What it means
When team members travel for work, managing a pile of paper receipts for coffee, dinner, and hotels can become a major administrative headache. A per diem solves this by giving employees a fixed daily amount of money to spend on their everyday travel costs.
Companies usually set these rates based on location, as staying in London costs much more than staying in a small regional town. For non-finance managers, per diems offer a brilliant way to control budgets.
Instead of guessing how much a business trip will cost, you can calculate the exact expense ahead of time by multiplying the daily rate by the number of days travelled. This makes financial forecasting straightforward and predictable.
From an accounting perspective, per diems save hours of manual data entry. Accountants do not need to audit dozens of individual meal receipts.
They simply verify the dates of travel and process the flat rate. Tax authorities also support this method, provided the daily amounts do not exceed official government guidelines.
It is important to remember that per diems typically cover living costs, not travel fares like flights or trains, which are booked separately. If an employee spends less than their daily allowance, they often keep the difference, depending on company policy.
If they spend more, they usually have to cover the extra cost themselves. Giving someone a per diem is like giving your teenager a daily holiday allowance for food.
You agree on a fixed amount per day, and how they choose to spend it within that budget is up to them, without needing to show every receipt.
In practice
Real-world examples
Example 1
Sarah, an entrepreneur, travels to a client meeting in Edinburgh for three days. Her startup pays a standard per diem of $100 per day, giving her a total travel allowance of $300 for food and lodging. Her flights and the client dinner are booked separately and are not covered by the allowance.
Example 2
A mid-sized logistics firm sends two warehouse managers to a four-day trade show in Manchester. The company provides a fixed per diem of $80 per day each, which gives a total of 2 x 4 x $80 = $640, making budgeting easy and predictable for the operations team. The managers submit only their travel dates when they return.
Example 3
A digital agency sends a developer to New York for a week. Because living costs are high there, the agency uses a higher per diem rate of $150 per day, ensuring the employee can comfortably cover local meals. Over seven days the allowance comes to $1,050, and the finance team approves it from the travel policy without checking individual receipts.
Think of it
Giving someone a per diem is like giving your teenager a daily holiday allowance for food. You agree on a fixed amount per day, and how they choose to spend it within that budget is up to them, without needing to show every receipt.
Formula
Calculation
Total Per Diem = Daily Allowance Rate x Number of Travel Days
Example:
Daily Rate = $90
Travel Days = 4 days
Calculation = $90 x 4 = $360 total allowance.
If the employee actually spends $85 a day, the total spend is $85 x 4 = $340. Under a policy that lets staff keep the difference, they keep $360 - $340 = $20. If they spend $100 a day, they spend $400 and must cover the extra $40 themselves, because the per diem is a fixed amount.
For a team trip, multiply again by the number of travellers. Three colleagues travelling for 4 days at $90 a day cost the company 3 x 4 x $90 = $1,080 in allowances, a figure that can be put in the budget before anyone books a ticket.Case study
Seen in the real world
This is a fictional, illustrative scenario. BrightSpark Design, a growing creative agency, used to let employees claim back every single business meal and hotel stay with physical receipts. This created a huge administrative backlog for the finance team, who spent days checking small coffee and lunch bills before payroll. To solve this, the finance manager introduced a standard per diem policy for all domestic travel, set at $100 per day.
When project manager Liam travelled to a client workshop for five days, he received a straightforward $500 allowance in advance. This change immediately reduced paperwork. Liam did not need to collect receipts for every sandwich or taxi ride, and the finance team processed his expenses in minutes rather than hours. BrightSpark successfully cut travel admin time by 80%, keeping managers focused on client work rather than expense forms.
The finance manager also compared costs before and after the change. Under the old receipt system, a typical five-day trip had averaged $520 in claims, so the new $500 allowance was slightly cheaper as well as quicker. In this fictional example, the real gain was predictability, because every trip could now be budgeted as days multiplied by the daily rate.
Watch out
Common mistakes
- Failing to adjust per diem rates for high-cost cities, leading to out-of-pocket losses for travelling employees.
- Reimbursing both a per diem and individual meal receipts for the same day, resulting in accidental double payment.
- Ignoring local tax rules, which can trigger unexpected tax liabilities if daily allowances exceed government limits.
Questions
People also ask
Do employees have to pay tax on per diem allowances?
Usually no, as long as the daily rates are within official government guidelines. If you pay amounts significantly above these limits, the excess may be treated as taxable income.
What happens if an employee spends less than their per diem?
Depending on company policy, the employee often keeps the leftover money. This encourages staff to find good value deals on food and accommodation.
Does per diem include travel tickets like flights and trains?
No. Per diem payments are designed for daily living expenses like meals, tips, and lodging, while major travel fares are booked and paid for separately.