Per Diem vs Reimbursement: Which One Saves Your Payroll Team Time?

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Payroll is an indispensable process for every organization, regardless of its size. It plays a pivotal role in ensuring that employees receive their rightful compensation promptly and accurately. This not only keeps employees content but also ensures that the company remains compliant with various laws and regulations.

Despite its significance, payroll is anything but straightforward. The intricacies woven into the payroll process, encompassing tasks like calculating work hours, managing deductions, and adhering to tax regulations, often render it a complex and time-intensive endeavor for the payroll department.

The process entails various calculations that contribute to an employee’s total compensation, including overtime payments, benefits, Per Diem, and reimbursements. These computations demand time and precision.

Every company aspires to simplify, expedite, and optimize its payroll process. In this blog, we’ll delve into the complexities that make payroll challenging. Furthermore, we’ll explore two specific terms, Per Diem and Reimbursement, and their role in payroll. We’ll define these concepts, offer practical examples, and assess which of the two can help streamline and save time for your payroll team.

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The Factors Leading to Extended Payroll Processing Time

Before diving into Per Diem and Reimbursement, let’s take a moment to appreciate the multifaceted nature of payroll processing. It involves numerous tasks, such as:

  1. Time Tracking: Employees are paid for the work they do each month and the payroll team has to accurately calculate the total number of hours employees work which includes overtime on normal days and on holidays which is not easy especially if you do not use technology that does it for you automatically and more efficiently.
  2. Not one component: Employee compensation is a composite of several components, encompassing the fundamental base salary, supplementary benefits like health insurance or retirement plans, reimbursements or Per Diem for business expenses, deductions, tax withholdings, and more. This intricate blend of elements contributes to the complexity of the payroll process, as each employee’s compensation package is unique.
  3. Tax Calculations: Handling a multitude of taxes, including local, state, and federal levies, while calculating and making the necessary deductions is a complex task. For instance, federal income tax may require multiple tax brackets and credits, state taxes can vary significantly, and local taxes may apply based on an employee’s work location, adding layers of intricacy to the payroll process.
  4. Benefits and Deductions: In the payroll process, the payroll team is responsible for making various adjustments to an employee’s base salary. These adjustments encompass both benefits, such as health insurance and retirement contributions, and deductions, creating a comprehensive compensation package for the employee.
  5. Compliance: The payroll team plays a critical role in ensuring compliance with tax and labor laws that frequently change. This is essential because mishandling these regulations can result in legal troubles and financial penalties. However, these compliance requirements also add complexity to the payroll process.
  6. Record-Keeping and Reporting: At the outset of the payroll process, the payroll department undertakes the meticulous task of record-keeping and reporting. This involves the precise storage of employee information, wage rates, and tax data. Subsequently, the team prepares and submits mandatory payroll reports like W-2s and 1099s. While this record-keeping and reporting are essential for legal compliance and transparency, they also extend the duration of the payroll process. 

Every company aspires to perform the tasks mentioned above swiftly, efficiently, cost-effectively, and with precision. This is precisely why we are delving into the topic of Per Diem and Reimbursement. While these two concepts share similarities, they also have notable differences. Our aim is to discern which option is superior in terms of time-saving for the payroll team and cost-effectiveness for the company.

Per Diem vs. Reimbursement

Now, let’s shift our focus to Per Diem and Reimbursement, two terms closely related to the payroll process.

  • Per Diem: Per Diem is like daily pocket money for employees when they’re on a work trip. It’s a set amount of cash given each day, so workers don’t need to bother with saving receipts for every little expense. For the company, it’s a breeze because they don’t have to dig into each tiny spending detail.

    Example: A sales representative goes on a business trip. Instead of meticulously tracking every meal and taxi ride, they receive a daily Per Diem allowance to cover food, accommodation, and other incidental expenses.
  • Reimbursement: Reimbursement, on the flip side, is when employees pay for work-related stuff from their own wallets and then ask the company to pay them back. It could be for things like gas, food, or stuff for the office. Usually, they have to show receipts or fill out expense reports to get the money back. 

    Reimbursement typically includes expenses incurred for various work-related purposes, not just those on a business trip. It can cover costs like mileage for using your personal vehicle for work, meals while entertaining clients, office supplies purchased for work tasks, or any other expense that benefits the company. 

    Example: An employee purchases stationary and then submits receipts to the company’s finance department to get reimbursed for the exact amount spent.

Which Saves More Time for Your Payroll Team?

To determine which option saves your payroll team more time, let’s weigh the pros and cons of Per Diem and Reimbursement:

Aspect Per DiemReimbursement
SimplicitySimple for employees, no need for receiptsMore administrative work requires receipts and expense verification
Processing TimeFaster processing, as it involves fixed daily allowancesSlower processing, as it requires reviewing and approving individual expenses
Record-KeepingReduced record-keeping, fewer individual transactionsMore extensive record-keeping for each expense
ComplianceEasier to ensure compliance with set per diem ratesCompliance can be complex, with different regulations for various expenses
Employee SatisfactionEmployees appreciate the convenience of a fixed daily allowanceEmployees may find the reimbursement process burdensome

Conclusion

In the continuous pursuit of saving time and streamlining the payroll process, both Per Diem and Reimbursement offer their advantages. Per Diem emerges as the clear winner in terms of simplification, reduced record-keeping, and expedited payroll processing, making it a cost-effective choice.

On the other hand, Reimbursement provides flexibility but at the expense of increased administrative work and slower processing. While it offers versatility, it may entail higher operational costs due to the extended administrative effort required.

The decision between Per Diem and Reimbursement should be rooted in your organization’s unique needs, the types of expenses involved, and the preferences of your employees. While Per Diem is often a time-saving and cost-effective option, it might not be the perfect fit for every circumstance. Therefore, thoughtful consideration is paramount to strike the right balance that optimally serves both your payroll team and your employees.

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