Per Diem Paycheck Explained

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Deciphering how per diem factors into your contract salary

When considering a contract position, it is necessary to fully understand how your compensation is structured. Per diem is an essential component of many contract salaries, particularly in fields like healthcare, where professionals frequently travel for work. In this article, we will demystify per diem and shed light on how it is calculated in your contract salary. By the end, you’ll have a clearer picture of how per diem impacts your earnings and benefits a contract worker.

What is Per Diem?

Per diem, derived from the Latin phrase “per diem,” which means “per day,” is an allowance provided to cover daily expenses while on a work assignment away from your primary residence. This allowance is intended to cover costs like meals, lodging, and incidentals incurred during your stay. This payment is built into your pay versus having to continuously submit for reimburse for all acquired expenses. These payments are tax-free as they are not considered wages as long as you meet certain criteria.

Tax Benefits:

One of the primary reasons companies include per diem in your contract salary is the tax advantage it offers. Per diem payments are typically tax-free, meaning they do not count as taxable income. This can significantly reduce your overall tax liability, leaving you with more take-home pay. Having decreased taxable income can have benefits; such as, decreasing your student loan repayments.

Components of Per Diem:

Per diem is usually divided into different components, primarily meal and incidental expenses, and lodging. The rates for these components can vary depending on your assignment location. The General Services Administration (GSA) in the United States, for example, provides standard per diem rates for various locations, which can serve as a reference point for many contracts.
GSA website: https://www.gsa.gov/travel/plan-book/per-diem-rates

Qualifications for per diem:

The old definition was that you had to work 50 miles from your tax home to qualify for per diem. Unfortunately, that does not cut it anymore. To qualify for non-taxable income, you must meet certain guidelines. You must determine your tax home through two of the these three factors:

You perform part of your business within the area of your main home and use that home for lodging while doing business within the area.
You have living expenses at your main home that you duplicate because your business requires you to be away from that home.
You haven’t abandoned the area in which both you historical place of lodging and your claimed main home are located; you have a member or member of your family living at your main home; or you often use that home for lodging.
If two of the three factors are true for your situation, you can earn tax-free stipend (per diem). Most recruiting companies will have you sign a document that you meet the criteria to qualify for per diem. Reach out to your recruiting company to review the qualifications if you are uncertain.

Understanding how per diem is calculated in your contract salary is essential for making informed financial decisions as a contract worker. It can significantly impact your take-home pay, tax liability, and overall compensation package. When considering a contract position, always inquire about the per diem structure, rates, and tracking requirements. By doing so, you’ll be better prepared to manage your finances effectively and maximize the benefits of your contract assignment.

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Kelly T

May 15, 2024

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