Talking Travel Nurse Taxes – The Regional Traveler:
What Happens When You Return Home Frequently During Assignments
Written prior to tax reform 2017. Watch for future articles.
Many travelers take assignments significant distances from their home but there are some that journey shorter distances, traveling within a few hours’ drive. These assignments allow the traveler to stay close to home, spend time with family, or attend to other priorities that preclude a long-distance assignment.
Most staffing contracts design tax-free per diem payments for lodging and meals around a 7 day a week payment with the assumption that the regional traveler will be away from home overnight at the assignment location for the duration of the contract.
This assumption creates some thorny tax issues for travelers that travel shorter distances and return home frequently – especially those that stay in hotels or only rent accommodations during workdays.
Before we explain how frequent returns home affect taxes, it may be good to discuss how per diem payments function. That will be the focus of this first part of the series.
The Per Diem Payment – How it Functions
In a perfect world, when an employee incurs travel-related expenses for meals and lodging, they will submit their receipts to a designated individual who approves a reimbursement, or the employee has an expense account allowing them to use a corporate credit card which is reviewed at various intervals. When an operation has a large number of employees traveling, it can become a huge administrative task to track all the employee expenses.
The IRS Allowance
To reduce the compliance burden on businesses, the IRS allows the use of a per diem (meaning per day) payment to cover meals and lodging expenses in lieu of actual receipts. The Federal government has long published standardized, daily rates for lodging and meals for its own use, and businesses are allowed to use these published rates in computing the amount they pay to their employees. The IRS also allows an individual to use the meal portion of the per diem tables for their personal tax returns. These per diem rates are based on a standard amount and adjusted for higher-cost areas like large cities or foreign countries. In lieu of receipts, a business can pay any amount up to the published rate for lodging and meals. Anything above the published rate requires a receipt. An employer is also free to pay less than the published rate so long as the meal and lodging component is accounted for as the IRS does not allow lodging only per diems.
How the Staffing Agencies comply
Many staffing agencies use the per diem method to reimburse travelers for lodging and meals if they are not directly paying a landlord or providing lodging themselves. The per diem method of reimbursement has an interesting twist that confuses many travelers but also presents a savvy method to maximize take-home pay. Under the per diem method, expenses for lodging and meals are deemed to be the same as the per diem payment. What does that mean? If the per diem is $100 and the lodging only costs $50, the cost is treated as the $100 payment. The excess over the actual expense is ignored and continues to be treated tax-free. In other words, the traveler keeps the difference. This seems contrary to conventional thinking, but the rationale behind the provision is that the expense in tracking the payments is more than the tax revenue forfeited when the excess is free of tax.
Why does this Effect the Traveler?
This sets up a thorny tax issue for the traveler who frequently returns home while working an assignment a few hours away. Under the per diem method of reimbursement, the recipient of the allowance must incur an expense for each day the tax-free payment is made. If the traveler gets a hotel room for 3 nights and sleeps at home for 4 nights, 4/7 of the lodging per diem is taxable – or, alternatively, the excess of the per diem over the expense. The same principle applies to a trucker who sleeps in their cab at night cannot receive a tax-free lodging per diem- it must be treated as wages since there was no lodging expense to justify the payment.
In the next part, we will explore this more fully and provide examples of how this applies to a number of situations.
Would you like to learn more?
Check out the TOP 10 Questions for Travel Nurses on Taxes.