Managing employee travel expenses effectively requires a balancing act between administrative efficiency and financial control.
Businesses have two primary options for reimbursing employees: per diem rates or actual expense reimbursements. Each approach offers specific advantages and potential drawbacks that need to be evaluated as companies choose a reimbursement method.
Per Diem vs. Actual Expense Reimbursement
With the per diem method, employees receive a predetermined daily amount to cover lodging, meals, and incidental expenses. This approach simplifies recordkeeping, as employees only need to document the time, place, and purpose of their travel—receipts aren’t required.
The advantages of the per diem method include:
- Predictable costs for budgeting.
- Reduced administrative burden.
- IRS compliance with minimal paperwork.
In contrast, actual expense reimbursement requires employees to submit detailed receipts for all travel-related expenses. While this method offers flexibility and more accuracy, it can be time-consuming for employees and employers.
The advantages of the actual expense method include:
- Employees are reimbursed for their exact costs.
- Allows for more flexibility in spending.
- Can be beneficial when travel expenses fluctuate significantly.
High-Low vs. Specific Location Per Diem
For businesses opting for per diem reimbursement, two methods are available:
The high-low method provides two standardized per diem rates—one for high-cost areas and one for low-cost areas.
In the context of business travel reimbursements, “high-cost areas” are specific cities or regions within the continental United States where the federal per diem rates for lodging, meals, and incidental expenses are set higher due to their elevated cost of living and travel expenses.
This typically includes locations such as New York City, Washington, D.C., San Francisco, and other popular business destinations. The Internal Revenue Service (IRS) and the General Services Administration (GSA) designate these areas and adjust the rates annually to reflect economic changes.
For the fiscal year 2025 (effective from October 1, 2024, to September 30, 2025), the IRS has defined a high-cost locality as any area with a federal per diem rate of $272 or more. Travel to these high-cost areas allows for a per diem rate of $319 per day, which includes $233 for lodging and $86 for meals and incidental expenses.
In contrast, travel to areas not classified as high-cost—or low-cost areas—has a per diem rate of $225 per day, covering $151 for lodging and $74 for meals and incidental expenses.
It’s important to note that some localities are considered “high cost” only during specific times of the year, often due to seasonal demand affecting lodging prices. For instance, per-diem rates in Newport, RI, range from an off-season (November through May) low of $141 before climbing to $268 for the peak summer period and declining to $218 for September and October.
The key benefits of the high-low method include:
- Simple administration with just two fixed rates.
- No need to check different rates for each travel destination.
In contrast, the specific location method assigns per diem rates based on the destination, using rates set by the GSA.
The benefits of this approach include:
- More precise reimbursement based on actual costs in different cities.
- Additional certainty for businesses with frequent travel to locations with highly variable expenses.
Which Option Is Best?
EEach business has unique travel needs, and choosing the right reimbursement method can impact financial planning and compliance. Keep the following rules of thumb in mind:
- Per diem is ideal for businesses that want predictable costs and simplified administration.
- High-low method is best for employers who prefer consistency and do not need destination-specific rates.
- Specific location methods are suitable for businesses with frequent travel to areas where costs vary significantly.
- Actual expense reimbursement is better for companies that prioritize flexibility and can manage the added administrative burden of tracking receipts.
The information above is a general overview and not inclusive of every option available to taxpayers. If you need help selecting the best approach for your company, contact us to ensure your policy aligns with IRS guidelines and your business objectives.
