Understanding Per Diem: A Complete Guide for Small Business Owners
If you've heard the term "per diem" tossed around in business conversations but aren't quite sure what it means or how it applies to your company, you're not alone. This Latin phrase, which translates to "per day" or "for each day," has important implications for how you manage both your workforce and business expenses.
As a small business owner, understanding per diem can help you make smarter hiring decisions and streamline your expense management processes. Let's break down everything you need to know about per diem in business contexts.
What Does Per Diem Mean?
At its core, per diem simply means "by the day." In business, this term applies to two distinct scenarios:
- Per diem employees – workers who are hired on a daily, as-needed basis
- Per diem reimbursements – daily allowances provided to employees for business travel expenses
Both applications can offer significant advantages to small businesses when used strategically.
Per Diem Employees: Flexible Workforce Solutions
Unlike traditional full-time or part-time employees who work regular, ongoing schedules, per diem employees are brought in on a day-by-day basis when additional support is needed.
When to Use Per Diem Workers
Small businesses typically hire per diem employees in several situations:
Covering gaps in coverage – When regular employees are out sick, on vacation, or taking personal leave, per diem workers can step in to maintain operations.
Managing unexpected staffing shortages – If an employee leaves suddenly or you're between hires, per diem staff can bridge the gap.
Handling seasonal demands – During busy periods or for special projects, per diem workers provide the extra hands you need without long-term commitments.
Testing before hiring – Per diem arrangements can serve as extended trial periods to evaluate whether someone is a good fit for a permanent position.
While per diem employees are commonly associated with healthcare (nurses) and education (substitute teachers), small businesses across industries use them for administrative support, creative projects, warehouse operations, event staffing, and specialized consulting.
How Per Diem Employment Works
Here's what makes per diem employment unique:
Fixed daily rate – Per diem workers typically negotiate a set daily rate before accepting an assignment. This rate is paid regardless of whether they work two hours or eight hours, though labor laws around minimum wage and overtime still apply.
No guaranteed hours – Unlike regular employees, per diem workers don't have guaranteed schedules. They're called in when needed and may go weeks without work from a particular employer.
Flexibility for both parties – Businesses gain workforce flexibility, while workers can accept or decline assignments based on their availability.
Example in Action
Imagine you run a boutique marketing agency and land a large project requiring extensive graphic design work over a two-week period. Your in-house designer can handle the normal workload, but this project requires additional support.
You hire a per diem graphic designer at a rate of 400 daily rate (though you'd owe overtime if hours consistently exceed eight per day, depending on your jurisdiction).
Per Diem Travel Reimbursements: Simplifying Business Travel
The second application of per diem involves travel expense reimbursements. Instead of requiring employees to track and submit receipts for every meal and expense during business travel, many companies establish a daily allowance.
How Per Diem Travel Expenses Work
Set a maximum daily rate – Your company determines the maximum amount employees can spend per day on travel-related expenses. This typically covers lodging, meals, and incidental expenses.
Provide upfront or reimburse – Some companies advance the per diem amount before travel; others reimburse afterward.
Simplified expense tracking – Employees don't need to collect receipts for every coffee or meal, as long as they stay within the daily allowance.
Federal Guidelines and Tax Implications
The U.S. General Services Administration (GSA) publishes federal per diem rates that vary by location. While businesses aren't required to follow these rates, there are tax implications for exceeding them.
Within GSA rates – Reimbursements at or below GSA rates are generally not considered taxable income to employees.
Above GSA rates – Any amount exceeding GSA rates is treated as taxable income and must be reported on employees' W-2 forms.
For example, if the GSA per diem rate for a city is 250 per day, the $70 difference is taxable income for the employee.
Example in Action
Your sales representative travels to a conference in Chicago for three days. You've established a per diem rate of 600 for the trip. Instead of collecting receipts for every meal and taxi ride, your employee simply ensures their daily spending stays under $200. They submit a brief expense report summarizing their costs, and you reimburse the full amount.
Key Benefits of Using Per Diem
For Per Diem Employees
Cost efficiency – You only pay for the labor you actually need, when you need it. There's no obligation to provide consistent hours during slow periods.
Reduced overhead – Per diem workers typically don't receive benefits like health insurance, retirement contributions, or paid time off, reducing your overall employment costs.
Built-in flexibility – Scale your workforce up or down based on current demands without the complications of layoffs or understaffing.
Specialized expertise – Hire specialists for specific projects without committing to full-time salaries for skills you only need occasionally.
For Per Diem Travel Reimbursements
Simplified administration – Less paperwork, fewer receipts to review, and streamlined expense report processing.
Predictable budgeting – You know exactly what each day of business travel will cost, making budget planning more straightforward.
Employee convenience – Your team doesn't need to front large amounts of money or save every receipt, reducing stress around business travel.
Faster reimbursement – Without extensive receipt verification, you can reimburse employees more quickly.
Best Practices for Implementing Per Diem
For Hiring Per Diem Employees
Research competitive rates – Survey your local market to understand going rates for per diem work in your industry. Offering competitive compensation helps attract quality talent.
Provide clear expectations – Even for one-day assignments, clearly communicate what needs to be accomplished, what resources are available, and what success looks like.
Respect their professionalism – Treat per diem workers with the same respect as regular employees. You may need their services again, and word-of-mouth matters.
Set them up for success – Provide necessary access to tools, systems, and information. A few minutes of onboarding can dramatically improve productivity.
Maintain a roster – Build relationships with reliable per diem workers who can step in when needed. Having a "bench" of trusted talent makes last-minute scheduling easier.
Comply with labor laws – Remember that per diem employees are still subject to minimum wage laws, overtime regulations, and workplace safety requirements.
For Per Diem Travel Reimbursements
Establish clear policies – Document your per diem rates, what expenses are covered, and how employees should report spending.
Consider location-based rates – Travel to New York City costs more than travel to smaller cities. Consider adjusting rates based on destination.
Require expense reports – Even without receipts, employees should submit reports summarizing how they spent their per diem allowance. This documentation is crucial for tax purposes.
Provide advances when possible – Requiring employees to front hundreds of dollars for business travel can create financial hardship. Providing per diem advances alleviates this burden.
Review and adjust regularly – Periodically evaluate whether your per diem rates remain reasonable as costs change.
Separate categories if needed – Some businesses set different rates for lodging versus meals and incidentals, giving more specific guidance.
Common Pitfalls to Avoid
Misclassifying workers – Ensure per diem workers are properly classified as employees (not independent contractors) if you control their work methods and schedule. Misclassification can result in penalties.
Ignoring overtime – Just because someone has a daily rate doesn't exempt them from overtime laws if they work beyond standard hours.
Setting arbitrary rates – Base your per diem rates on market research and actual costs, not guesswork.
Lacking documentation – Even with simplified per diem processes, maintain proper records for tax and compliance purposes.
Treating per diem workers poorly – Creating a negative experience means talented workers won't be available when you need them again.
Is Per Diem Right for Your Business?
Per diem arrangements work well when:
- Your business has fluctuating staffing needs
- You need specialized skills for specific projects
- You want to test-drive potential employees
- Your employees travel regularly for business
- You want to simplify expense management
- You need coverage for employee absences
They may not be ideal when:
- You need consistent, reliable daily coverage
- The learning curve for new tasks is steep
- Positions require deep institutional knowledge
- You're in a location with limited per diem talent
- Your business rarely involves travel
Moving Forward with Per Diem
Whether you're considering per diem employees or travel reimbursements, the key is implementing these arrangements thoughtfully. Take time to research appropriate rates, establish clear policies, and communicate expectations clearly.
For many small businesses, per diem arrangements offer the perfect balance of flexibility and structure. They allow you to access the talent and resources you need while maintaining lean operations and predictable costs.
Start small—perhaps with a single per diem hire for a upcoming project or implementing per diem travel reimbursements for your next business trip. As you become more comfortable with these arrangements, you can expand their use strategically throughout your business.
Remember, the goal isn't to replace your core team with per diem workers, but to complement your regular workforce with flexible solutions that help your business operate more efficiently and adapt to changing demands.
Have questions about implementing per diem arrangements in your business? Consider consulting with a human resources professional or accountant to ensure you're handling compensation, taxes, and compliance correctly for your specific situation.
