Per diem is a fixed daily payment made to employees to cover meals, lodging, and other expenses when traveling for work. But how exactly is the per diem amount determined and calculated?
In this comprehensive guide, we’ll walk through everything you need to know about per diem, how rates are set, what costs are covered, and how the final per diem amount is calculated.
What is Per Diem?
Per diem refers to a specific amount of money an employee receives per day to cover expenses like lodging food, and incidentals when traveling for work.
Instead of reimbursing actual expenses, the per diem system provides a fixed daily allowance. This simplifies reimbursement and allows for predictability in travel budgeting.
The General Services Administration (GSA) sets per diem rates for travel within the continental United States. The Department of Defense sets rates for Alaska, Hawaii, US Territories and Possessions. The State Department sets foreign per diem rates.
What Costs are Included in Per Diem?
Per diem is broken down into different categories covering various travel costs:
- Lodging – Covers hotel/motel expenses
- Meals – Covers food expenses
- Incidentals – Covers tips, transportation like taxis and rideshares, and other minor expenses
The per diem rates set by the GSA include specific maximum amounts for lodging and meals & incidentals (M&IE).
How are Per Diem Rates Determined?
Several factors impact how per diem rates are set each fiscal year:
Cost of Living
The cost of living in a given area impacts per diem rates. Places with higher costs of living will have higher per diem rates.
The GSA uses data from its Travel Management Information Service to analyze hotel prices and recommend lodging rates accordingly.
Seasonal Variations
Travel costs can fluctuate based on the time of year. Hotels and airfare tend to be more expensive during peak seasons.
The GSA adjusts per diem rates for certain cities during seasons when prices spike, like summer and winter resort towns.
Federal Travel Regulation Requirements
The Federal Travel Regulation (FTR) establishes the requirements for per diem and reimbursement.
The GSA must ensure per diem rates comply with limits and rules outlined in the FTR when setting annual rates.
How is the Lodging Per Diem Calculated?
The lodging per diem is based on the average daily rate across approved hotels in a given area.
The GSA uses data gathered from its contractor reservations systems to analyze hotel prices in an area.
The per diem lodging rate is set at the average daily rate of mid-priced hotels, plus applicable taxes. Typically, this rate corresponds to a specific hotel class – like a Courtyard by Marriott or Hampton Inn.
For example, if the average daily lodging rate for mid-priced hotels in a city is $150, plus applicable taxes of $20, the max lodging per diem would be $170 ($150 average lodging + $20 taxes = $170 max lodging per diem).
Lodging Per Diem Rules
There are a few key rules around the lodging per diem:
- The lodging per diem is the maximum reimbursement for hotel expenses. If an employee spends less on hotel costs, they can only claim the actual amount spent.
- Employees are expected to seek accommodations within the established lodging per diem rate. Exceptions may be granted on a case-by-case basis if reasonable accommodations are not available within the lodging per diem rate.
- Lodging is reimbursed based on single room occupancy. For conferences or long term travel, per diem rates are reduced.
How are Meals & Incidental Expenses (M&IE) Calculated?
The M&IE per diem covers costs like food, tips, and transportation expenses. It is calculated based on the federal meals allowance plus an incidental expense allowance.
Federal Meals Allowance
The federal meals allowance portion of M&IE is set based on average costs for breakfast, lunch, and dinner.
For most continental US locations, the daily meal allowance is broken down as:
- Breakfast – $16
- Lunch – $17
- Dinner – $31
On the first and last day of travel, the meals allowance is calculated at 75% – so $12 for breakfast, $13 for lunch, and $24 for dinner.
In higher cost areas like New York City, the federal meals allowance will be increased accordingly.
Incidental Expenses
Incidentals cover tips and transportation like taxis, rideshares, parking, etc.
The incidental expenses rate is currently $5 per day across the continental US.
Adding together the federal meals allowance and incidental expenses determines the total M&IE per diem rate.
For example, for a location with standard meal rates, the M&IE calculation would be:
- Breakfast – $16
- Lunch – $17
- Dinner – $31
- Incidentals – $5
- Total M&IE – $69
On partial travel days with the 75% reduced meal rates, the M&IE would be lower.
M&IE Per Diem Rules
The main rules around M&IE per diem are:
- M&IE is paid as a daily lump sum – itemized receipts are not required
- Employees keep any unused portion of the M&IE per diem
- On partial travel days, M&IE is prorated based on time away from home
How is Total Per Diem Calculated?
To determine the total per diem rate for a given area, simply add together the applicable lodging per diem and M&IE rates.
For example, for a location with:
- Lodging per diem: $170
- M&IE per diem: $69
The total per diem rate would be $239 ($170 lodging + $69 M&IE = $239 total per diem)
This $239 would be the maximum per day an employee could claim for reimbursement when traveling to this location.
Of course, the total per diem can vary widely by location based on the underlying lodging rates and meal costs that factor into the calculation.
Locality Per Diem Rates vs Standard CONUS Rates
As mentioned earlier, the GSA establishes per diem rates for approximately 300 higher cost locations known as non-standard areas (NSAs). These have individual locality per diem rates.
All other continental US locations fall under the standard CONUS per diem rates, which are lower.
For example, the FY2023 standard CONUS lodging per diem is $96, while the lodging per diem for New York City (an NSA) is $226.
Checking if an area falls under locality per diem rates or the standard CONUS rates is crucial to applying the proper rates for reimbursement.
The Bottom Line
Whether you’re an employee needing to understand your per diem reimbursement or an employer budgeting for travel costs, knowing how per diem rates are set and calculated is key.
The GSA goes through an extensive process each year to establish per diem rates using lodging data, federal regulatory guidance, and localized cost inputs.
Separating out lodging and M&IE into set maximum amounts provides simplicity and predictability compared to tracking actual travel receipts.
Now that you understand all the ins and outs of how per diem is calculated, you can better estimate costs and ensure proper reimbursement when traveling for work.
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What is Per Diem & How To Calculate
How do I find per diem rates?
Look up per diem rates by location or download annual rates for all locations. GSA sets per diem rates for the contiguous 48 States and the District of Columbia. Rates are updated annually at the start of the fiscal year (or as necessary). View recent changes. DoS sets the per diem rates for foreign locations.
How do you calculate lodging per diem?
Most organizations calculate the lodging portion of the per diem according to the average cost of accommodation in the area. This usually depends on hotel rates or other approved lodging options. The total per diem is the sum of the M&IE rate and the lodging rate. In other words: Total Per Diem = M&IE rate + Lodging rate.
How do per diem rates work?
Per diem rates are set based upon contractor-provided average daily rate (ADR) data of local lodging properties. The properties must be fire-safe and have a FEMA ID number. The ADR is a travel industry metric that divides room sales rental revenue by the number of rooms sold.
How are per diem rates substantiated?
According to IRS rules and regulations, there are two main substantiation methods for per diem rates: the high-low method and the regular federal per diem rate method. The high-low method uses only two per diem rates: one for places designated as high-cost locations and another rate for all other locations that don’t fall into that specific bucket.
