What on Earth is a Travel Therapy Tax Home?
To continue our series on travel therapy, I wanted to provide some more information on probably the biggest topic on everyone’s minds: pay.
Travel therapist pay is usually placed into two different categories: taxed and untaxed. But, regardless of what any recruiter might tell you, qualifying for this untaxed pay unfortunately isn’t as easy as checking a few boxes.
The good news, however, is that with just a little bit of upfront effort, maintaining this status throughout your time as a traveling therapist is simple.
DISCLAIMER: I am not an accountant or tax attorney, and the following article is not intended to be instructional tax advice. Everything in this article is for informational purposes only. Always consult a licensed tax professional to understand what to do for your own personal situation.
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Becoming an Itinerant Employee vs. Maintaining a Tax Home
It’s first important to point out that you technically have two options when going into travel therapy – being an itinerant employee or an employee that has a static tax home. Being an itinerant employee is inherently simpler.
An itinerant employee doesn’t have a permanent residence – they live on the road! If you intend to do travel therapy long-term, this may sound like your dream. No permanent home to worry about, no location that you’re tied to, and the freedom to go wherever the wind takes you.
However, all of this freedom comes with a catch – itinerant employees are not eligible for tax-free stipends. You see, the reason that this income is allowed to be untaxed is based on the premise that you are duplicating expenses in housing, meals, and incidentals.
When you are an itinerant employee, you have no “true” home, and as such, no duplicate expenses. Sound confusing? Think of it like this: A person taking a business trip travels a few states away from home for a week. Due to distance, the employee is unable to return home nightly during this period of time. But their mortgage at home doesn’t pause for a week even though they aren’t using their home – thus, duplicated expenses. Their company is then allowed to reimburse them for the cost of their hotel stay and meals.
Think of travel therapy similarly – it’s effectively a long-term business trip.
Only you can decide if being an itinerant employee is right for you. While itinerant employees aren’t able to claim tax-free stipends, they do have the benefit of not having to maintain a tax home, which definitely comes with its own set of costs. Itinerant employees can also stay in a location as long as they want, whereas maintaining a tax home comes with certain rules that make that difficult.
For me, the decision was easy because I liked my home and knew I would want to return. And, even with the costs of maintaining a tax home, this has financially been the better option for me. As always, I recommend consulting an accountant on your personal situation to see what choice will make the most sense for you.
Tax Homes, Permanent Residences, and Bears, Oh My!
So you might notice that I keep circling back to the phrase “maintaining a tax home.” But what even is a tax home? Is it like a permanent residence? Do you automatically have a tax home? Help!
Take a deep breath. For most people, figuring out their tax home is easy. It’s their permanent residence – the location where they live and work 365 days out of the year. For people who do business in multiple places, that question gets dicier.
The IRS thus defines a tax home through three factors:
- You perform part of your business in the area of your main home and use that home for lodging while doing business in the area.
- You have living expenses at your main home that you duplicate because your business requires you to be away from that home.
- You haven’t abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or you often use that home for lodging.
If you meet all three of these qualifications, then congratulations, you have a tax home!
The good news is that the IRS technically only requires you to satisfy two out of three of these factors to claim a tax home. I do say technically, because, unfortunately, tax law is murky and there aren’t a lot of hard and fast rules. So, my advice would be to try to satisfy all three of these rules as best you can, but definitely fulfill two if you are interested in maintaining a tax home.
Satisfying the Rules
I always recommend fulfilling this rule if you can because it lends a lot of credibility if the status of your tax home ever comes into question. Not only do you live in your tax home, you earn income there which is really what the IRS is concerned about.
Now, this is where the law gets murky again – can you come home and work one PRN weekend a year to meet this rule? Probably not. To fulfill this factor, the IRS is looking for you to do a significant portion of your business in this location. So if you work 6 months out of the year in your tax home? Almost definitely significant. If you earn most of your income there? Again, almost definitely significant. If you work there for six weeks out of the year? Maybe.
Unfortunately, there is no number that the IRS provides that travelers can aim for. As a rule of thumb, I have known some people to attempt to earn 25% of their taxable income for a year in their tax home, but again, this is mostly guesswork based on how the IRS has ruled in specific cases in the past.
Travelers often want to avoid fulfilling Rule 2 as duplicating expenses sounds, well, expensive! But while fulfilling this rule definitely isn’t free, it is sometimes the financially smarter option. There are also ways to this that are less costly than others. For example, I got rid of my large, costly apartment and started renting a bedroom from friends. Others may choose to take on a roommate or set up their home as a vacation rental when they are away.
Basically, as long as you have a residence that you pay for, whether through a mortgage or renting, you are duplicating expenses. And yes, this does mean that if you’re planning on using a family home as a tax home that you will probably still have to pay them fair market rent, which just means that it’s a rent price that could actually be found in your area, without any friends and family discount.
This one is the most “fun” rule for me to fulfill – traveling home! Again, there are no set in stone rules here, but it has been advised to me to try to return home for at least 30 days total in a calendar year. I also fulfill this requirement by maintaining personal business at my tax home – e.g. going to the doctor, volunteering, banking, and voting.
My tax home is also my permanent residence and as such, the address I use for my driver’s license, car registration, billing address, etc. Do take note of the phrase “historical place of lodging” here as well. It doesn’t mean much if you plan for your tax home to be the place where you’ve lived for the past several years, but it does prevent someone from “choosing” their tax home to be in a place that is less of a financial burden – like somewhere with lower rent costs.
Breaking the Rules
If you got through all of that and aren’t scared off yet, then congratulations! You may be wondering, if it’s this complicated and expensive to maintain a tax home, then why does anybody do it? The honest answer is that not everyone does.
Despite all these rules, there’s no form that you have to fill out every year that proves you abided by them. I’ve known plenty of travelers who claim tax-free stipends who are probably more correctly categorized as itinerant employees – whether it’s because they use a PO box as a tax home, never actually go back to their tax home, or use a family member’s house and don’t pay them rent.
And while there are people out there getting away with it, to me the risk is not worth it.
While the IRS won’t ask you to prove that you’re playing by the rules every year, if you are ever audited, you run the risk of paying back taxes on ALL of the untaxed income that you didn’t actually qualify for (plus penalties, especially if it’s found that you purposely tried to defraud the IRS!).
And since travelers already run a higher risk of being audited, it’s not unlikely that it could happen to you. Even though some people see it as “losing out” on money, for me the peace of mind of knowing I’m attempting to do everything by the letter of the law is worth a lot more than an extra few hundred bucks a month.
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We hope this article has helped demystify the tax home process! As confusing as all of this info might seem, I’m happy every day that I took the plunge to become a traveling occupational therapist.
We’ll continue exploring traveler pay, finding housing, and other topics in this series, but if there’s anything in particular you’d like to have addressed, let us know in the comments below!