receipts. Standard expense reimbursement requires documentation and reimburses the actual amount spent. Per diem reimburses a fixed amount regardless of actual spend, and the employee keeps any unspent portion. The trade-off is simplicity (per diem) versus accuracy (actuals-based reimbursement).

Does a company have to use the IRS per diem rate, or can it set its own?

A company can set its own per diem rate at any level, but the IRS rate is the threshold for tax-free treatment. If the company rate is at or below the IRS rate for the relevant location, the reimbursement is not taxable to the employee under an accountable plan. If the company pays above the IRS rate, the excess is taxable compensation that must flow through payroll. Many companies set rates at exactly the IRS level to avoid the payroll complexity while still offering a competitive travel policy.

What documentation is required for a per diem reimbursement?

Under an accountable plan, per diem for meals and incidentals does not require receipts; the daily rate serves as substantiation of the amount. The employee must still document the business purpose of the travel, the destination, and the dates. Lodging per diem (where applicable) requires a receipt. Some companies require documentation even for meal per diem as a policy choice, but this removes most of the administrative benefit of using per diem in the first place.

Corporate Card Reconciliation, Expense Policy Compliance, and Expense Report come up in the same workflow as per diem, and the rest of the expense tools cluster is indexed in the finance operations glossary.