Travel Nursing Pay – Qualifying for Tax-Free Stipends and Tax Deductions: Part 2: Maintaining Temporary Status
In our previous blog post we laid out the criteria under which individual tax payers can qualify to receive tax-free money to cover their expenses while traveling away from their tax home. We pointed out that for the vast majority of travel nurses, the first consideration is to maintain status as a temporary worker. In this blog post, we’ll discuss what that takes.
Travel nursing tax home versus family home
Starting at the beginning, let’s recall that, “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.” Take note of the distinction between “your tax home” and “your family home.” This is important because it’s possible to have both!
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For example, I have a friend who had a permanent job in San Jose, CA. He married his college sweetheart who was from Fresno, CA and they purchased a home in Fresno which is a 3 hour drive from San Jose. He kept his job and apartment in San Jose for nearly 3 years before he was able to find a comparable job in Fresno and move there permanently. For that 3 year period, he was not entitled to tax write-offs or stipends. Purchasing the home in Fresno was a personal matter, not a business matter. His tax home was in San Jose where he worked, and his family home was in Fresno.
The important distinction between my friend’s example and a travel nurse is that my friend’s job was a permanent job and travel nursing jobs are temporary short term assignments.
However, I offer this example and stress the difference between tax home and family home for a reason. While the IRS employs a different set of principles when dealing with temporary assignments, namely the 3 factor threshold test or the more subjective facts and circumstances test (which we discussed in Part 1 of this 4 part series), the spirit of the original definition is certainly at play. Authorities have ruled that declared tax homes were “personal in nature” rather than business related when deciding cases involving taxpayers engaged in temporary assignments.
Temporary assignments versus permanent employment
With that in mind let’s discuss the difference between temporary assignments and permanent jobs, or “indefinite employment” as it is commonly referred to by the IRS. This is a very important distinction to make because if a travel nurse’s employment away from their declared tax home is considered indefinite, then they no longer qualify for tax-free stipends.
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In defining temporary work, IRS Publication 463 states, “If you expect an assignment or job to last for 1 year or less, it is temporary unless there are facts and circumstances that indicate otherwise. An assignment or job that is initially temporary may become indefinite due to changed circumstances. A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment.”
In this regard, one of the great things about travel nursing jobs is that you receive a contract which designates a start date and an end date. This provides proof that your employment is temporary without question. You must keep copies of your contracts! I cannot stress this enough. However, if you sign multiple contracts in one location for a total consecutive time-frame of 1 year or more, then you may run afoul of the rule. This is why you will consistently hear about the “1 year rule.”
Two employment scenarios to watch out for as a travel nurse
You’ll want to be careful with this rule in order to maintain your temporary status as a travel nurse. There are two scenarios under which I believe travelers get into trouble. First, they sometimes take consecutive travel nursing jobs in the same metropolitan region.
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For example, I’ve worked with travelers who worked in Los Angeles, California for 9 months, and then worked 30 miles away in West Hills, California for 6 months consecutively. The IRS may claim that this travel nurse is exceeding the 1 year limit because they are essentially in the same general area. Obviously, the same would be true if a traveler continued to work in the same city repeatedly.
The key to avoiding this is to ensure that you maintain what the IRS refers to as “breaks in service.” Unfortunately, the IRS does not provide an exact time-frame defining a break in service. However, there are some very clear guidelines. It’s important to note that the IRS considers employment history in 24 month increments when determining breaks in service. Various IRS cases indicate that a 3 week break is not considered significant, a 7 month break may be significant, and a 12 month break is definitely significant. A safe rule of thumb is to never work in one location for more than 12 months in a 24 month period (traveltax.com).
However, it’s very important to remember that your approach to this rule should be dependent on which two of the three factors in the 3 factor threshold test that you’re aiming to satisfy. Remember, the 3 factors of the test are:
- 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).
If you are incurring duplicative expenses, and therefore satisfying factor 2, then the advice in the preceding paragraph is sound. However, if you are seeking to avoid paying duplicative expenses and instead satisfy factors 1 and 3, then you may need to move around much more. We’ll discuss this in detail in Part 4 of this four part series.
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The second way that travelers can jeopardize their status as a temporary worker is to sign on for PRN with either a local agency or directly with a hospital in the same area as their travel nursing job. Travel nurses see this as an opportunity to supplement their hours and earn extra money. It can certainly be a very attractive option. For example, some hospitals in California will pay their direct PRN nurses over $70 per hour, and making $60 per hour or more is quite common. However, the IRS may view these positions as “indefinite” and reject your claim for tax-free stipends. Sure, you may have a travel nursing job in the area, but you just accepted another job that has an indefinite end date.
You can try to avoid this pitfall by requesting a contract to work the PRN shifts with clearly defined starting and ending dates. However, you’ll likely find that only agencies are willing to do this.
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Hospitals on the other hand are looking for people who want to keep the PRN positions long-term. They’ll have no problem finding them because these nursing jobs pay so well and are typically highly coveted. In any case, I strongly advise that you seek the advice of a tax adviser who has experience specifically with travel nursing and temporary workers on these or similar issues.
Conclusion
As you can see, there are many pitfalls to avoid when seeking to maintain your status as a temporary worker. Moreover, you’ll also need qualify under the 3 Factor Threshold Test in order to receive tax-free reimbursements as part of your pay package. We’ll discuss this in our next two blog posts.
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.
