Last month, we looked into the mechanics of tax free per diem payments and how agencies generally pay these reimbursements under the assumption that the travel nurse will stay at the assignment location each night of the contract. For travelers working engagements within a few hours’ drive of their home, this potentially causes the per diems to be partially taxable.
The following are three scenarios where the traveler can have taxable partially per diems/allowances or subsidies.
Scenario 1: Traveler pays for use of an apartment/room each day of the assignment, but frequently returns home
In this case, the entire lodging allowance is allowed as a tax free benefit, but for those nights that the traveler sleeps in their own bed, the meal allowance is taxable. To be technically correct, the meal allowance is allowed at a 75% rate for travel days but nothing for the other 24 hour periods that the traveler is at home. Also, the actual amount that is taxed is based on an annual accumulation of allowed meal deductions and tax free reimbursements. When the traveler completes their annual tax return, the total meal deductions for the year are compared to the total meal reimbursements and the excess is taxed as regular income.
Scenario 2: Traveler stays in a hotel, paying per night of lodging and returns home frequently
In this scenario, the lodging and meal reimbursement provided for the days that the traveler is home is treated as taxable wages. Lodging allowances are designed to offset lodging expenses so when the traveler is at home and not incurring lodging expenses at the assignment location, it is an excess reimbursement. A trucker that sleeps in their own cab while in transit cannot receive tax free housing allowances since there was no housing expense. As an alternative, the total actual lodging expenses can be used to offset the lodging allowance if that provides a better result for the taxpayer. That would only hold true when the traveler spends more for the housing on a daily basis than the daily lodging allowance. Additionally, as in Scenario 1, the meal portion of the allowance is taxable for those nights the traveler sleeps in their own bed.
Scenario 3: Traveler stays with relatives at assignment location without incurring any housing expense and returns home on days off.
In this final example, all of the housing per diems/allowances/subsidies etc. are treated as taxable wages. The meal allowances are allowed tax free for the nights away from home. Agencies are increasingly asking for proof that the traveler is actually incurring lodging expenses at the assignment location and requiring the signed statement from the traveler.
Three items related to these scenarios.
1) The “60/40” rule
When a traveler receives a tax free per diem, subsidy or allowance and there is no breakdown of the payment between lodging and meals, the allowance is deemed to be 60% for lodging and 40% for meals. There is no such thing as a housing only allowance and since meals are only 50% deductible, an agencies attempt to label the full amount of tax free payments as a “housing/lodging allowance” is an effort to avoid the 50% haircut. For instance, if an agency pays $1,000 to the traveler as a per diem without allocating a portion to meals, the payment is deemed to be $600 for lodging and $400 for meals. The full $600 lodging allowance is deductible by the agency, but only $200 (50% of $400) of the meal allowance is allowed. Since the agency already spent the $400, the recognition of $200 income creates an accounting anomaly known as phantom income. Further, the corporate income tax on the phantom income is often more than the payroll tax savings derived from treatment of the amount as a reimbursement. When the dust settles, agencies often pay more in taxes to provide meal allowances than to not, contrary to most travelers perceptions. Also, the traveler also has to treat 40% of the per diem as a meal reimbursement on their personal return. Most tax professionals are unaware of this special rule when they have not dealt with mobile professionals on a regular basis.
2) Trips home are often only partially deductible.
The IRS considers trips home during an assignment to be personal and not a business necessity, unless the taxpayer returns home to work. Going home to check on a vacant dwelling during an assignment is a personal trip and not a business necessity. As a concession, the IRS allows deductions for trips home up to the amount that would be claimed had the traveler stayed at the assignment location.
(3) Lastly, all of the situations above require the traveler to have a qualified tax residence. Otherwise, ALL of the per diems/allowances/subsidies or stipends received are taxable regardless of the amount of expenses the traveler incurs to complete the assignment.
Next month we will start a series of articles addressing traveler audits and what travelers should do in case they get a “happy letter” from the IRS.