Hey everyone, welcome to The Truth About Travel Nursing Podcast. My name is Kyle Schmidt and I’m your host and this episode 18 of the podcast. In this episode, we’re going to discuss travel nursing tax issues. As we’ve discussed in previous episodes, travel nursing pay packages include a sizeable percentage of tax free money. So we’re going to take a look at why tax-free money exists in travel nursing, the advantages and disadvantages of tax free money, and how to qualify to receive the tax free money in the eyes of the IRS. All three of these issues are very important for travelers to consider. [Please note that this is a transcript of a podcast episode. As such, grammar and spelling are not optimized for written content.]
Before we begin, I have to provide the disclaimer that I am not a registered tax adviser, lawyer, financial adviser or certified public accountant. So our discussion here on the podcast is for informational purposes only. You would need to consult registered professional in order to legal advice for your unique circumstances. In that regard, we always recommend that you work with someone who has experience working with travel healthcare professionals, because these issues are unique.
That said, I do have a Bachelor’s degree in Finance, I spent 7 years working in the financial services industry, most notably with E*Trade where I was registered stock broker and licensed principle. I also have 9 years of experience in travel healthcare, 6 of those years as a recruiter and manager at a healthcare staffing company. I’ve read and researched the issue extensively, so I hope you’ll find the information on this episode to highly relevant, actionable and accurate. If you find that we make a mistake, simply let us know by posting a comment on the show notes page which will be found at blog.bluepipes.com/episode18.
How and Why Do Travel Nursing Companies Pay Tax Free Money?
Okay, so let’s start off with some basic background information on tax-free compensation. First, where does this concept even come from? 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. Now, this concept of a “tax-home” Is very important and we’re going to discuss in great detail later in the episode. But for now, it’s important to know that the IRS defines your tax-home as “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.”
So with that in mind let’s distinguish between reimbursements and write offs. The easiest way to do that is with an example. Let’s you’re a salesman who has a large sales territory that covers several states, but of course you spend the vast majority of time working from your home office in the city you live in. Every once in a while, you go out on sales calls that are far enough away that you need to sleep or rest before returning home. And maybe you stay out there for several days or weeks at a time. Of course, while you’re out there, you’re going to need a place to stay and you’re going to have to eat at restaurants. So the IRS has mechanisms that let you get this money back without paying taxes on it…it’s not really income per say, it’s covering a cost.
One mechanism is that you can declare these expenses on your taxes at the end of the year so that they count as tax-write-offs. This means that they reduce the total of your taxable income so that you pay less in taxes. However, this isn’t really ideal. I mean, ideally, your employer would pay for the entire cost of these expenses in addition to your normal income.
So the other mechanism is reimbursements. There are two main ways that reimbursements work. The first is that the employer can have you fill out an expense report every time you go out on the road. You would complete a report and then turn it in with all the receipts to justify the costs. The employer would then reimburse for that amount.
The second way is for the employer to rely on the Government’s per diem tables. These per diem tables are published annually and they signify the maximum amount that employees can be reimbursed for 2 categories of expenses while working away from their tax homes. The first category is lodging and the second category is Meals and Incidental Expenditures. Now these tables are broken down by location so different locations have different rates. In the United states, they’re typically broken down by county. So for example the rates for Los Angeles County will be higher than the rates for San Joaquin county because things are more expensive in Los Angeles county.
So using this mechanism, the employer can simply pay these rates out to their employees without having to keep track of all these expense reports and receipts. This is the way that the vast majority of travel healthcare agencies run their business. Now, it’s important to note that the rates published by the government are the maximum amounts allowed. They are not the required amounts and there is a big difference between maximum and required right? The point is that agencies aren’t required to pay these amounts. Instead, they can pay these amounts or less.
How Do Travel Nursing Agencies Determine Tax Free Amounts?
So that begs the question, how do agencies determine the amounts they’re going to pay for these stipends. Well, agencies are constrained or guided by at least three issues when it comes to determining how much they pay for these reimbursements. The first constraint is the bill rate for the job in question. The second constraint is the IRS’s wage recharacterization rule. And the third constraint is that the IRS requires them to have a reasonable cause to believe that their employee will actually be incurring the cost in question.
As we’ve mentioned in previous episodes, the bill rate is the hourly rate that the agency is able to charge for your time at the hospital. Therefore, the bill rate is the fundamental basis on which the entire pay package is based. It represents all the revenue that the agency is going to generate for the contract in question. So theoretically, the higher the bill rate, the more money the agency has to work and again theoretically, the higher the tax-free reimbursements could potentially be.
One thing to point out here at this point is that hospitals do not reimburse agencies per the values on the government’s per diem tables. Many travelers seem to get the impression that hospitals are giving this amount of money to the agencies and they’re not. Everything is built into a single bill rate.
With that in mind, the agency is also constrained by wage recharacterization rules. We discussed this in episode 4 when we talked about overtime and extra-time pay rates. Again, this rule seeks to ensure that employers aren’t playing funny games with their pay packages in order to avoid paying payroll taxes and income taxes. So for example, an agency shouldn’t be paying nurses really low taxable hourly rates so that they can increase the amounts of the tax free stipends. Instead, the agency must pay the nurse a taxable pay rate that is in line with a nurse would reasonably expect to make in the regular job market. So in that way, the wage recharacterization rules considered in light of the bill rate constrain how much tax-free money an agency is able to pay. Now, there are other ways that the wage recharacterization rules can constrain the tax-free amounts that agencies pay, but they get a little convoluted and they’re not really all that necessary for us to know here. The important thing to know is that there are constraints that agencies are dealing with. At the end of the day, travelers should be comparing and evaluating pay packages as we discussed in episode 3 to ensure they’re getting the best deals possible.
Now the third constraint is that agencies are supposed to have a reasonable cause to believe that you will indeed be incurring these expenses. In other words, they need to have a reasonable belief that paying these stipends is justified. For example, if the agency is working with a couple that travels together and the agency sets them both up in a shared apartment, they might be tempted to work the housing into one traveler’s contract, and provide the other traveler with the lodging stipend. They really shouldn’t be doing this because they know that this expense isn’t justified. Or, if a traveler tells their recruiter that they’ll be staying with their aunt for free while on assignment, then the recruiter technically shouldn’t be providing a lodging stipend.
What Are The Advantages and Disadvantages of Travel Nursing Tax Free Money?
Okay, so now we have an idea of where this concept of tax free money comes from and how the tax free money is determined. Let’s move on to discussing why agencies choose to do it this way and what the advantages and disadvantages of tax-free money are for the traveler.
So there are several reasons that this reimbursement or stipend approach is beneficial for agencies. Well you know what, first let’s take a step back and discuss the meaning of stipend. A stipend is a lump sum payment. So for example, when an agency quotes you $2000 for a monthly lodging stipend, the term stipend is supposed to mean that they’re paying it as a lump sum. The vast majority of agencies pay their stipends in lump sum amounts on each pay check.
And, as we’ve mentioned on previous episodes you should be breaking these stipend quotes down to hourly values for two reasons. First, it’s the best way to evaluate and compare pay packages as we discussed in episode 3. Second, for all intents and purposes they’re actually paid hourly. This is because the vast majority of agencies either pay them hourly or have a penalty for missing shifts that is equal to the value of the stipends and other costs they’re incurring. So knowing how these break down is important.
Okay, so first of all, paying them this way makes it much easier for the agency. This way, they can avoid processing hundreds to thousands of expense reports every pay cycle. It also makes it easier for you because you don’t have to deal with expense reports. Second, paying the stipends this way allows the agency to avoid a certain amount of payroll costs. They’re not responsible for paying the employer portion of payroll taxes on most of the tax free money they pay out, so they avoid this cost.
Third, selling the pay package this way is so much easier for them. Could you imagine if they had to explain expense reports and reimbursements to every traveler they worked with? Most people probably wouldn’t even travel if they had to listen that spiel.
Now, for the traveler, this approach has some advantages as well. As I mentioned previously, it saves you all the trouble of completing expense reports and tracking all of this data. That said, it’s important to note that there are certain records that you should definitely keep. For example, you should always save copies of travel nursing contracts. You should always maintain mileage logs and keep your travel receipts on record among other documents. The point here is that you won’t be bothered with reporting tis to your agency in order to get reimbursed.
But the bigger advantage is that you will possibly receive more in tax-free stipends than you actually spend on the items that they’re intended to cover. For example, you might receive a $2000 monthly stipend for lodging, but only spend $1300 on the lodging. That additional $700 is yours to keep tax-free. By contrast, if you were working under a true reimbursement program where you had to turn an expense report, then you wouldn’t get this advantage. And the same is true for Meals and incidentals. You’ll find many agencies that offer $250 per week for M&IE. That’s over a thousand dollars per month. So you may well spend less than that if you cook from home.
You may be wondering how this is possible. I mean, how does the IRS allow this to happen? Again, the per diem rates that the government sets are the maximum amounts that can be provided without the exchange of receipts. Moreover, the rates are actually set with the very short term business traveler in mind. We’re talking about people who travel someplace for business for less than a week at a time. So these folks are subject to staying in hotels and eating primarily at restaurants.
Travelers on the other hand re typically there for 3 months. So they can secure an apartment and have the option of preparing meals at home. These are both far less expensive options. But travel nurses are subject to the same government rates nonetheless.
Now, all of this in mind, it’s important to remember that travelers must qualify to receive the tax-free stipends. Also, agencies are responsible for making a reasonable attempt to verify that their employees qualify to receive the tax free money. Again, we’ll talk about that in detail a little later. First, we want to take a quick look at the disadvantages of tax-free money as a travel nurse.
The first disadvantage of tax-free money is that it has a negative impact on you future social security benefits. The social security benefit you receive when you reach retirement age is based on what you pay into the system. And what you pay into the system is contingent on how much taxable income you earn. So by taking a lower taxable pay rate, you and your employer are both paying less into your social security retirement fund. Now, the longer you travel, the more of an impact this will have. So for someone who travels a year or two, there may not be much of an impact at all and maybe even no impact. But if you travel for 20 years, then it could end up having an impact.
Okay, second, the lower taxable base rate will affect the amount you receive in worker’s comp, disability and/or unemployment benefits should you end up needing them. Again, the benefit you receive from these is based on the amount you pay in which is based on the taxable base rate. You know, I once worked with a traveler that went out on disability for a knee surgery she ended up needing. She received her first disability check and it was much less than she expected. She called in and I had to refresh her memory about that we had previously discussed this close to two years before when we started working together. That sucked…so please keep this in mind so you can plan ahead and prepare.
Another thing to prepare for is the possibility that the lower taxable wage affects your ability to secure loans. Specifically, I’m talking about housing loans and auto loans. Most banks are going to base their calculations off the taxable income. They view the stipends as being expense reimbursements rather than part of your regular income. That said, I’ve worked with many travelers who have been able to work around this, but a few who haven’t. It all depends on the bank.
Finally, there is a very slight possibility that the lower hourly wage you receive as a travel nurse could potentially affect your future salary negotiations. I think this is really rare though. I had it happen twice in 6 years where a permanent employer called in to verify a traveler’s income. Both times, they were only concerned with the taxable income. That said, I highly doubt this is a big issue or ever will be. Most salary negotiations in nursing are based on experience anyway. However, still a good thing to know just to be prepared.
How Do Travel Nurses Qualify For Tax Free Money?
Okay, so now let’s shift gears into our discussion on qualifying for tax free money. For starters, we already covered the common scenario for tax free money. Earlier we discussed the salesman who has a place of employment where spends the majority of his time but travels periodically for work related issues. Remember also that the idea is that tax-free reimbursements are allowed when you’re traveling away from your tax-home and your tax-home your main place of business; it’s essentially where you work the most.
Clearly, that’s not what travel nurses really do. Instead, they take temporary short term assignments in various locations. They may not really even work at their declared tax home much if at all. There are many other industries like this as well. So there is a set of guidelines for such industries and workers that have resulted from court cases over the years specifically for such industries.
One of the guidelines that has emerged is commonly referred to as the three factor threshold test. Basically, there are three criteria. If meet all three of the criteria, then you qualify. If you meet 1 or none of the criteria, then you don’t qualify and you are classified as an itinerant worker; someone without a tax-home. If you meet 2 of the three criteria, the they look at the “facts and circumstances” of your situation to determine whether or not you qualify. So you may or may not qualify if you meet 2 criteria.
The criteria 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.
Okay, so let’s take a look at each of these criteria to figure out exactly what qualifies for meeting them. We’re actually going to take a look at 2 and 3 first, because 1 is the most ambiguous. So the second criterion is, “Whether the taxpayer’s living expenses are duplicated as a result of their traveling for work.” Simply put, are you duplicating your living expenses? Are you paying rent and/or a mortgage at home and on the road? Are you paying for bills at home and on the road? And it’s really important to note that these expenses must be in line with fair market value, so you can’t rent a room in your parent’s house for $50 a month because that wouldn’t be fair market value.
We’re not going to go into all the scenarios here. Unique scenarios are something you should bring up with a tax advisor. However, there is no getting around the fair market value issue. It’s also important to note that if you do rent a room from someone back at your tax home, they may be required to declare it as rental income and pay the taxes on it.
The next criterion is, “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.” So, using the tax home for personal lodging and whether or not there are family members there is pretty straight forward. So let’s take a look at the things that qualify as personal business:
Maintain one permanent address at your tax home: You should use one address for all official documents and all mailing purposes. Get a P.O. Box that offers mail forwarding services and use it for everything. As far as I’m concerned, don’t use your assignment addresses for anything.
One Bank Account: Be sure that your one bank account was opened at a branch in your tax home. Use it for everything. It’s best to use a national bank with branches throughout the nation, or at least in the locations you’ll be traveling. Trust me nobody likes local credit unions more than me, but they’re rarely suited to meet the demands of a constant traveler.
File your taxes as a nonresident in assignment states: Do not file as a resident, or part time resident, because you’re neither one.
Keep your driver’s license registered at your tax home: Do not get a new driver’s license.
Register to vote at your tax home: No matter what the circumstances, do not register to vote anywhere else other than your tax home. And if you’re not registered to vote, you should be.
Make sure that all financial services you utilize have your tax home address: This goes for automobile insurance, health insurance, 401K, and any other type of financial service you utilize.
Maintain a primary doctor and dentist at your tax home: I understand you may need to get healthcare on the road, but you should always see your primary care providers for routine services and as much as possible otherwise.
Volunteer and civic activities: If you currently participate in such activities, continue to do so or try to maintain the connection. If you don’t participate in these activities, it may be a good time to look in to it.
Register all vehicles in your tax home state: Despite that fact that you’re traveling, you should register all vehicles you own in your tax home state and keep them registered there.
Okay, so both of those are fairly straight forward. But, if you plan on meeting factors 2 and 3, then you still have to worry about maintaining your temporary status as a travel nurse. Remember, your tax home can shift in the IRS’s eyes if you don’t maintain temporary status. When you’re meeting factors 2 and three, then there are two common mistakes you want to watch out for.
First, you want to watch out for inadvertently taking a job that qualifies as “indefinite employment”. This is the IRS’s term for a permanent job. They call it indefinite employment. One example is if you sign on for per diem work through an agency or directly with a hospital. Or if you take a part time job somewhere. These can all qualify as permanent work and could shift your tax home. It’s best to ask the employer if they can give you a contract that has a start and end date specified on it.
Second, you want to make sure that you don’t stay in one location for too long. Specifically, there is a myth out there that you can stay qualified for tax free money as a traveler in the same location for as long as you want as long as you return home to work for 2 or 3 weeks every year. This is not correct. For example, if you take travel assignments in and around Los Angeles California for 11 months, then return home to South Carolina to work for 2 to 3 weeks, then return to Los Angeles to continue to take travel assignments, your tax home will shift to Los Angeles. One rule of the thumb is to never work in one location for more than 12 months in a 24 month period. Again, this is if you are meeting the duplicate expense criteria. If you’re not meeting the duplicate expense criteria, then you’ll actually need to move around quite a bit more.
And this is where we get to the discussion of the first criterion which is quote, “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.” The reason that this criterion is pretty ambiguous is that asks whether the taxpayer is performing quote “a portion of their business” in the vicinity of their tax home. What exactly constitutes “a portion”?
Well, remember that if you meet all three criteria, then you definitely qualify for tax free money. So if you’re incurring duplicate expenses and maintaining all your personal business at the tax home, then “a portion” of your business could be a very small amount. However, this still doesn’t mean that you can continue to take travel jobs in the same location for years on end because again, your tax home will shift to that location. You still have to move around.
But, if you’re not paying duplicate expenses, and instead are trying to qualify based on criteria 1 and 3, then the amount of time you have to work at your declared tax home increases. Moreover, you have to stay pretty mobile as a traveler to ensure that you don’t work in any one location longer than you work at your declared tax home. Let’s look at an example. Let’s say you’re a traveler who’s not paying duplicate expenses. Maybe you have a motor home or trailer and you move from place to place. Now let’s say that each year you take an assignment in a place like Phoenix, AZ or somewhere in Florida. Or perhaps you sign on with one of the hospitals that does seasonal contracts directly through the hospital. Either way, you pay taxes on all the income you earn and you establish all of your personal business in that location. So your mail goes there, your vehicles are registered there and everything else. Now, for the rest of the year, you’d need to make sure that you didn’t work in any one place for longer than you worked at your declared tax home. So if your stints at your tax home were 5 months, then you shouldn’t be working for 5 months or more in any other location. Otherwise, your tax home could shift to that location, or worse yet, they could just classify you as an itinerant worker.
Okay, so as you can see, you need a strategy to maintain your temporary status as travel nurse so that you can continue to take the tax free money. You can satisfy all the criteria and you’re good to go. But you still need to make sure that you don’t stay in one location for too long. Again one rule of thumb is no more than 12 months in any 24 month period in the same location. Or, you can choose to satisfy criterions 2 and 3, in which case you’d be pretty much in the same boat. Or, you can choose to satisfy criterions 1 and 3, which is the most complicated case. You have to move around more and you have to have a steady temporary gig that you can land on annual basis where pay full taxes on the income you earn.
Now, all this said, it’s important to remember two things. First, every case is going to have some unique aspects, so it’s always important to run your case by an experienced tax adviser, especially if you have any uncertainties about your scenario. Second, rules can change. So new court case may come about that alter the landscape, which is another reason that it’s a good idea to check in with a tax adviser.
3 Myths About Travel Nursing Tax Issues
Okay, so the last thing I want to cover is a couple of myths related to tax issues. Remember, we’ve covered one myth already; this idea that you can keep working in the same area for years on end as long as you return home for a couple of weeks per year to work. This isn’t true. Another myth is that there is 50 mile rule. This myth states that as long as the assignment is more than 50 miles away from your tax home, you qualify for tax free stipends. And this is not true, there is no such rule. Again, the rule is that tax-free reimbursements are for instances where the nature of work requires that you rest or sleep away from your tax home to meet the demands of the job.
The final myth is that it’s okay to work for $10 an hour as an RN. Some companies set their taxable hourly rates really low so they can load up on the tax free stipends, which makes the compensation package really attractive when the recruiter talks about the net pay. It’s not okay to take such a low rate. The IRS requires that you be paid a taxable rate that is in line with what someone in the profession could reasonably expect to make as a permanent, fully taxed employee.
All have these myths have more interesting back stories, but I plan to cover them in greater detail in a future episode devoted to myths in travel nursing. So we’ll leave it that for now.
That’s a good place to close off this episode. We hope you enjoyed it. I know we covered a ton of information here, but don’t worry, everything is available on the show notes page. We’ll also have tons of links there to tax related blog posts so you can do some further research if you want. The show notes will be at blog.bluepipes.com/episode18. As always please post your questions, comments and other feedback there. Let us know if we missed something or got something incorrect so we can get it fixed. And while you’re there be sure to join BluePipes where you can take advantage of the revolutionary document management we features we have, network with your colleagues and recruiters and much more all for free and without the risk of having your personal contact information sold to third parties. Again, we hope you enjoyed this episode and until next time, have a safe and prosperous travel healthcare adventure.