What is per diem in business travel & how does it work?

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Business travel may be necessary to grow your business, and a per diem policy can make life easier for you and your employees by simplifying your expense management process. This article defines per diem, explains daily per diem rates, and outlines best practices for implementing a per diem policy.

What does per diem mean?

The term “per diem” is a Latin phrase that roughly means “by the day” or  “for each day." In business, a per diem is a daily allowance to cover specific expenses, particularly travel expenses like meals, lodging, and incidentals. Businesses usually offer per diem allowances on top of covering or reimbursing transportation expenses like airfare.

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Per diem work is a similar term that refers to workers hired on an as-needed (day-to-day) basis.

How does per diem work?

Employees who must incur business expenses to complete their jobs are eligible for a per diem allowance. You can choose to provide per diem dollars in advance or reimburse employees after they submit an expense report.

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The Internal Revenue Service (IRS) requires businesses to keep expense reports that show the time, place, and business purpose for per diem expenses. However, employees do not need to submit expense receipts for per diem expenses, simplifying travel expense management.

What does per diem cover?

Typically, per diem is broken down into two categories: meals and incidental expenses (MI&E), and lodging.

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• Meals and incidental expenses (MI&E): The meal per diem covers food and beverage costs for breakfast, lunch, and dinner. Incidental expenses include fees and tips for porters, baggage carriers, and hotel staff, as well as miscellaneous expenses like laundry or dry cleaning. The M&IE rate also includes taxes and gratuities.
• Lodging: Lodging rates pay for both hotel stays and short-term rentals. The per diem rate for lodging is based on average daily rate (ADR) data, which reflects the average cost of lodging in a given area. Note that lodging taxes aren’t included in the per diem rate. Instead, lodging taxes are reimbursable as a miscellaneous travel expense.

What is the per diem rate for 2025?

The U.S. General Services Administration (GSA) establishes daily per diem rates that the government uses to reimburse federal employees for business travel expenses. The rates apply to the continental United States (CONUS) and are updated annually. Many companies use the GSA per diem rates as a benchmark for business expenses.

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The daily per diem rate may vary depending on the cost of living in a particular location. As such, there are two types of per diem rates:

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• Standard per diem rate: The 2025 standard daily per diem rate is $178, including $110 for lodging and $68 for meals and incidental expenses
• Non-standard areas: For fiscal year 2025, the GSA identifies 296 non-standard areas with higher per diem rates than the standard rate. For example, the daily per diem rate for Los Angeles is $191, which is higher than the standard rate.

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Some per diem rates are adjusted seasonally. For example, the rate for New York City will increase from $179 in January 2025 to $342 in September 2025 as the city experiences more tourism and business travel in the fall.

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How to manage per diem rates

You can assign per diem rates based on each city your employees travel to throughout the year. As mentioned above, 296 non-standard areas allow a higher per diem amount than the standard rate. However, applying a specific per diem rate to many locations may be difficult.

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Instead, you can use the high-low method for per diem rates. As the name applies, this method assigns a higher per diem rate to high-cost locations and a lower rate to all other locations. Here are the details:

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• The current rates apply from October 1, 2024, to September 30, 2025
• The daily per diem rate for high-cost locations is $319, and the rate for all other locations is $225
• The meals portion of the daily rate is $86 for high-cost locations and $74 for all other locations

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Each year, the IRS publishes a list of high-cost locations, with a date range for when high-cost per diems apply. For example, Steamboat Springs, CO, is a high-cost location from December 1 to March 31 because it’s a popular ski destination, and rates are higher during ski season.

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You can apply the high-low method by checking the list of high-cost locations and when the higher rate applies. The high-low method eliminates the need to manage dozens of different per diem rates.

Per diem methods

Once you decide how to manage per diem rates, you can create a per diem policy using the fixed-rate method or the actual (out-of-pocket) expenses method.

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Let’s use an example to illustrate the difference between the two methods. Assume that a salesperson travels to Cincinnati to meet with customers. The 2025 lodging rate is $163, and the M&IE rate is $86, for a total per diem allowance of $249.

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• Fixed-rate method: The salesperson receives a per diem allowance of $249 for each day of travel, and the employee pays their per diem expenses using the allowance
• Actual expenses method: The salesperson pays their per diem expenses out of pocket, and the company reimburses expenses up to the per diem limit.

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If you use the actual expenses method, employees must spend personal dollars on per diem expenses and wait for reimbursement. Employees who travel frequently incur more out-of-pocket costs, and that may cause frustration.

Other per diem requirements

If you choose to implement a per diem policy for your business, note that you’ll need to comply with a few requirements:

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1. Employees can only use per diem for business-related expenses
2. Expense reports must document the time, place, and business purpose for per diem expenses
3. Employees should return unused per diem dollars to the employer. If not, the dollars are considered taxable income to the employee.

Are per diem payments taxable?

When you reimburse employees for per diem expenses using an accountable plan, the payments aren’t considered taxable income to the employee. However, this assumes you don’t pay per diem rates higher than the GSA guidelines; if you pay more than the GSA rates, the excess is taxable income to the employee.

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IRS Publication 463 provides these accountable plan rules for employees:

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1. Expenses must have a business connection—that is, employees must have paid or incurred deductible expenses in service of their employer
2. Employees must adequately account for these expenses within a reasonable period of time
3. Employees must return any excess reimbursement or allowance within a reasonable period of time. Specifically, employees must account for expenses within 60 days after they were paid or incurred.

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When your staff follows these rules, per diem reimbursements are not taxable. However, if you don’t follow these accountable plan rules, you must withhold payroll taxes on the reimbursement, and the employee must include the amount in taxable income.

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The key here is to communicate the importance of timely expense reports. Make sure your staff knows why filing expense reports on time is essential.

How a per diem system improves your business

Controlling spending requires less time and effort when you use a per diem system. Employees can submit expense reports faster because they don’t need to compile and attach expense receipts for every transaction. A per diem system can also improve morale since employees can choose how to spend per diem dollars based on their preferences.

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You need to plan carefully to implement an effective per diem policy. Depending on employee travel, you may have to account for dozens of different per diem rates. You must also comply with IRS regulations and accounting standards for business expenses. 

Best practices for implementing a per diem policy

While per diem can be easier to manage than traditional expense reporting and approval processes, it can still be hard to implement. Here are some best practices to set yourself up for success as you roll out a per diem policy:

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1. Use expense management software: Modern expense management platforms like Ramp allow you to set per diem rates as part of your overall travel and expense (T&E) policy. This helps control spending and ensures every employee gets the allowance they’re entitled to based on their travel destination.
2. Document your policies: Create a written policy for per diem management and ensure your staff can access it easily. The document should define the purpose and scope of your per diem policy, specify your rates, and outline what types of expenses are eligible for reimbursement.
3. Monitor per diem spending: Finally, compare your team’s actual spending to your travel budget and investigate variances to identify areas for cost savings. Regularly monitoring per diem expenses also helps ensure compliance with the various IRS rules and requirements we covered above.

Automate your team’s per diem allowances with Ramp

Managing travel expenses can be challenging, and the process gets more complex as you grow. Ramp can help simplify travel expense management no matter your scale.

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Ramp Travel pulls in the latest GSA per diem rates for your business travel destinations, helping you keep expenses in check. You can even apply a multiplier to add a buffer to ensure employees have sufficient daily spend no matter where they’re traveling.

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With Ramp, you can control costs, work more productively, and free up staff time for critical tasks. Try Ramp and see why customers save an average of 5% a year.