What is Tax Advantage (also called living allowances, blended rates, tax free allowances etc)

Tax Advantage is an industry marketing slogan for a travel reimbursement policy used by some companies. Any employer having employees that travel in the course of their work, can reimburse for expenses incurred while the employee is away from home. There are three common approaches: 1) Company pays for actual employee travel expenses requiring employee to submit receipts, 2) Company pays for the expense directly (i.e. housing) or 3) Company pays an allowance up to the maximum per diem or standard allowance for lodging, meals, and/or use of car. A company can mix approaches for each category of expense (i.e. pay for housing, and provide a meal per diem),

Per Diem: These are maximum rates that can be given to an employee without an exchange of receipts for lodging and meals during days that an employee is away from home on the business of the employer. The rates are set by the government for every area of the world and are broken down by counties in the US. The rates can be found in IRS Publication 1542 and other government publications. These rates are designed to be a national standard for a particular area and reduce the reporting burden by employee and employer. As long as the allowance does not exceed the per diem rate maximum and the company has a reasonable belief that the employee would deduct these expenses without reimbursements, no receipts are required to be exchanged.

Standard Mileage Allowance: For 2007, 48.5 cents a mile. The is the amount that the IRS allows as a deduction for use of a vehicle. When renting cars, this does not apply.

The rules for travel reimbursement programs are uniform. The only industries that have different rules are transportation workers, government and military. There is nothing special about the travel nurse industry that would change the normal rules for the programs

How it works:

A typical tax advantage program starts with a known salary and breaks it down into a taxable wage and a non-taxable allowance. The total that is tax free is based on the per diems (usually maximum) and in some cases the car allowance, travel pay and other reimbursements like licenses. The taxable portion is reported to the IRS as wages. The tax free amount should be reported on your W-2 as an "L" code on box 12 or in the "Other" section on box 14, but is not included in taxable wages. In practice, a company in the travel nurse industry rarely does this. Your pay stub should clearly state the wages, lodging reimbursements, meal reimbursements etc.

TOTAL COMPENSATION

TAXABLE WAGE                               NON TAXABLE ALLOWANCE

The way companies present a "tax advantage" program can be confusing for the following reasons:

1) Your "taxable wage" is often much lower than a standard wage. This is especially true for high cost areas like San Francisco, LA etc.

2) The total amount that is "tax advantaged" is based on a seven day period and your contracted weekly hours. For example, if the daily per diem is 100$/day and you are contracted to work 40 hours per week, the total weekly perdiem is 700$ OR 17.50$ an hour (100$ daily per diem X 7 days divided by 40 hours of work per week = 17.50).

3) The combination of the taxable and non-taxable wage is sometimes referred to as a "blended rate". In other words, your taxable and non-taxable compensation is "blended" together. This term is also used with the CA wage rates

Is it Legal?

Providing per diems (daily travel reimbursements) is a normal practice in industries that employ mobile professionals. For example, professional sports players receive a meal per diem for each day on the road during away games. The IRS has specific rules pertaining to reimbursement programs but not all companies abide by these rules and nether are their travelers aware of the requirements. The subject is complex but the following are some things that both traveler and agency should be aware of:

1) You must have a valid tax home to qualify for any travel reimbursements, provisions or allowances and your employer is not in the business of policing nor certifying your tax home. BE AWARE that signing the permanent residence questionnaires that many companies issue ASSUMES that you understand the IRS rules concerning tax homes for individuals. The fact that you sign this form and the company provides you with the tax free housing DOES NOT indicate that you have an approved permanent tax residence. Most of the permanent residence questionnaires in the industry are vague and simplistic. Some companies have policies such as a minimal distance (e.g.. 50 mile rule) to determine whether an assignment is far enough from a tax home or require a return home (2 week or 30 day rule) to determine whether additional assignments or extensions in the same area are temporary. These policies satisfy IRS regulations for company to have a reasonable belief that you will be away from home and incur the expense, but do NOT ensure the employee qualifies for tax free benefits. Rules for company polices are not the same for individuals. Example - Company A's policy is that any assignment over 50 miles a way is considered "away from home". The 50 mile benchmark is acceptable for the company program, but if the traveler returns home at the end of each shift, they are not "away from home" by IRS standards and all of the reimbursements (allowances, housing etc) are taxable income.

2) The IRS requires that excess reimbursements be returned or reported as income.  If the traveler is handling their own housing, and the company provides a tax free housing allowance, the company assumes that the housing is required by the traveler 7 days a week and provides an allowance based on 7 days. . If the traveler stays in a hotel, returning home the other 4 days, 4/7ths of the weekly allowance must be returned to the company OR reported as additional income on the tax return. By contrast, if the traveler secures temporary lodging  that is available to them 24/7 during the assignment, the housing reimbursement is allowed in full, but if the traveler returns home at any time during the contract, they cannot receive a meal per diem for those days and the excess must be returned or treated as additional taxable wages. In my practice, I rarely see a tax advantage program that specifies this requirement in the contract and since a policy such as this is required, many of the tax advantage programs will fail the test. (see LTR-RUL No. 9052002 and Revenue Ruling 2006-56)

3) A per diem travel reimbursement program cannot be part of a salary reduction or replacement arrangement similar to a section 125 Cafeteria Plan where the employee chooses pre tax benefits. Neither can wages be deconstructed as part salary and part reimbursement for one employee and straight salary for another (e.g. a company that pays its nurses 30$ and hour cannot reduce wages to 25$ and hour taxable and 5$ an hour non taxable for only those that qualify). All employees must receive the same salary (within reason for regional markets) for the given task and THEN a reimbursement. Lastly, a travel reimbursement arrangement is required to be an addition to normal salary as a separate entity of compensation for those employees that are reasonably expected to incur such expenses. If the employee does not substantiate (evidence) the need for the reimbursement, the compensation is treated as taxable wages . By contract or employer evidence, the employee must report any excess reimbursements to the employer. Lastly, the amount of taxable wages and the amount of reimbursements should appear on your check stub (or two separate checks) and on your w-2. If the company requires you to produce receipts, the amount of reimbursement will not appear on your w-2 (IRS Publication 535 - also see FINAL-REG, ESN-REGS, §1.62-2. Reimbursements and other expense allowance arrangements - included in linked documents below).

4) The most aggressive tax advantage programs are really wage recharacterization schemes (changing wages to reimbursements) designed to avoid payroll taxes. Prosecution requires proof of intent to avoid these taxes. Wages that are clearly below the national/ local average, qualify for Earned Income Credit or approach minimum wage carry the greatest risk. Additional proof is the willingness of a company to exchange wages for reimbursements in the contract. When a company offers to reduce your taxable hourly wage and increase your tax free wage to accommodate a car allowance, licenses reimbursement or travel pay, it is a clear sign that the program is illegal. Some companies even trumpet their tax advantage programs as a way to qualify for educational assistance which is clearly a breach of the integrity of our educational assistance programs.

For Agencies (and the informed traveler): Often, companies using aggressive tax advantage programs defend their practices by stating that they are staying within the published per diem rates. Case history is clear that the IRS views salary and reimbursements as separate entities, thus a payroll arrangement must have a reasonable salary. It may seem like a matter of schematics, but paying a reasonable salary AND an additional reimbursement is different from paying a set rate of compensation and deconstructing it based on the per diems. Per diem reimbursements are an addition to the employees wage, not the variable that determines the taxable wage by working backward from a set rate of compensation. The fact that the taxable wage is ridiculously low in comparison to local averages, national averages or competitors average wages is proof that the tax advantage program is designed to limit payroll taxes. The domicile of the the traveler is irrelevant when comparing travelers to permanent coworkers. It is the comparison of traveler to traveler that highlights the nature of the plan.

References for these Rules and Travel Reimbursement Plans        Additional Reference Nov 9 2006

Immediate Concerns for Traveling Professionals

1) All loan applications are based on taxable wages, not reimbursements or per diems. If your tax advantaged taxable wage is 10$/hr, then that is the wage that a loan company will use to determine approval.

2) Disability is based on prevalent taxable wages, not reimbursements or per diems.

3) Social Security benefits are calculated using the highest 35 years of wages. Long term employment under a tax advantage program may affect the calculation. (See  http://www.socialsecurity.gov/pubs/10070.html )

4) Overtime rates are often determined by taxable wage vs. total compensation.

5) Audit Risks:

Using Bank Account Analysis or "Lifestyle" Audit: When previous tax returns show a consistent annual salary and reported income suddenly drops in a subsequent year (without other information that would suggest hardship) and a bank account analysis shows the same amount of activity as previous years, it provides a reasonable cause to investigate the possibility of unreported income. Bank account analysis usually requires a subpoena, but a "Lifestyle" audit utilizes public domain information like county personal property tax rolls or real estate taxes to determine the level of income necessary.

Statute of Limitations extended for unreported income that exceeds 25% percent of reported income: In normal circumstances, the IRS has three years from the filing date to audit a return (Statute of Limitations). If the IRS audits the companies payroll polices and determines that they are unacceptable, if your per diem payment (tax advantage money) is more than 25% of your reported earnings, the time limit is increased to 6 years.

Probable outcome:  It is more probable that audits will be focused on the agency and not the employee. The IRS will be more eager to shut down an offending company to make an example for the rest of the industry than to go after a lot of travelers, HOWEVER, it is well within their right to do that. Make sure that you can completely document your tax home status if you take a tax advantaged contract.

It is TravelTax's policy to defend any returns we prepare without cost, HOWEVER we do not extend the same courtesy for audits that apply to years where income was earned under an aggressive tax advantage program

Related Questions

Can tax advantage contracts put more money in your pocket?

Tax advantage programs can increase your take home pay 100-500$ a month.  As a GENERAL rule, without considering housing per diems, an assignment WITHOUT a tax advantage meal allowance program that pays 5$/ hr more than the same assignment WITH a tax advantage meal program can be a better, but again, each program has to be evaluated for its legality.

How much does a company gain (save in taxes) by using Tax Advantage?

Almost 10% of your wages. If your monthly per diem is 3000$ a month, the company will save 300$ a month.

If it is wrong, why do all the companies offer it?

Not all companies offer a tax advantage program. The IRS simply has not investigated the practice

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