A lot of confusion surrounds the “per diem” payments that many travelers receive that covers lodging and meals.

These payments are usually paid on a tax free basis assuming that the traveler has a qualifying tax home. Per Diems are also called allowances, stipends, subsidies and reimbursements, but more specifically, are paid for lodging and meals – not transportation.

The per diem concept can be summed up with this illustration:Suppose you and 99 other people were sales reps for a medical manufacturing company. Your weekly activity consisted of traveling to potential buyers, spending nights in hotels and eating out. When you returned, you handed all of your receipts to a human resources staff member that processed reimbursement checks for you and the other 99 sales agents. What seems to be a simple process is now 99 times larger and if this occurs each week, your employer would commit a full time staff member to this task alone.

Enter the per diem.

Since the Federal government has a LOT of traveling employees a system was designed where the costs for lodging and meals was standardized for every locality in the world. The system allowed the employer to use these standard rates as the reimbursement amount for lodging and meals without the exchange of receipts, disregarding the actual expense of the employee. In effect, the employer pays the per diem rate and so long as the employee had a reasonable expense and the rest is theirs to keep regardless of the amount of the expense unless there was NO expense at all (like a trucker sleeping in their cab).

This is an important concept for another reason – this is how ones makes money as a traveler- by taking the per diem and finding cheaper lodging. The rest is theirs to keep and so long as they have a qualifying tax residence, the entire payment is free of tax or more accurately, “excluded from gross wages subject to tax”.

If you need additional information or assistance on tax or tax-free issues, please contact Joseph Smith at TravelTax.com

Note from Gypsy Nurse:

If you accept tax-free per diem, it’s imperative that you are following the IRS guidelines of ‘Duplication of Expenses’ and have a valid Tax Home. I’ve worked both as a per-diem employee as well as an itinerant (all taxed) employee and to be honest, I don’t see a ton of difference in the take-home amounts. The flexibility (for me) of not having to maintain a tax-home has been worth the small difference in take-home.

It’s also important to note that you will not likely receive the full Government GSA rate for any given location. It is however important that you do NOT receive over this government designated rate.

Guest Article provided by: Joseph Smith @ Traveltax.com

ACA (aka “Obamacare”) requires all individuals carry health insurance starting with the 2014 tax year. Here is some information on ACA tax implications for travel nurses:

Since travelers are highly susceptible to gaps in employment, they are more likely to be subject to the penalties assessed for the lack of coverage. Additionally, travelers who intend to use the health insurance exchanges and associated tax credits will have difficulty predicting their subsidy due to the income swings that occur with their various contracts.

ACA Tax Implications

The next series of articles will look at the ACA mandate and its impact on travelers by first focusing on how penalties for non-compliance are assessed. In the next installment, we will look at the mechanics of the tax credits that are available to those who procure health insurance from the exchanges.

Penalties

The penalty for not carrying qualified health insurance coverage starts in 2014 at 1% of income or $95, whichever is greater. In 2015, the penalty rises to $325 per person or 2% of income; and in 2016, $695 or 2.5% of income. The penalty applies for any month that an individual is not covered and is prorated if the individual fails to carry insurance less than 12 months of the year. Since travelers run the risk of losing employer based health insurance during the periods between assignments, they are subject to the penalty unless they procure another policy or continue the policy provided by the last employer through COBRA.

GAPS in Coverage

Under the ACA regulations, if an individual has coverage for one day in a month, they are credited as having coverage the entire month. This potentially allows a traveler to gap coverage for nearly two consecutive months so long as the coverage ends and starts in each month. Some health insurance providers follow a calendar month cycle, meaning that coverage continues until the last day of the month even if a traveler finishes an assignment in the first week of the month.

Exemption for Gaps in Coverage

Though the penalty applies for any month an individual does not have coverage, there is an exemption available for those whose coverage gap is less than three consecutive months. This exemption is only allowed once a calendar year so if the exemption is used in the early part of the year, it cannot be used again in the latter part. If there is a second gap in coverage during the calendar year, a separate “hardship exemption” can be requested. “Hardship” exemptions include a number of specific situations including a death of a family member or bankruptcy filings; however, most all of them require some form of documentation. Hardship exemptions are filed separately from the annual tax return unlike the regular exemptions.

Since the ACA regulations incorporate a one day = one month convention, a traveler could have almost 5 months of coverage gaps and still qualify for the exemption, so long as the coverage ended sometime during Month 1 and coverage with a new policy began in Month 5.

Coverage gaps that extend through one calendar year and into the next have a specific counting rule.

If a traveler does not carry coverage the last two months of the year, when they file their tax return for that year, they report a two month gap in coverage which would qualify for a regular exemption. The counting for the second year incorporates the previous year end gap.

EXAMPLE: If the traveler continues without coverage for the first two months of the second year, they will be considered to have a gap in coverage for 4 months in that year and be subject to the penalty. A peculiar situation can arise when a traveler gaps coverage in November, December and January. For the first year, there is a two month gap which is covered under the regular exemptions. For the second year, the gap is a three month gap, again, covered under the regular exemptions; however, since the regular exemption is used, a subsequent second gap in that calendar year requires a hardship exemption.

Filing Taxes

Since ACA compliance disclosure is incorporated in the annual tax return filing, it adds another layer of complexity to set of forms required with each return. Most taxpayers will receive Form 1095 that evidences health insurance coverage. An additional form currently being developed will be used to report the information on the 1095 series forms when the return is filed. Search and download forms HERE.