Per Diem vs Actuals: How to Choose the Right Expense Model for Startups

Per Diem vs. Actuals: Choosing Your Expense Model

As a founder, you are the de facto head of finance, HR, and operations. When your first team members start traveling, reimbursing their expenses feels simple. They send you receipts; you send them money. But as your team grows, that process of startup expense tracking quickly becomes a drain on your time and a risk to your cash flow. Deciding on the best way to reimburse employee expenses for a startup is a strategic choice that impacts your runway, team morale, and compliance. Choosing the right employee expense policy now prevents major headaches as you scale, especially when you are trying to manage team expenses without a dedicated finance team.

Foundational Understanding: The Two Core Travel Reimbursement Methods

At its core, the choice comes down to two primary travel reimbursement methods: paying for what was actually spent or providing a fixed daily allowance. Understanding the fundamental difference is the first step in building a scalable and effective policy for your business.

Actuals (Receipt-Based) Reimbursement

This is the model most early-stage startups begin with. Employees pay for business-related expenses out of pocket, submit receipts for proof of purchase, and the company reimburses them for the exact amount spent. The main advantage is precision; it is transparent and ensures the company only pays for legitimate, verified costs. This granular data can also be useful for detailed financial analysis. The downside is the significant administrative burden of collecting, verifying, and processing every single receipt for coffee, meals, and taxis, a task that scales poorly as your team expands.

Per Diem (Daily Allowance)

From the Latin for “per day,” this model provides employees with a fixed daily allowance to cover costs like meals and incidentals (M&IE). Lodging is sometimes included in a total per diem rate, but more often it is handled separately via a corporate card or actuals reimbursement. This method dramatically reduces paperwork, as employees typically do not need to submit individual receipts for expenses covered by the per diem. It offers cost predictability for the company and flexibility for the employee, fostering a sense of trust and autonomy.

The Hybrid Approach: A Balance of Control and Efficiency

Many scaling companies land on a hybrid model, which is one of the most effective expense reporting best practices. For instance, a common policy requires actual receipts for large, variable expenses like lodging and airfare but provides a per diem for meals and incidental expenses. This approach captures the best of both worlds, offering financial control over major expenditures while eliminating the administrative hassle of tracking small, everyday costs. It strikes a pragmatic balance between rigorous oversight and operational efficiency.

The Founder's Decision Framework: Three Core Trade-offs

How do you choose the right model for your company right now? It comes down to balancing three competing priorities: cost control, administrative overhead, and employee experience. Your industry, funding stage, and company culture will heavily influence which of these you prioritize.

1. Cost Control vs. Predictability

The actuals model gives you precise control over every dollar spent, but it offers zero predictability. A sales dinner in New York City could cost triple what it does in a smaller city, making cash flow forecasting a significant challenge for startups with tight budgets. Per diem offers the opposite: you know exactly what travel will cost per person, per day, but you accept the risk of overpaying if an employee is frugal or finds cheaper options. The reality for most pre-seed startups is more pragmatic: cash management is king, and predictability often outweighs precision.

• E-commerce Startups: For a founder sending a small team to a sourcing trade show in Asia, a per diem is often ideal. Margins are tight and knowing the exact cost of the trip upfront helps protect cash flow. This predictability is critical when managing inventory costs and marketing spend.
• Deeptech and Biotech Startups: These R&D-heavy companies often need to track expenses meticulously for grant reporting or claiming R&D tax credits. An actuals model, while burdensome, ensures every cost is categorized correctly against a specific project. This level of detail is crucial for financial reporting under US GAAP or FRS 102 and for satisfying audit requirements from funding bodies.

2. Administrative Overhead and Scalability

This is the most common pain point that forces a policy change. In the beginning, managing receipts for two or three people is manageable in accounting software like QuickBooks or Xero. However, the administrative burden of an actuals policy becomes a significant time sink as a team grows. A scenario we repeatedly see is this: a five-person sales team attends a SaaS conference. Processing 15 meal receipts per person for a three-day trip using an actuals model creates a huge backlog for the founder or operations manager. A per diem policy would have eliminated that entirely. A key trigger for re-evaluating an actuals-only model is when a company has more than five employees traveling regularly.

3. Employee Experience and Trust

Your expense policy sends a powerful message to your team. An overly bureaucratic receipt-based process can create friction and frustration. Delays in reimbursement can negatively impact employee morale, especially for junior team members who may not have large credit limits. A per diem model, in contrast, signals trust. It tells employees you trust them to manage their budget responsibly. This autonomy can be a significant cultural benefit, allowing your team to focus on the purpose of their trip, not on collecting every single receipt. However, it requires clear communication about what is covered to avoid misunderstandings.

Staying Compliant Without Losing Your Mind

Avoiding tax issues is non-negotiable. Both the US and UK have specific rules to ensure reimbursements are not considered taxable income for the employee. Getting this wrong can lead to payroll tax penalties and complicated accounting corrections. A well-structured policy is your primary defense.

For US Companies: The IRS Accountable Plan

The entire system is built around a concept from the tax authority. The 'Accountable Plan' is the set of IRS rules that allows a company to reimburse employees for business expenses without the reimbursement being counted as taxable income. To qualify, your expense policy must meet three simple tests:

1. Business Connection: The expense must have a clear and direct business purpose.
2. Substantiation: The employee must adequately account for the expenses within a reasonable time. For actuals, this means providing receipts. For per diems, it means providing a record of the time, place, and business purpose of the travel.
3. Return of Excess: The employee must return any excess reimbursement or allowance beyond actual substantiated expenses within a reasonable time.

Failure to meet these rules means the reimbursements could be treated as wages, subject to income and payroll taxes. For a practical template, see our US startup expense policy framework.

For UK Companies: HMRC Benchmark Rates

The principles in the UK are similar. The tax authority, HMRC, wants to ensure you are reimbursing genuine business expenses, not just giving employees extra tax-free cash. To simplify this, HMRC publishes benchmark and overseas scale rates for subsistence expenses. Using these government-set rates for meals is a straightforward way to create a compliant employee expense policy. You can pay less than these rates without issue. If you pay more without a specific approval from HMRC, the excess may be considered taxable income for the employee, creating a payroll liability for the company.

For a ready-to-use policy, see our UK startup expense policy template.

Evolving Your Policy: A Staged Approach from Seed to Series B

Your expense policy should not be static. It needs to evolve with your company's headcount, travel frequency, and operational complexity. Here is a common trajectory for managing team expenses as you scale.

Seed Stage (1-15 Employees)

At this early stage, founders typically manage finances on spreadsheets, QuickBooks, or Xero. The actuals model usually works fine. The team is small, travel is infrequent, and the priority is scrutinizing every expense to conserve runway. The administrative burden is low enough for a founder or a part-time bookkeeper to manage. The pattern across SaaS and professional services startups is consistent: stick with actuals until the administrative work becomes a noticeable distraction from core business activities.

Early Growth Stage (15-75 Employees / Series A)

This is where things start to break. The breaking point for moving from an actuals to a hybrid model often occurs around the Series A stage. You now have multiple people traveling regularly, and the person managing operations is spending hours each week chasing receipts and processing expense reports. This is the perfect time to implement a hybrid policy. Use a corporate card solution like Ramp or Brex for flights and hotels to gain control and visibility. Then, introduce a per diem for meals and incidentals using the official GSA (US) or HMRC (UK) rates. This transition is one of the most effective ways to manage growing pains in your expense process.

Scaling Stage (75+ Employees / Series B and Beyond)

By this stage, manual processes are no longer viable for managing team expenses. At Series B and beyond, a formal per diem or hybrid policy integrated into dedicated expense management software is standard. Tools like Expensify, Navan, or SAP Concur become necessary to automate submission, approval workflows, and synchronization with your accounting system. The goal here is to create a fully scalable system that provides financial control without slowing the company down. A formal, clearly communicated employee expense policy becomes essential for fairness, compliance, and efficiency at scale.

Practical Takeaways for Founders

Choosing the best way to reimburse employee expenses for your startup is a journey, not a one-time decision. Your approach will and should change as you grow. Here is a clear action plan.

1. Start Simple with Actuals: When you have fewer than 15 employees and infrequent travel, stick with receipt-based reimbursement. It offers maximum cost control when every dollar is critical to your runway.
2. Know the Tipping Point: When you have 5+ employees traveling regularly or your total team hits 15-20 people, the administrative cost of an actuals policy begins to outweigh its benefits. This is your signal to evolve.
3. Adopt a Hybrid Model for Growth: At the Series A stage, transition to a hybrid system. Require receipts for large, variable costs like flights and hotels, but use a per diem for meals and incidentals. This balances control with operational efficiency.
4. Stay Compliant with Government Rates: Do not invent your own per diem amounts. Using the official GSA (US) or HMRC (UK) rates is your compliance safe harbor. This removes guesswork and minimizes tax risk for both the company and your employees.
5. Automate When You Scale: By Series B, manual tracking is inefficient and error-prone. Invest in expense management software to automate your policy, enforce rules, and free up valuable time for your finance and operations teams.

For more detailed resources, visit the Expense Management hub for templates and further guides.

Frequently Asked Questions

Q: What expenses are typically covered by a Meals & Incidentals (M&IE) per diem?

A: An M&IE per diem generally covers the cost of meals (breakfast, lunch, and dinner), room service, laundry, and tips for service staff. It does not cover lodging, transportation (like taxis or rental cars), or airfare, which are typically handled as separate actual expenses.

Q: Do we still need receipts if we use a per diem model?

A: For expenses covered by the per diem (like meals), employees generally do not need to submit individual receipts. However, they must still substantiate the travel itself with records showing the date, location, and business purpose of the trip to comply with IRS and HMRC regulations.

Q: How should our employee expense policy handle costs that exceed the per diem rate?

A: A clear employee expense policy should state that the per diem is the maximum allowance. If an employee chooses to spend more, the excess is their personal expense. For exceptional situations, like a required client dinner, the policy should define an exception process where the higher cost can be submitted as an actual expense with receipts and pre-approval.