A thorough understanding of what it takes to qualify for tax free stipends is of the utmost importance for travel nurses. While many travel nursing agencies, travel nurse recruiters, and even travelers will tell you that there is a lot of “gray area” or “wiggle room” with respect to the qualifications for tax free stipends, the simple fact of the matter is that the IRS and applicable court rulings have made the qualifications quite clear. And it’s certainly clear who doesn’t qualify for tax-free stipends.
In this four part series on qualifying for tax free stipends as a travel nurse, we’ll discuss the following:
- In Part 1, we’ll discuss some general concepts pertaining to the qualification of tax free stipends and how travel nurses commonly fit in.
- In part 2, we’ll provide a detailed explanation of “temporary status”, describe its importance for travel nurses, and discuss how to maintain this status.
- In part 3, we’ll begin to discuss the IRS’s 3 Factor Threshold Test in greater detail with emphasis on pertinent issues for travel nurses.
- In part 4, We’ll wrap up our discussion of the IRS’s 3 Factor Threshold Test so travel nurses will have a thorough understanding of how they can maintain their qualifying status for tax free stipends.
The Basic Scenario for Qualifying for Tax-Free Stipends
The tax code allows tax-free stipends for all ordinary and necessary expenses incurred while working away from one’s tax home. Therefore, whether or not traveling nurses qualify to receive tax-free stipends depends on where they’re working versus where their tax home is. Defining your tax home then becomes the key to determining if you qualify to receive tax-free stipends. According to the IRS, “Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home.”
To get a general idea of how one qualifies under this definition, think of a salesman who has a permanent job and a home both in Madison, WI. As a salesman, she spends 80% of her time working at the office in Madison, and 20% traveling to meet with clients at various locations where she must sleep or rest to meet the demands of her work while away from home. While she is working away from home, all of the necessary and ordinary expenses are tax deductible, or her company can provide tax-free stipends to cover the costs.
This is a good place to stop and gain some perspective because it represents the first test in determining whether or not you qualify to receive tax-free stipends. Note that the individual in the example has a permanent job that is primarily based in one location. In addition, the individual travels a small percentage of the time for business.
Let’s consider a similar real world example for travel nurses. The simplest example that I’ve dealt with is the nurse who has a permanent job but schedules time off to work the occasional short-term contract or strike in a location that requires rest before returning home. They may also work out a schedule at their permanent job that allows them the opportunity to travel and pick up some shifts in another location on their off days. For example, they may work 6 days in a row and then have eight days off in a row at their permanent job. During these periods they can occasionally travel to another location to work some guaranteed shifts. The important thing to note is that they are maintaining a “regular and main place of business.” Essentially, the tax home is where they work a significant amount of time and where they derive the majority of their income.
The Typical Scenario for Travel Nurses is a Bit Different
The vast majority of travelers do not fall into this scenario. Don’t fret; the IRS and tax courts recognize that there are other scenarios that may qualify someone to receive tax-free stipends. First, the nature of the taxpayer’s business may be such that it is literally away from home all the time. For example, the captain of a cruise ship could certainly fall in to this category. Second, a taxpayer may work at multiple temporary assignments in various locations. To get an idea, think of an oil rig worker who gets sent to multiple locations throughout a 12 state region for temporary periods of time. The majority of travelers fall into the second scenario. Again, they work multiple temporary assignments in various locations. That’s essentially what travel nursing jobs are.
In such scenarios, the IRS makes a determination as to whether or not the tax payer even has a legitimate tax home and ultimately whether or not the taxpayer qualifies to receive tax-free stipends. To make this determination, the IRS seeks to determine whether the taxpayer has a “regular place of abode in a real and substantial sense.” (Blum and Coppage)
This definition is clearly subjective. However, various court cases and IRS rulings have set some pretty clear guidelines. For example, IRS Revenue Ruling 73-529 established a 3 factor threshold test which is now widely used when determining the existence of a tax home. The three factors are as follows:
- Whether the taxpayer performs a portion of their business within the vicinity of the declared tax home and uses the declared tax home for lodging purposes while performing business there.
- Whether the taxpayer’s living expenses are duplicated as a result of their traveling for work.
- Whether the taxpayer has not abandoned the declared tax home. This is typically determined by how frequently the taxpayer uses the declared tax home for their own personal lodging and personal business, and whether or not the taxpayer has direct family members living in the declared tax home (Blum and Coppage).
Qualifying for Tax-Free Stipends Under the Typical Scenario
If a taxpayer working multiple temporary assignments meets all three of these factors, then they are safe with declaring a tax home, and they qualify to receive the tax free stipends. If a taxpayer meets two of the factors, then tax courts will typically employ a more subjective “facts and circumstances” test to determine if a true tax home even exists (Blum and Coppage). Finally, taxpayers meeting only one, or none, of the three criteria are considered “itinerant workers”. Itinerant workers do not have a tax home and are therefore not entitled to tax free stipends (Blum and Coppage).
The three factor threshold test makes it very clear that if you qualify for only one of the three factors, then you are not qualified to receive tax-free money. Satisfying two or three of the factors is not as clear on the surface. Therefore, we’ll provide details to clarify these issues in a future blog post. But first, we have to look at how travelers can maintain temporary worker status. Remember, in order to qualify for the 3 Factor Threshold test, you must be classified as a temporary worker. We’ll take a look at what it takes to maintain temporary worker status in the next blog post.