In this interview, Joseph Smith, the founder of TravelTax, discusses the unique tax challenges for travel healthcare professionals in 2020, best tax practices, and ways to maximize your earnings.
What’s new this year that everyone should pay attention to?
- For an update of COVID-19 tax information, please visit Joseph’s YouTube tutorial.
- The tax deadline has been extended to July 15.
- For an updated list of state tax deadlines, visit Joseph’s recent blog post.
A major change this year is the W-4s — where you set your federal withholding. They’re different this year, and they’re very confusing. When I trained recruiters last year, I warned and warned them about it — there are going to be a lot of questions — because now, we don’t put our marriage status plus how many exemptions we have. Now, we’re basically doing a mini tax return on one page to determine how a withholding should be because the IRS wants everybody to have low refunds now.
So, there’s a simple way to fill them out, be prepared for the new W-4 forms. I’ve got a blog post on it.
What challenges do travel nurses face with their taxes?
I think they fall into three main categories:
First, the most difficult area is understanding the concept of a tax home. It’s tricky to understand and can be difficult to maintain.
The second biggest challenge is understanding their contracts. How the taxable and nontaxable income are presented in agency contracts often leads to a lot of confusion. So, when it’s time to look at the tax side of things, that confusion impacts their total understanding of their taxes.
And third, it’s difficult for travel nurses to file multi-state tax returns. They must file in every state they’ve worked, plus the state their permanent home is in. There’s a whole lot to understand about taxes and the rules and regulations differ between states.
How would you suggest travel nurses tackle these challenges?
To understand the tax home, I like to explain it in the simplest way possible: A tax residence and a permanent residence are two separate things. A permanent residence is where a travel nurses legal ties are. The tax residence is an economic home base. So to find a travel nurse’s tax home, I ask:
Where is it that you make the majority of your income on a year-to-year basis?
If I find that place, then it’s straightforward. I’m done.
If I don’t find that place, the tax home can be where a travel nurse’s main dwelling is, if they have substantial expenses at their dwelling that are duplicated when they are on the road.
If they don’t have a place where they make the majority of their income or a place where they have significant duplicate expenses, then they do not have a qualifying tax home.
Without a qualifying tax home, all of a travel nurse’s income is taxable.
To help travel nurses understand their contract, I like to give them a clearer picture of how much they will be bringing in per contract, overall.
So, first, there are their wages, which are taxable.
Then there’s their lodging and other stipends, which is tax-free. I want travel nurses to be able to compare taxed and untaxed income easily.
So, the formula I use is:
[Taxable wage] x [# of hours worked in entire contract]
[Nontaxable wages in an hourly equivalent] x 1.4 [because it is more valuable than taxed income] x [# of hours worked in entire contract]
That makes it easy to understand the value of a single contract and to compare multiple contracts to one another.
What is important for travel healthcare professionals to know if they are filing a multi-state return?
First, it’s a little bit more difficult when you have to file on multiple states and get W-2s that have more than one state entry, especially for first-time travel nurses.
The second thing is, as a multistate professional, tax filing doesn’t go as quickly as it used to in the past. So, your timing expectations should change a little bit accordingly.
When you do get your W-2s from the agency, make sure that they cover every state that you worked in (unless a particular state doesn’t have an income tax).
And don’t be surprised if you get a letter from a state that you worked in, or even your home state. States are way more aggressive than the IRS these days — particularly your home state.
The way multi-state tax works is that your home state’s going to tax everything, and they’re going to use your credit for what you paid in the work state. When you electronically file, the home state doesn’t always get a copy of that work state return, so they will randomly send letters requesting paper copies of that. Or, in other cases, they may want to assert residency. Say traveler changed the state of their driver’s license inadvertently along the way, because they couldn’t get back home and do it. And that’s how most of the states try to find people that they feel should be filing as a resident.
For multistate tax returns, I recommend travel nurses don’t go it alone. If they do, it can be quite the journey. Most of the automatic tax return generators don’t allow for the complexity of a travel nurse’s tax situation in a multistate environment.
Even local CPAs who don’t focus on travelers often have trouble with it because they usually focus on their own state and border states.
What’s your advice for travelers who are filing for the first time?
Make sure, since you’re on the road, that you have received all of the other tax documents that you’re used to getting. For example, if you have a brokerage account and are now on the road, make use of getting that online.
If you had some interest or dividend reports, mortgage interest, student loans — any of the things that you’re used to deducting — make sure you have the documentation first, because you’re probably going to get it on the road.
And, keep your contracts. Don’t let those go. You can have an audit within three years, or even six years, the way our industry runs, so you want those contracts.
When they audit, that’s the first thing they’re going to be looking at.
Do you have any tips for travelers if they do get audited?
First, it’s important to know what an audit is. If you get a letter that says, “We have a retirement statement that you didn’t report,” that’s not really an audit per se. That’s just matching up the math.
An audit is when they want you to justify something that you claimed on your return versus something that you didn’t claim on your return.
And if they’re doing an audit that’s related to your work per diems and that sort of thing, they’re going to be looking at your contracts and your activities more so. Those audits are not as frequent as they used to be because tax reform killed itemized job expenses. (A few years ago, tax reform eliminated the job expense deductions, in other words, the meals and excess of meal allowance, transportation mileage and excess of travel pay. There are still nine states that still allow it: California, New York, Iowa, Alabama, Arkansas, Pennsylvania, Hawaii, Massachusetts, and Minnesota.)
But, that doesn’t mean audits won’t happen because there’s a lot of tax revenue that gets missed in the staffing world.
If you try to handle an audit yourself, make sure you read exactly what they’re looking for and don’t offer more information than what’s requested. That’s basically like being in a court system. It would do you good to have somebody represent you.
If you had a list of actionable items for travel nurses that would make taxes much easier for them, what would they be?
- Keep a copy of all your contracts. This is non-negotiable.
- Keep all your documents with you. When you’re on the road, it can sometimes be more difficult to maintain your documents.
- Don’t wait til the last minute to file. If you get close to the filing deadline, file an extension. There’s no harm in filing an extension.
Can you talk a little about the 50-mile radius myth?
There’s no such rule. It comes from some other parts of the tax code, such as those related to moving expenses. Claiming moving expenses is allowed if your move is 50 miles + your old commute closer to a new job. But it has nothing to do with where travel nurses take their jobs. The agencies need to have a reasonable belief that you will incur lodging expenses at the assignment location.
Do you have any financial advice for travel nurses?
Think like a trucker. The way to make money in the industry is to live cheaply. Travel nurses who have established homes in low-cost areas do far better than, say, a travel nurse whose tax home is in San Francisco or New York. You don’t find many travelers in San Francisco. Travel nurses in high-cost areas should consider moving.
Get a high-demand specialty. You’re going to be able to work lots and lots of hours at a higher wage.
Also, with the shortages out there, crisis shifts can really boost your salary, no matter what your specialty.
Most travelers I talk to recommend being flexible and having three different specialties so you can market yourself.
Take advantage of your benefits package. Every agency has a certain set of benefits. If you tend to swap agencies a lot, retirement becomes a little hard. So most travelers that switch agencies are better off just contributing to an individual IRA so that they don’t get three years of traveling if nine different companies and have nine different IRA accounts. You want to have one — just get it consolidated.
Also, don’t look at the money first. Look at the experience. Travel nursing reshaped the way I look at the world and at life, for the better. Take the assignments that push you out of your comfort zone and bring you to places you’ve never been. You’ll really reap a lot of benefits.
Looking for more tax advice? Visit TravelTax for more insight from Joseph and his team.
Looking for more interviews? Check out our travel nursing interview series.