The Travel Nurse One Year Rule for Taxes

Travel nurses often receive tax-free financial stipends to cover housing and meals while on assignment. However, this benefit is governed by specific Internal Revenue Service (IRS) rules. To legally receive these untaxed funds, a nurse must properly manage their permanent residence and the duration of their work assignments.

Defining Your Tax Home

The ability to receive tax-free stipends hinges on having a “tax home,” which is the general area of your main place of business. To qualify for tax-free reimbursements, a nurse must prove they are working away from this established tax home. The stipends are intended to cover the duplicate living expenses of maintaining a permanent residence while living at a temporary assignment location.

The IRS uses three factors to determine if a taxpayer has a legitimate tax home. The first is whether you perform part of your business in the area of your main home and use that home for lodging. The second factor is whether you incur duplicate living expenses, which means you are paying for housing at your permanent residence (like a mortgage or rent) while also paying for lodging at your temporary assignment location.

The third factor is whether you have abandoned your tax home area, which is assessed by looking for continued connections like voter registration, a state driver’s license, and family ties. A travel nurse must satisfy at least two of these three conditions to establish a tax home. Failing to meet this standard can result in the IRS classifying the nurse as an “itinerant,” which disqualifies them from receiving tax-free stipends.

The One-Year Rule Explained

The “one-year rule” distinguishes between temporary and indefinite work assignments. An assignment is considered temporary if it is realistically expected to last for one year or less, and it does last for that duration. This expectation is assessed from the start of the assignment, so if a contract is for nine months, it is temporary and stipends can be paid tax-free, assuming a valid tax home exists.

In contrast, an assignment becomes indefinite if it is expected to last for more than one year, and any assignment that exceeds 12 months is automatically treated as indefinite. The location of an indefinite assignment becomes the nurse’s new tax home for federal income tax purposes. This change has a direct and immediate financial consequence.

Once an assignment shifts from temporary to indefinite, any stipends received from that point forward are considered taxable income. They are treated as part of the nurse’s wages rather than as reimbursements. For example, if a nurse on a six-month contract signs extensions that push the total work period beyond 12 months, the assignment becomes indefinite at the moment the expectation changes, and all subsequent stipends are taxed.

Required Documentation and Record-Keeping

Travel nurses must maintain records to prove the existence of a tax home and the payment of duplicate living expenses. During an audit, these documents are required to substantiate the tax-free status of stipends. Without proper proof, the IRS can reclassify stipends as taxable income, resulting in a significant tax liability, penalties, and interest.

To prove you maintain a permanent residence, you should keep documents that demonstrate your connection to the area and your intent to return. Useful records include:

• Mortgage statements or a signed lease agreement
• Utility bills in your name at your permanent address
• A valid driver’s license tied to your tax home
• A voter registration card for your tax home address

It is also important to document duplicate expenses. This involves keeping records of rent payments for your temporary lodging and other costs associated with living away from home. Bank and credit card statements that clearly show ongoing payments for both your permanent home and your temporary housing provide a clear financial trail that supports your claim.

Navigating Assignment Extensions and Breaks

Assignment extensions can affect the tax treatment of stipends. The determining factor is when the expectation of the assignment’s length changes to exceed one year. For example, if a nurse on a 10-month assignment signs a four-month extension, the assignment becomes indefinite the moment the extension is signed, not after 12 months have passed. All stipends received from that day forward are taxable.

Returning to the same metropolitan area after a break does not automatically reset the one-year clock. To restart the count for a location, a substantial break in service is required. While the IRS has not established a formal rule defining a substantial break, internal guidance for auditors offers some insight. A break of less than three weeks is not considered long enough to restart the clock, whereas a continuous break of at least seven months is considered substantial.