Travel nursing pay packages are quite complex compared to normal, everyday, permanent-job pay packages. This is due to the fact that travel nursing pay is commonly split between a taxable base rate and various tax-free reimbursements. Moreover, different agencies have different ways of splitting the pay among the various pay package components. Some agencies will pay travel nurses more tax-free money and less taxable money, and vice-versa. However, there are rules that agencies must follow. One set of rules that agencies should adhere to pertain to what is commonly called “wage recharacterization.” Understanding this issue will provide travel nurses with a better understanding of travel nursing pay.
A basic travel nursing pay package example
Let’s start with a basic and admittedly oversimplified example of a pay package. As we’ve mentioned before, a pay package begins with the bill rate for the particular job in question. The bill rate is the hourly rate that the company can charge the hospital for an hour of the traveler’s time at the hospital. Let’s use a bill rate of $60 per hour as an example. In this oversimplified example, the company is going to determine all of their costs, subtract them from the bill rate and use the remainder for the pay package. Let’s say the agency is left with $45 per hour when all of the dust settles.
With the remaining $45, the agency could pay a taxable wage of $30 per hour and split the remaining $15 per hour among a lodging stipend, a Meals and Incidental Expenditure stipend, and a travel stipend. Or, they could pay a taxable wage of $20 per hour and split the remaining $25 per hour among the same tax free stipends. Either way, the gross amount is still $45 per hour.
What are the rules for avoiding wage recharacterization?
With this basic example in mind, we can now discuss the wage recharacterization rules that agencies should follow when determining their pay packages. Let’s start with a fundamental truth we all know; income is taxable. However, in some cases, the rules allow for tax write-offs and/or tax-free reimbursements. But the IRS doesn’t want people going crazy with these things, so they have rules defining the proper use of tax-write-offs and tax-free reimbursements. And there are several such rules pertaining to wage recharacterization. Essentially, the IRS prohibits substituting, or “recharacterizing”, tax-free payments for wages.
1) Travel Nursing Pay Packages Should Include a Reasonable Wage
First, agencies should be paying a taxable wage that is in line with what the nurse would reasonably expect to make for working a permanent nursing job. Given the broad range of compensation for nurses, there is same gray area here. But one thing is for sure, Registered Nurses make more than $10 per hour.
So, if the agency in the example above were to pay a taxable wage of $10 per hour and split the remaining $35 among the tax-free stipends, then they’d be guilty of wage recharacterization. If they got caught, they might end up paying a fine and/or the the taxes required had the wages been paid as taxable income originally. Additionally, when an agency gets audited for an issue like this, it’s also possible that their employees get drug into the audit as well. You can read more about this particular issue and it’s potential ramifications for travel nurses here.
2) Local VS. Travel Nursing Pay Packages Should be Different
Second, agencies can’t pay the same gross wage for local work as they would for travel nursing work. The idea here is that tax-free stipends are supposed to be additional payments on top of the normal wage intended to cover costs incurred while working away from one’s tax home.
For example, if the agency pays a nurse $45 per hour taxable when the nurse works PRN shifts at home and then pays the same nurse $30 per hour taxable plus $15 per hour tax-free when the nurse works a travel job, then they could be guilty of wage recharacterizaton. A more common example occurs when an agency has multiple nurses working at the same facility. If one of the nurses is “local”, the agency might pay them $45 taxable per hour while paying the “travelers” $20 taxable and the equivalent of $25 non-taxable per hour. In both cases, the gross amount is $45 per hour. Here again, the agency could be guilty of wage recharacterization.
This is why many agencies will have two separate companies for travel nursing and PRN staffing. By maintaining two companies, they’re trying to keep their pay packages for travelers and PRN separate to avoid potential wage recharacterization violations.
3) Reasonable Expectations for Qualifying for Tax-Free Money
Third, agencies can’t pay tax-free stipends when there is a reasonable expectation that the individual will not incur the expenses that the tax-free stipends are intended to cover. For example, if the company knows that the traveler will be staying with a family member for free while working a travel job, then they shouldn’t be paying a tax-free lodging stipend. This is why many agencies will have their travelers sign a document attesting that they expect to incur the expenses and qualify to receive tax-free stipends.
4) Flexible Travel Nursing Pay Packages
Finally, agencies shouldn’t be offering flexible compensation packages that adjust the taxable base rate depending on the various options that travelers choose as part of their pay package. For example, an agency shouldn’t offer a choice of $30 per hour taxable if an Extended Stay Hotel is selected, or $27 per hour taxable if a fully furnished 1 bedroom apartment is selected. By offering the different taxable pay rates, the agency maybe guilty of wage recharacterization.
What should travel nurses be aware of?
1) It’s Everywhere
There are three issues pertaining to wage recharacterization that travel nurses should be aware of. First, expect to run into wage recharacterization frequently. Different agencies interpret the rules in different ways. Some agencies are unaware of the rules. And some agencies just don’t care.
2) It Constrains Honest Actors
Second, wage recharacterization rules are a constraining factor for agencies that adhere to them when they’re determining their travel nursing pay packages. When bill rates are low, like they have been between 2009 and 2013, agencies adhering to wage recharacterization rules might not be able to offer license reimbursements, rental cars, posh apartments, or other benefits because there wouldn’t be enough money left to pay a legitimate taxable wage. Meanwhile, agencies that don’t adhere to wage recharacterization rules may offer these benefits and lower the taxable wage they offer.
3) Maintaining Tax Records is Important
Finally, travel nurses should remember that maintaining proper records for tax purposes is an integral part of proving their personal compliance with IRS regulations. For example, your company may get in trouble for offering a taxable wage of $10 per hour. This may result in an audit of the company’s travel nurses. Travel nurses who can account for the ordinary and necessary expenses they’ve incurred while traveling away from their tax home maybe in the clear. Meanwhile, if you work with a company that offers high taxable wages and lower stipends, you may qualify for further tax-write-offs if you can provide proper documentation.
It’s important to note that we are not tax advisers, Certified Public Accountants, or Lawyers. We are 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.