What is Per Diem?
Per diem is a daily allowance provided to employees for business-related expenses incurred while traveling for work. This fixed amount covers costs such as lodging, meals, and incidental expenses, eliminating the need for detailed expense reporting.
How Per Diem Works
Instead of reimbursing actual expenses, organizations set a per diem rate based on government guidelines or company policies. Employees receive a predetermined amount per day, simplifying travel expense management. Per diem rates vary by location, with higher rates for expensive cities.
Components of Per Diem
- Lodging – Covers hotel or accommodation expenses.
- Meals – Includes breakfast, lunch, and dinner.
- Incidentals – Covers minor expenses like tips and service fees.
Advantages of Per Diem
- Simplifies Expense Management – Employees don’t need to save receipts for every meal or minor expense.
- Predictable Costs – Employers can budget travel expenses effectively.
- Reduces Administrative Burden – Less paperwork compared to traditional expense reimbursements.
- Encourages Cost Control – Employees are more mindful of their spending within the allocated amount.
Per Diem Rates and Regulation
Per Diem in Kenya
In Kenya, per diem rates are regulated by the Kenya Revenue Authority (KRA) and vary depending on the destination. Government employees and private sector organizations follow different guidelines. Employers must ensure per diem payments align with KRA’s prescribed rates to avoid tax implications. The applicable rates depend on whether the travel is domestic or international, with higher rates for major cities like Nairobi and Mombasa.
Tax Implications in Kenya
- Tax-Free Per Diem – Per diem payments that comply with KRA-approved rates are tax-exempt. Employers should ensure rates do not exceed the prescribed limits.
- Taxable Excess – If an employer pays per diem above the allowable threshold, the excess amount is considered taxable income and must be included in the employee’s taxable earnings.
- Documentation Requirements – To maintain compliance, employers should document per diem payments appropriately, ensuring they are correctly categorized and not treated as disguised salary.
- Withholding Tax Considerations – In certain cases where per diem is paid to non-employees, withholding tax may apply based on specific KRA guidelines.
Best Practices for Managing Per Diem
- Establish Clear Policies – Define what is covered under per diem and ensure employees understand the guidelines.
- Set Appropriate Rates – Use government benchmarks or industry standards to determine fair per diem rates.
- Monitor Compliance – Ensure employees follow company policies to maintain tax compliance.
- Leverage Technology – Use expense management tools to track per diem allocations and usage efficiently.
Conclusion
Per diem is a valuable tool for managing business travel expenses efficiently. In Kenya, organizations must adhere to KRA guidelines to ensure compliance and avoid unnecessary tax liabilities. By implementing clear policies and appropriate rates, companies can streamline reimbursements while providing fair compensation to employees. Understanding per diem ensures compliance, cost control, and a hassle-free travel experience for all parties involved.
