In our last blog post we provided some basic background information on the tax free stipends that are commonly a part of travel nursing pay packages. In this blog post, we’ll take a look at why tax free stipends are so prevalent in the travel nursing industry and how they can be beneficial to both the agency and the travel nurse.
Every company you come across will be offering you tax free stipends. In fact, you would have difficulty finding an agency willing to pay you an all taxable income with no tax free stipends at all. The very simplified logic for this is that tax free stipends are offered for travel nursing jobs because they can be. But a deeper look at the issue provides insight in to how companies benefit from offering tax free stipends and how they are in a sense almost forced to offer tax free stipends.
Reduced payroll costs for agencies
The first benefit of tax free stipends for the agency is that they allow the agency to avoid certain payroll costs. This is because payroll costs are calculated as a percentage of the travel nurse’s taxable income. The Federal Insurance Contributions Act (FICA) taxes for Medicare and Social Security are an example. Many travelers don’t know this, but both the company and nurse pay a tax for these government insurance plans.
In 2012 the FICA Medicare tax was 1.45% and the FICA Social Security tax was 6.2%. This means that both the company and nurse each pay this percentage on the taxable income. For example, if you earned $1000 of taxable income for a week’s work, then you would see a total deduction of $76.50 for these two taxes. In addition, the company would also pay $76.50 for these two taxes but you wouldn’t necessarily see this happening. There are similar costs at the state level. Workers Compensation, Disability, and Unemployment Insurance are examples. These costs vary from state to state. Some states have higher costs and other states have lower costs.
When all of these costs are added up on the company’s end, they can be as low as 10% of the taxable wage to as high as 18% of the taxable wage. For example, let’s say that the total for a particular state was 15%. If a traveler earned $33 per hour as a taxable income, then the company would have to pay $4.95 for every hour that the travel nurse worked (15% of 33 = 4.95). However, if a company paid the traveler $33 per hour, but split that payment up between a taxable wage of $20 per hour and non taxable stipend that averaged $13 per hour (total $33 per hour), then they would only have to pay $3 for every hour that the travel nurse worked (15% of 20 = 3). All else equal, they would save $1.95 per hour worked.
Selling “tax-advantage” is easier for agencies
The second benefit of tax free stipends for agencies is that tax free money is a huge selling point for agencies trying to sell people on travel nursing. Recruiters appeal to candidates with talk of “Weekly Net Pay,” which is the amount of money after taxes that will be deposited to the candidate’s account for one week’s work. This figure is typically much higher than the candidate is used to earning. However, the Gross Pay, or before tax figure, may not be that much different than what the candidate is earning with their current job. The difference comes as the result of lower taxes.
Let’s say that a candidate is making $33 per hour at their permanent job at home in Alabama. Their Gross Pay, before taxes, for a 36 hour work week, is $1188. Their Net Pay, after taxes, would be approximately $865 (calculated by Paycheckcity.com based on zero exemptions). Now, a recruiter calls the candidate and says that they have a job that is paying $1004 Net Pay per week in California, PLUS the agency will provide free housing and cover the travel expenses.
Assuming that the candidate intends to keep paying all their bills back at home (rent, utilities, etc.), then that’s a NET difference of $149 per week ($1004-$865 = $149). That’s a pay increase of 17%. In the compensation world, that’s a huge increase. Imagine getting a 17% pay raise at your job without a promotion. Even with a promotion, that’s a significant increase. The trick is that agency is offering the same Gross Pay per week. The example I just used for California also has a pay rate of $33 per hour. The difference is that only $20 of the $33 is taxable. The other $13 is paid as a tax free stipend. As a result, the taxes are less and the Net Pay is higher.
One agency offering tax advantage means they all have to
Ultimately, the sales appeal and cost savings represent competitive advantages for agencies offering them versus agencies that do not offer them. Agencies offering the tax free stipends can use Net Pay as major selling point over agencies that do not use the stipends. Meanwhile, the cost savings realized by offering the tax free stipends can be used to increase the rate that the agency pays, making the agency even more competitive, or spent on advertising and other revenue generating objectives, or passed back to the hospital in the form of a lower bill rate. It’s better to understand this concept in reverse. That is to say that if agencies didn’t realize this cost saving, they would be forced to pass off the extra cost somewhere.
This is one of the main reasons why it’s difficult to find a agency that will offer a fully taxable wage. A fully taxable wage is a tough sell in a market that’s dominated by companies offering a seemingly much more attractive pay packages, and explaining away the differences is a difficult task. Furthermore, the additional cost would make the agency less competitive, whether with their hospital clients, with their travel nurses, or with their own internal employees. That additional cost would have to affect something.
You might ask why a agency wouldn’t just offer both options. All they would have to do is tell you what the pay package would be if they provided tax free money and what it would be if they provided an all taxable wage, right? There are two main reasons they don’t want to do this. First, offering to pay both ways can potentially complicate payroll processing and other aspects of an agency’s internal procedures. Second, and perhaps more importantly, offering compensation both ways exposes them to the risk of getting tagged by the IRS for what is called a re-characterization of wages. This is something that agencies, not their travelers, have to worry about.
The IRS doesn’t want tax free stipends to be treated as part of a wage. Tax free stipends are just that, payments to cover expenses incurred while traveling away from one’s tax home. If an agency claims that they’ll pay you $30 per hour taxable plus a $360 stipend for working a 36 hour week, or $40 per hour all taxable, whichever you choose, then they may open themselves to a claim from the IRS that the $360 stipend is actually being offered as a wage rather than a stipend. This is a risk that agencies don’t want to take. It’s also one of the reasons that the biggest agencies in the business maintain very structured and inflexible pay package offerings.
Tax free stipends also have benefits for travel nurses. Simply put, they get to put more money in their pockets. However, there are also disadvantages for travel nurses taking tax free stipends and, as we’ll discuss in a future blog post, travelers must be certain that they even qualify to receive the tax free stipends.