Per Diem Compensation

• Independent contractors and some other limited term workers, such as state legislators, are paid on a per diem basis. Per diem workers are not employees but work for a specific amount of time on an assigned project as agreed upon in a contract. They are not entitled to overtime pay if they work more than 40 hours in a week. In addition, they are not covered by workers' compensation or unemployment insurance benefits. No taxes or other deductions are withheld from a per diem worker's paycheck. He is responsible for paying state and federal income, Medicare and social security taxes every three months. His wages are reported to the Internal Revenue Service (IRS) on form 1099, rather than on a W-2.
  
  

Per Diem Expenses

• When an employee travels for business, the employer gives her an allowance to pay for certain expenses. The per diem may cover lodging, meals, entertainment and other business-related expenses. The U.S. General Services Administration (GAO) sets the maximum allowable Per Diem rates for cities in the continental United States. The Per Diem Committee in the Defense Department sets rates for travel to Alaska, Hawaii, Guam, Puerto Rico and other U.S. territories and the State Department sets rates for foreign travel. All rates are set at least once a year. Different cities have different per diem rates and in some instances, the rate for a city may be different for certain months of the year. For example, New York City had a lodging Per Diem of $192 per night for January 2011 and a rate of $224 per night for June 2011.
  
  

Per Diem Expense Regulations

• An employee is eligible for a per diem allowance when traveling for business. If the travel does not involve an overnight stay, the employer may prorate the per diem or the portion of the day she travels. The per diem may cover meals and incidental expenses, such as tips and parking fees or it may cover lodging, meals and incidental expenses for overnight travel. A worker must submit an expense report to the employer. The report must include the purpose of the business travel, the dates and place and receipts for authorized expenses over $75. Employers may also require receipts for expenses under $75. Completed expense reports must be submitted to the employer in a timely manner.
  
  

Per Diem Expenses and Employee Income

• Expenses are not considered income to the employee if the per diem rate is equal to or less than the maximum amount set by the federal government and the person submits an expense report to the employer. If the expense report is incomplete, no expense report was required or the per diem rate exceeded the federal maximum allowed for the location, the per diem is considered taxable income to the employee and is listed on his annual W-2 form.