Per Diem Series Part 1: What is Per Diem?

Because the nature of contracting often requires contractors to live somewhere other than their permanent residence, those contractors can incur additional expenses most employees don’t have. In those cases, the contractor may be offered a daily “per diem” rate to help them cover those expenses. This is Part 1 of a three-part series examining the guidelines surrounding the payment of per diem. Don’t miss Part 2 and Part 3. 

Per diem is Latin for “per day” or “for each day.” It usually refers to the daily rate of any kind of payment. For our purposes here, it refers to a specific amount of money that an organization allows an individual to spend per day to cover living and traveling expenses in connection with work.

Employers often choose to pay a per diem rate to an employee on business travel instead of reimbursing them for the actual cost of the expenses they incur. This is especially common in contract assignments because the employee is often working in a location far from their permanent residence and must maintain a second residence while on assignment.

The per diem reimbursement is not subject to payroll tax withholdings and is not reported as income on the employee’s W-2 if:

• The rate paid to the employee does NOT exceed the IRS approved maximum rates; and
• The employee provides simplified substantiation (time, place of travel and business purpose.)

To qualify for full per diem, the contractor must maintain two residences during the contract assignment. In addition to his/her primary residence, an apartment, hotel, etc., will qualify as a secondary residence. Living with a friend or family member does not qualify as a secondary residence.

Per diem can not be given for more than 12 continuous months on the same contract assignment. If the contractor is still on the same contract assignment after 12 months, the per diem rate should be discontinued but can be ADDED to his/her taxable income.

There are two common methods that can be used to determine the per diem rate. Both methods will be addressed in detail in Top Echelon Contracting’s next blog post.

This article is for informational purposes only and should not be considered legal or financial advice.