As a business owner, chances are, you've heard the term "per diem" before—but what, exactly, does "per diem" mean? And, more importantly, what does it mean for your small business?
This article is written by our friends at Gusto.
"Per diem" is a Latin term that translates to "per day" or "by the day." From a business perspective, you need to know about two different per diem scenarios: per diem employees and per diem travel expenses.
Traditional employees are employed on an ongoing basis and generally have a set schedule and reliable hours. For example, full-time employees may work 9 am to 6 pm every Monday through Friday, while a part-time employee may work four afternoons per week, from 1 pm to 5 pm.
Per diem employees are, as the name suggests, employed by the day. Instead of following an ongoing employment contract, per diem employees are hired on a daily, as-needed basis. Generally, companies hire per diem employees when they need a little extra support, whether that's to fill in a gap in coverage (for example, when an employee is sick or goes on vacation), support a team that's short-staffed (for example, if an employee quits without warning), or tackle a big project.
While per diem employees are most well-known in the healthcare and education industries (for nurses and substitute teachers, respectively), small businesses also regularly hire per diem workers in a variety of roles and capacities. This includes administrative support, creative support, warehouse support, and event support.
COVID-19 has brought business travel to a halt. But when business-related travel ramps up again, per diem reimbursements are the maximum amount of money your company will reimburse employees for travel-related expenses for each day they travel. Per diem expenses are divided into three categories: lodging expenses, mileage expenses, and meal & incidental expenses (often abbreviated as M&IE).
For example, let's say your maximum per diem rate is $175. That means, for every day your employee travels, you'll reimburse them a maximum of $175 to cover travel-related costs, like lodging and meals. Per diem reimbursements work like a daily allowance for your employees.
Now that you know what per diem is, let's jump into how each per diem scenario actually works.
When you hire a per diem employee, they generally have their per diem rate set ahead of time. And, unlike traditional hourly employees, it doesn't matter whether they work one hour, three hours, or eight hours—they're entitled to their full per diem rate, regardless of total hours worked. It's also important to note that, even though per diem employees have a set daily rate, as a business owner, you still need to abide by all relevant labor laws, including those around minimum wage and overtime.
For example, let's say you're launching a new product, and you want to hire a per diem photographer to capture product photos to use in your marketing. If the photographer's per diem rate is $350, you need to pay them the full $350—even if the shoot wraps up a few hours earlier than you anticipated.
Or, say you need to hire a per diem worker to clear out your warehouse space. You might think the job will take eight hours—but if the job ends up taking 11 hours, you need to pay the worker their per diem rate *plus *overtime pay for the extra three hours, just like you would an hourly employee.
Depending on the situation, hiring per diem can deliver major benefits to your business, including:
As mentioned, as an employer, you need to set a maximum per diem rate for your employee's travel reimbursements. The U.S. General Services Administration (GSA) has set federal per diem rates to use as a guideline (rates vary by location). Business owners don't have to use those rates, but if your company's maximum per diem rate is above the GSA's, anything above the GSA rate is considered taxable income. And that income must be reported on your employees' W-2. For example, if the GSA's maximum per diem rate is $150—but you set your maximum per diem rate at $200—the $50 difference is considered taxable income for the employee.
Some companies prefer the per diem method because it's easier for their team. Instead of trying to keep track of receipts or track down their supervisor for approval on travel-related costs, they know exactly how much they have to spend on each business trip from the get-go. As long as they stay under their per diem allowance, they don't need to worry about submitting receipts or their expense report being denied.
If you're considering hiring per diem employees to support your small business, here are a few things to keep in mind to make sure the experience is a successful one:
And if you decide to use a per diem travel reimbursement, here are a few things to keep in mind to ensure the process goes smoothly:
How Bench and Gusto can help
Like Bench, Gusto is committed to simplifying small business—they make mastering your company's HR, payroll, and benefits simple. When it comes to per diem payments, Gusto's payroll system makes it easy to reimburse per diem travel expenses or add per diem workers to your payroll. Learn more about Gusto.
Bench's bookkeeping services can help you report and categorize per diem expenses properly, so you don't miss out on any relevant tax deductions. Our year-round tax advisory service makes sure you're well prepared for tax season—and when the time comes, we can also file your taxes for you.
We are offering free 1 Month Basic Bookkeeping to all new customers so you can experience Accracy's seemless and professional services.
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