How Low Should You Go? Understanding Taxable Travel Nurse Pay
By Linda Beattie, contributor
Nurses have a lot to consider when they are reviewing contracts from travel nurse agencies, not the least of which is the hourly pay rate. How that pay rate is constructed is also important. For instance, what portion is taxable pay compared to nontaxable reimbursements and subsidies?
At first glance, it may seem like a good idea to go with agency contracts that offer comparable overall pay with the lowest amount of taxable wages, but there are some long-term considerations and risks that should be weighed before you sign on the dotted line.
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Variations in Travel Nurse Pay Packages
Travel nursing assignments can pay a different hourly rate based on regional trends, nursing specialties and the individual employer’s needs. Yet, a travel nurse’s pay generally consists of two main components: the regular, taxable hourly rate, plus nontaxable reimbursements (also called stipends, subsidies, allowances or per diem payments), which are meant to cover meals and lodging.
Some travel nurse agencies will quote their “effective pay rate” to include the taxable base pay and nontaxable daily per diems, and mention free housing or a housing stipend separately. Other agencies may include the housing amounts in the quoted hourly rate, and then deduct that amount if the traveler takes the free housing option.
Regardless of whether the travel nurse receives a housing allowance or is provided the actual lodging, paid for by the agency, the amount of this benefit is considered part of the nontaxable reimbursements. This reimbursement component is exempt from tax only if the traveler is maintaining a permanent tax residence and is working an assignment away from that residence far enough to require an overnight stay. If the travel nurse does not have a tax residence, the reimbursement portion is supposed to be treated as taxable wages.
Note that reimbursements for travel and other expenses can also be added to the contract, but may be taxable and need to be substantiated by receipts. In addition, a traveler’s total compensation package may include a variety of benefits such as medical and dental insurance, life insurance, 401k, etc.
Some pay practices under scrutiny
Some travel nursing agencies offer an extremely low pay rate per hour with higher nontaxable reimbursements. Depending on the methodology used to determine the taxable wage, this may be an indication of “wage recharacterization,” which violates the tax regulations. Wage recharacterization occurs when tax-free reimbursements are purposely paid in place of wages to lower an agency’s employment taxes and promise tax-advantaged take-home pay for travelers.
Such practices have not gone unnoticed. In fact, the IRS has been taking a closer look at several health care staffing companies and auditing their payment practices. Joseph Smith, EA, MS Tax, president of TravelTax, reports that at least 15 companies are in the process of being audited or have been audited over the past three years. And agency audits can lead to more traveler audits, sometimes going back multiple years.
Larger, established healthcare staffing companies are more likely to have well-developed tax policies and staff, according to Smith, especially those that are publicly traded. Yet size doesn’t dictate behavior, and having safeguards in place “does not ensure compliance,” he explained. Nurses should still conduct their own due diligence when choosing an agency to represent them.
Expect more questions and extra documentation
In response to the recent audits, some agencies are stepping up their compliance efforts. One change can be seen in the screening of a traveler’s tax home status and requiring more involved disclosure of the traveler’s affairs--including the submission of documents that validate the expenses incurred to maintain his or her residence.
Why should your travel nurse agency be worried about your tax home and your expense records?
“Without a tax home, all travel, lodging and meal per diems, allowances, stipends and the value of any provided housing is taxable for the individual nurse,” according to Smith. He added that agencies must have documentation of how they determined the tax-free portion of the pay packages, so nurses should expect to provide expense records to their agency if requested. They should keep copies for their own records, as well.
This kind of scrutiny shouldn’t be anything to worry about though, he said. Instead, nurses should be reassured that their agency is following established guidelines.
“Nurses are professionals who are used to complying with high standards; closer scrutiny in this case is a good thing, and can protect you from any problems caused by not following the rules.”
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The risks of accepting extremely low taxable wages
Although individual audit risks are low overall, extreme changes in taxable pay may be noticeable on a nurse’s tax returns. For instance, if your permanent pay rate was $32 per hour and it drops to $12 per hour, the change in taxable income can raise a red flag and increase the potential for audits--especially if you claim mortgage interest on your home. Pay rates should be within the realm of what’s reasonable in your profession for temporary staff.
“The IRS doesn’t provide guidelines on how low is too low for a taxable pay rate,” Smith said. “But the lower it goes, the greater the suspicion and the greater the risk.”
If nurses are audited and any of their nontaxable claims are disallowed, they may become liable for additional taxes and penalties.
Considering a new mortgage or other loan in the near future? Lower taxable pay rates can affect your ability to qualify, said Smith, although some lenders may make allowances for nontaxable reimbursements with additional documentation. Accepting low taxable pay packages can also lead to lower payments for disability or workmen’s compensation, if they become necessary. And if a nurse were to travel for a significant period of time, a low base wage could affect Social Security payments upon retirement. Yet because Social Security payments are based on your 35 highest years of earnings, Smith noted, “For the broader population of travelers, this is not as serious of an issue as it is made out to be.”
6 Warning Signs to Avoid Tax Consequences as a Travel Nurse
Smith recommends working with travel nurse agencies that follow IRS guidelines and practice good business ethics. If you are unsure about a particular situation or company, he lists a few warning signs to watch for when talking with recruiters or reviewing travel nursing contracts.
Six signs of tax practices to avoid:
1. Low taxable wages. You are offered extremely low taxable wages with high stipends, and the company continually hypes the tax advantages of their particular pay package.
2. Too many options. You are given the option to reduce your taxable wage and replace it with a tax-free travel reimbursement; agencies are not allowed to do this, even though Smith has seen companies provide documents with a box that travelers could check off to that effect. The opposite is also a sign of caution. An agency cannot raise the taxable wage and reduce nontaxable payments on request.
3. Always save receipts. You are offered reimbursements, outside of meals and lodging, without requiring receipts. This may include car allowances or weekly mileage amounts, health insurance reimbursements, etc. Travel pay is normally substantiated by the contract and origin of travel, and per diem reimbursements for meals and lodging do not normally require receipts as long as they are within U.S. General Services Administration (GSA) guidelines. Yet travelers should keep proof of expenses if they receive a per diem or allowance for assignment lodging.
4. Remember to sign everything. A company fails to provide a tax home declaration sheet that you are required to sign and return. Or, if you complete the form declaring that you do not have a tax residence and the agency fails to honor it, insisting on paying you a tax-free stipend.
5. Do the math. A recruiter quotes a specific “after-tax equivalent” or take-home pay rate. Smith reminds travelers that recruiters are not tax professionals and should not give tax advice that attempts to validate a particular compensation scheme.
6. Know the rules. Agencies allow you to work multiple assignments in the same location for more than 12 months. If a traveler spends too many months in one location over a period of time, his or her tax home will shift, which would cause all reimbursements and the value of provided housing to be taxed. Smith urges travelers to become familiar with break-in-service rules.
How to Enjoy Travel Nursing Without Tax Worries
“Find a tax advisor familiar with the travel health care industry and talk to them,” said Smith, noting that many nurses find the tax laws that apply to traveling and working in multiple states confusing. “Travel nurses are given a highly sophisticated compensation package, so they need to find the right resources to decipher that for them. There are so many nuances of the rules and experienced advice is crucial.”
As a former respiratory therapy traveler, Smith encourages health care workers to enjoy the perks of this unique lifestyle and not be overly anxious about the tax issues. Just be careful.
“When you give narcotics to a patient, you confirm the order; follow the same due diligence with taxes,” he advised.
“Get proper tax advice from someone who understands this industry, work with an ethical travel nurse company that requires proper documentation, and keep records of your expenses to establish your tax home and be able to justify reimbursements if you are ever asked,” Smith concluded.
Please note: The content in this article does not constitute tax advice. TravelNursing.com recommends that travel nurses obtain advice from a qualified tax professional.
Previously published to the site in 2014. Updated as of March 27, 2018.