Managing employee travel expenses can be a challenge for any business. From airfare to meals and lodging, the costs can quickly add up. If you're a business owner, you may already be familiar with the hassle of tracking every receipt and managing reimbursements. Fortunately, there’s a simpler way to handle it: per diem.
Per diem is a daily allowance given to employees to cover travel-related costs, reducing the need for complex reimbursements. In Saudi Arabia, where business travel is frequent, setting up a clear per diem system not only helps you control spending, it also ensures compliance with local labor laws.
To help you understand it better, this blog will explain the per diem meaning and why it’s an important tool for your business’s bottom line.
Per diem is a Latin word that means “per day.” In the business, it refers to a daily allowance given to employees or contractors to cover expenses during business travel. It’s usually paid in advance or reimbursed after the trip, depending on the company’s policy.
Instead of asking employees to submit receipts for every coffee, taxi, or meal, companies provide a flat rate that covers typical travel costs. This simplifies the reimbursement process and ensures employees are fairly supported during work trips.
Historically, per diem systems were introduced to reduce the burden of expense tracking. Employees knew exactly how much they could spend each day, and companies avoided the hassle of sorting through endless receipts.
Per diem is intended to cover essential daily expenses employees incur while traveling for work. Although the basics are the same, the exact coverage can vary from one company to another. Generally, per diem includes:
However, there are limits to what per diem can cover. Businesses typically set these amounts according to location and daily allowances.
Per diem allowances exclude certain non-business or excessive expenses. These usually include:
Note: Airfare is typically managed separately and not included in the per diem unless explicitly stated in the company’s travel policy.
With a clear understanding of the per diem meaning and its coverage, let's dive into how it functions in practice and how it's applied to business travel.
Per diem amounts are not fixed; they vary depending on several important factors that influence travel expenses. Here’s how these factors come into play:
Based on these factors, per diem is typically provided upfront or reimbursed afterward, without requiring employees to submit receipts for each expense. Let's look at an example to understand how per diem is calculated.
As mentioned above, the total per diem is determined by a combination of factors, including the destination, duration of travel, and the company’s specific policy.
To calculate the per diem, the following formula is used:
Total Per Diem = (Lodging Rate + Meals & Incidentals Rate) × Number of Days
Example:
Let’s say an engineer is traveling from Dammam to Riyadh for 3 days. The per diem rates are as follows:
Now, to calculate the total per diem:
Per Diem per day = SAR 300 + SAR 150 + SAR 100 = SAR 550
Then, for a 3-day trip,
Total Per Diem = SAR 550 × 3 days = SAR 1,650
The amount may be paid in advance or reimbursed after the trip, depending on company policy.
Now, let’s look into the different ways employers handle per diem payments and the variations you might encounter.
Employers determine per diem payments based on their policies, which may vary by company or region. In some cases, government-set rates apply, while others allow businesses to set their own.
Generally, per diem rates fall into three main types:
i) Fixed Per Diem Rates: As the name suggests, these are set amounts determined by factors like industry standards, location, and time of year. Employees receive a fixed daily allowance and do not need to submit receipts for every expense. Typically, companies cover fixed per diem rates by prepaying the employee or using a corporate credit card.
ii) Partial Per Diem Rates: In this arrangement, the company covers part of the daily expenses, and the employee pays the rest. This is common for longer trips where employees split time between meetings and the office.
The per diem system can differ for international travel, as each country sets its own allowances based on local costs. Companies often use software or spreadsheets to track these amounts and make sure employees don’t exceed their allowances.
However, it's important not to confuse per diem meaning with reimbursement, as both are distinct methods businesses use to handle travel expenses.
Although per diem and reimbursement approaches aim to support employees during business trips, they operate quite differently:
Per diem is a popular choice for many companies as it’s simple and predictable. By setting a fixed daily allowance for each employee, it makes budgeting and handling travel expenses much easier. Let’s take a detailed look at the real advantages it can bring to your business.
Paying a per diem is an easier and cost-effective way for companies to reimburse employees for travel expenses. It saves both employers and employees from having to track every single expense. Here are the key benefits:
Despite its advantages, managing per diem can come with a few challenges. Let’s look at the common issues.
Even with a clear per diem policy, businesses in Saudi Arabia may face some challenges. Here are a few common issues and practical solutions:
Solution: Align per diem rates with industry standards and government guidelines. Review and adjust the rates annually to keep them in line with inflation and regional cost changes.
Solution: Set clear limits for meals, lodging, and transportation. Require manager approval for extended travel and monitor spending through post-trip audits.
Solution: Use standard exchange rates from the Saudi Central Bank (SAMA) to ensure consistency and fairness.
Solution: Train employees on per diem policies and update the employee handbook regularly to keep everyone informed.
Solution: Establish strong internal controls and ensure clear communication about per diem usage. This helps in monitoring spending and identifying areas for cost reduction.
These challenges can be avoided by establishing clear guidelines and making sure employees understand how to use per diem properly. But before adopting a per diem system, it’s important to understand how it impacts tax reporting and compliance, especially in Saudi Arabia.
Per diem is not only a tool for expense management, but it also plays a vital role in ensuring tax compliance. In Saudi Arabia, employees are not subject to personal income tax, so per diem allowances are generally not taxable. However, businesses must still adhere to local tax regulations to ensure accurate reporting.
Here's what you need to know about per diem and its impact on tax compliance.
Hope you now understand the per diem meaning and how it simplifies travel expense management for both businesses and employees. These daily allowances make covering travel costs easy, eliminating the need for detailed expense reports.
While it may seem like a simple concept, per diem is an essential tool for managing business operations. A clear per diem policy helps control travel budgets and reduces administrative work.
If you're looking to simplify your company's travel expenses and ensure accurate per diem management, HAL ERP can help. Our Expense and Payroll Modules can seamlessly manage travel allowances, reimbursements, and policy compliance, giving you more time to focus on what truly matters.
Request a Demo to learn more!
