Now that we have a pretty solid understanding of the basics of the travel nursing pay package (1, 2, 3, 4, 5, 6), let’s discuss the “Tax Free” aspect that everyone seems so fascinated with. I mean, what’s not to be fascinated about?! You’re not going to have to pay any taxes!! Is it possible that Benjamin Franklin was wrong when he said, “in this world nothing can be said to be certain, except death and taxes.”? The answer is yes, possibly. Please note the emphasis on “possibly.”
Before I offer any further information it’s important to note that I am not a tax adviser, Certified Public Accountant, or Lawyer. I am not in any way providing any tax advice. All information regarding taxes is informational and intended as a jumping off point. You must seek the help of professional tax advisers to gain a clear understanding of your unique circumstances. We recommend the folks at traveltax.com. That said we can move on to a detailed discussion of this issue.
Tax write-offs versus reimbursements
Let’s begin by discussing where the concept of tax free money even comes from. In a general sense, the tax code allows for tax write offs or tax free reimbursements for all ordinary and necessary expenses incurred while working away from one’s tax home. First let’s distinguish between a “tax write off” and a reimbursement.
A tax write off is when you reduce the amount of your taxable income by a specified amount in the course of compiling your tax return. For example, if you lived in Atlanta and went to Chicago on a business trip and incurred hotel and food charges while in Chicago that were paid out of your own pocket, you would keep the receipts and reduce your taxable income by this amount on your tax returns.
Now let’s say you took the same business trip, only this time your employer gave you a fixed amount of money to pay for your expenses before you left; that’s a reimbursement or “per diem.” Many agencies and recruiters will call a per diem payment, a “stipend” which is a term that is technically used to describe any lump sum of money given for a specific purpose. This is the term that we will use moving forward because in the travel nursing world, it helps us differentiate between per diem as meaning PRN shifts worked on an on call basis, and stipends as meaning tax free money.
What are travel nursing stipends?
The most common forms of tax free stipends offered by travel nursing agencies are travel stipends, lodging stipends, and Meals and Incidental Expenditure (M&IE) stipends. Travel stipends are determined in part by the cost of traveling to and from the job. These costs can include among other things airline tickets, or car mileage reimbursements. The car mileage stipend rates are set and periodically updated by the IRS. For example, the standard mileage rate in January, 2012 was 55.5 cents for business miles driven.
Maximum lodging and M&IE stipends are also set by the government on an annual basis. These rates are set by the General Services Administration and can be found here. The government sets these rates for every country in the world and the rates vary depending on the estimated cost of living in a given area. For example, the per diem rates (as the IRS calls them) in San Francisco, CA are going to be much higher than the per diem rates in El Paso, TX. When you’re looking up rates in the United States, you may see them referred to as the “CONUS Rates”. CONUS simply means the Continental United States. Per Diem rates for lodging and M&IE are the maximum rates that an employee can be given without an exchange of receipts while the employee is away from home on the business of the employer.
I’ve bolded the definition above to highlight the importance of being familiar with it. It’s particularly important to note two aspects of the definition. First, these are the “maximum rates.” That means that agencies can pay less if they’d like to, or need to. Second, these are the maximum rates that can be given “without an exchange of receipts.” This means that the agency does not have to collect receipts from the travel nurse for its own records.
In Part 2 of this series, we’ll discuss the reasons that tax free stipends are so heavily utilized in the industry.