2021 Travel Nursing Tax Strategy — What You Need To Know
Taxes as a travel nurse can be intimidating. Between filing in multiple states, tax homes and starting multiple new jobs every year things can feel very complicated. Well we are here to help you and this article is here to help you along your travel nursing journey; to make sure your taxes are filled correctly and with the largest tax savings possible.
We are HBB Accounting. Last year we worked with over 30 travel nurses to file their taxes and save them big on their taxes. Over that time period we would come across the same questions over and over again. In this article we are going to review the top questions and most important rules to know as a travel nurse. At the end we will explain the best tax strategy for any travel nurse to save big on their taxes.
Filing Exempt vs Filing Another Number
One of the most common questions we get and one of the most misunderstood is around filing out your w4 and filing exempt vs filing with another number.
What you put on your w4 simply tells the government whether you would like them to hold onto your money or whether you would like to receive your money now. How much you actually pay on your taxes is determined when you file your taxes in the spring, based on how much you made over the entirety of the pervious year. When you file your taxes this is when you “square up” with the government and what you put on your w4 will have little or no impact on what the actual value of this will be.
The purpose of a w4 is to estimate how much you will owe on taxes in the end and to have the government hold onto this money for you, so it is available for them when you file your taxes. For most w2 employees, this is very straight forward, however for travel nurses, because they have so many different w2 jobs throughout the year and have periods of very high pay, followed by possible months off of work, it becomes complicated.
So when you are filing out your w4, don’t stress. You can’t really mess it up. In the end the actual impact on your taxes and your bottom line will be minimal.
Maintaining Your Tax Home
One of the most important things you can do as a travel nurse is to maintain your tax home. This will enable you when you are traveling on assignment to be able to keep your tax free stipend. If you do not maintain your tax home, you could be asked to pay taxes on your stipend or not be eligible to receive one at all.
Here are four key things to do in maintaining a tax home:
- Maintain living expenses at your place of permanent residence. Most importantly, pay the mortgage if you own and pay rent if you are renting a home, apartment or room. If you do not want to maintain a full home or apartment as your tax home, you can rent a room from a friend for example, but be sure it is in line with the current rental market rates in the area.
- Stay registered to vote in your home state. Keep your driver’s license in your home state. Keep your car registered in your home state.
- Be sure to return to your tax home (home/apt/room) at least once a year. It is good to return there between jobs if possible for you.
- File a Residence Tax Return with your home state.
Not all Tax Homes States Are Created Equal
Not all tax home states are created equal. For example, California will charge you state taxes even on money made in another state. Even if that income was already taxed by the other state. For example, say California is your home state and you do work in Massachusetts. Because the Massachusetts tax rate is 5% and California’s tax rate is 7.25%, California will actually charge you an extra 2.25% on your taxes for money made in Massachusetts.
This is not the case with all states, for example a tax home state like Florida or Texas with no state tax would never do something like this.
How You Will Be Taxed By Each State
So, how will you be taxed by each state? This is a little more straight forward. For each state you will pay the state taxes for that state on as much money you made in that state. So for example, if you make $50,000 in Massachusetts, you will be charged the 5% state tax on that amount of money, so $2,500. If you make $50,000 in Florida you will not be charged any state tax because Florida has zero state tax. However, as we mentioned above your tax home state can charge you additional tax on money made in any other state if they choose.
In order to calculate how much you will owe in each state and in order to pay your taxes in each state, you will need to file a state tax return in each state you worked in. This is the most complicated part of travel nursing taxes. Ideally, you would like to work with a CPA who has experience with travel nurses. At HBB Accounting, you will work with one.
How to Save Big On Your Taxes As a Travel Nurse
The best and really only significant way to save big on your taxes as a travel nurse is with a home based business. At HBB accounting, this is what we specialize in. In fact in our name HBB stands for Home Based Business.
Setting up a Home Based Business is easier than you may think and in a lot of cases people already have one and don’t realize it. Especially if you have any sort of work that is paid as a 1099 or Independent Contractor. A home based business in its most simple form is any activity that you are working on with the intent of making a profit and that you are working on consistently.
Once you have a home based business you are able to save big on your taxes. This happens because when you have a home based business many of your living expenses automatically become business expenses. All of these deductions add up. 76% of our travel nurse clients have between $10K–$30K worth of these type of expenses. These 76% of our clients save between $4K-$11K on their taxes. Every other travel nurse client saved over $11K on their taxes with some clients saving $17K on the high end. And as long as you keep working on your business and keep trying to make a profit in your business you can realize these saving every year.
The simplest example of this type of crossover living expense deduction is your cell phone. If you have a part time business, you will obviously be using your phone for your business: making calls, researching online for example. Thus your cell phone bill and the cost of your phone are now a business expense. Other examples of common expenses are automotive expenses, home office expenses, business use of home, health insurance, meals, internet, travel, tax preparation and legal services.
There are a two major myths that people believe when it comes to a home based business that stops them from moving forward:
Myth # 1: You need to set up an LLC in order to take deductions on your home based business. This is just not true. An LLC, is a limited liability company. The purpose of it is to limit your personal liability with respect to your business activities. It is not necessary to take deductions on your business. In fact, the first time you tell the government about your business can be when you are filing your taxes and taking your business deductions.
Myth # 2: You need revenue in order to take deductions on your business. Again, this is just not true. The government understands that it takes time and effort to get a business up and running, which is why they give you some leeway on making a profit for the first three years of your business.
There is nothing stopping you from starting a business. It is your right to do so. Most of our travel nurses have business involving women’s health, clothing and beauty supplies. This could be you and just by doing so and working on your business you are guaranteed to realize these tax savings. In fact over 90% of the travel nurses that filed with us last year had a home based business.
At HBB Accounting we provide free coaching and expert advice to help our clients start a new business or help them make their current business or passion compliant with the IRS so they can legally, morally and ethically maximize their tax savings.
If saving thousands of dollars every year sounds good and you are interested in learning more, please feel free to reach out to us on our website HBB Accounting Contact Form.
Written By: Ryan Moriarty, Tax Strategist, HBB Accounting