4 Min. Read

Per Diem Meaning: What You Need to Know

July 3, 2021

Here’s What We’ll Cover:

What this little Latin phrase means for you and your business.

What Does Per Diem Mean?

Paying Per Diem Expenses for Your Employees

Charging Per Diem Rates as a Contractor

Key Takeaways

What this little Latin phrase means for you and your business.

The meaning of “per diem” in Latin is “by the day”. You may have come across it once or twice in your career so far as a freelancer, contractor, or even as an employee.

Whether you hire contractors for your business or are a contractor yourself, it is helpful to understand how per diems work.

What Does Per Diem Mean?

The short answer is that “per diem” refers to the daily rate that you owe employees, or that an employer owes you.

It generally falls into two camps:

Per diem expenses

These are daily expenses outside of your main salary or contracted wage.
This could include travel expenses, meal costs, accommodation for a business trip etc.

Businesses can legally pay an employee or contractor a set rate per diem for expenses, rather than an exact calculation. It essentially reduces expense report paperwork which is always a plus.
Per diem rate

This refers to an employee who is paid on a daily basis. This is common if you are a contractor with a daily or hourly rate.

It sounds wonderful and easy, but there are tax implications and limitations to this employment unicorn.

Paying Per Diem Expenses for Your Employees

Let’s first tackle the expense side of things as a business owner with employees. Cutting down on expense reporting and receipt collection can be great. It also helps a business to manage their budget by setting a diem allowance for employees or contractors ahead of time.

The most common use for per diem reimbursements is for business travel.

So how do you set a fair daily allowance for expenses? You don’t!

The US government has done the legwork for you and set maximum per diem rates for travel, lodgings and “incidentals” (like fees or tips).

You can see the latest rates on the US General Services Administration website.

The per diem guidelines vary from state to state.

Are Per Diem Expenses Tax Deductible?

Yes, they are! If the rate is lower or equal to the government guideline, it is untaxed income.

To claim this, the employer must submit:

The details of the trip
Any receipts for accommodation (if applicable)
The purpose of the business trip

This should be submitted along with an employee’s W-2 form. If you pay over the federal rate, then that extra income is considered taxable.

Charging Per Diem Rates as a Contractor

Now let’s flip it around for all the contractors and day rate freelancers out there.

So you want to charge a day rate for your services. This is a great way of operating if it makes sense for your industry and your offering.

You’ll need to negotiate your daily rate with your client before you start working. You should outline what is included in that day rate and what isn’t.

3 Tips for Working as a Day Contractor

Make sure you are paid over minimum wage
As contractors, we can often undervalue our services. You are still protected under the law and should be paid at least the minimum wage in your state.
Factor in expenses
If your meals on the days you work are not included, factor them into your fee. Long journey to the work location? Account for it in your fee. Any equipment rentals, lodgings and extra helping hands should all be considered in your proposal.
Use a solid invoicing system
Having professional invoicing software is priceless. It allows you to send invoices, track them and calculate extra expenses is priceless as a per day contractor. Platforms like FreshBooks give you the flexibility to set your payment terms easily and get paid online.

Key Takeaways

Per diem expenses or per diem work is commonplace in the business world. Once you know your rights as a contractor and your rights as an employer, you can navigate this way of working to your advantage!