While you may have read my articles on various websites, or my posts on Facebook pages and other forums, from time to time I like to wax eloquent without fitting my thoughts into someone else’s prescripted format. Some of the entries may be long and a few will simply be rants. Whatever the case, you are guaranteed to find some nugget of tax knowledge fitting for your situation with a dash of sarcasm or philosophy.
Since our clients are primarily engaged in multi state assignments, cross border employment or posted abroad, they share a common connection of working on the road, exploring the world or just planting themselves in a foreign land ….. travelers and nomads at heart.
The 50-mile rule to determine whether stipends can be received tax-free is basically a myth. ITs not about the distance, it’s about whether you require and pay for lodging at the assignment. However, hospitals (facilities) often have a distance rule and it frequently is 50 miles. See how this can create confusion in the conversation with the recruiter and what to ask.
This short blog post is not going to cover ever aspect of the NEW W4 form that the IRS has created. This is the form you give to the employer to determine the amount of tax payments taken from your check with each payroll cycle- take a look at it: https://www.irs.gov/pub/irs-pdf/fw4.pdf
I realize that many of our clients don’t want to spend too much time on this so here is some quick suggestions for filling this out. Remember, this only applies to Federal taxes, not state. States can feed off the Federal form, have their own, or come up with some really zany approaches like Arizona does where the ask you what percentage withholding you want.
The EASIEST advice. Want a really BIG refund (but a smaller paycheck)? Fill out your name, address, the marital status you use on your tax return, check box 2c and sign at the bottom. DONE! Disregard the wording of the questions as a traveler will never fit the descriptions. The label may be wrong but the math behind the declaration on the form fits. Remember, you don’t give this to the IRS, you give it to your employer. You wont be taken to jail for what you put on this!
Now- that advice should handle those that view their returns as savings accounts, but realistically, the dilemma many travelers face is that many have different wages with each job and some can be all over the place. 25/hr at one , 15/hr at another, short hours one week, OT the next etc. We don’t have average, dull, one job a year lives!
The next piece of advice applies to SINGLES who don’t want a Super Gulp sized refund and whose wages are within $2 for each contract:
To compensate for the varying wages AND for some, to ensure that there is a sufficient Federal refund to cover the state amounts due (for those in high tax states), you need a buffer. Here is the best guide o keep things simple and I am assuming you get paid WEEKLY. Double this if you get paid BI-WEEKLY. Assume you work 52 week a year. To get a $1000 refund, you need to overpay your taxes by roughly $20 each check (20 X 52 = $1,040) (40 x 26 for bi-weekly). On the W4, fill out your name, address, marital status you will use on the return (assuming single or separate here), skip to line 4c and put $10 for a $500 buffer, $20 for $1,000 etc. If you anticipate only working 48 weeks (4 contracts with a week off in between), divide $1,000 by the weeks you will work.
Again, this works only when your wages amount is consistent through each contract. The more erratic the wages, the more likely you should just check Box 2c and be done.
MARRIED? HEAD of HOUSEHOLD? There is way more to this and at this point you are best calling us or wait for my next entry. You can use the quick fix noted in red above. Unfortunately, the forms are not designed to be simple – see the next paragraph. If you are so inclined, my wife Daina found a really good video that is more in-depth: https://www.youtube.com/watch?v=_VPjX0dDTgs
One important thing to note – these revisions to the W4 are designed to keep refunds low – for many, that’s a new language. AND, travelers don’t fit cookie cutter solutions either , but hey, that’s why we are here!
Recently, our office has received a number of calls and messages regarding changes to contracts where the hourly taxable rate has been lowered significantly and the per diem has increased as well.
Is this legal? Do I have risks? Is this wage re-characterization? Should I extend the contract? Will I get audited?
These are all good questions.
First, an agency/employer can change the terms of a contract in this manner but only in a NEW contract, not in the middle of a contract that has not been completed. Revenue Ruling 2012-25 (which is linked in our References and Citations section of this blog) allows a PROSPECTIVE change to an employees taxable / per diem, but not a mid contract change. If it follows the Revenue Ruling them it is not wage re-characterization
Second, there are some risks that are not borne equally by all travelers. Loans, disability, workers compensation, and unemployment all rely on the taxable rate. Per diems are reimbursements / expense offsets so they are not income and do not count for these items. Social Security is based on the 35 highest years or earnings so if the earnings history needs some years of higher earnings, this arrangement might not work well.
Third, Can I get audited? Anyone can get audited just for breathing 🙂 However, there are thresholds that the IRS uses to further investigate arrangements where additional tax might be collected. Lower taxable wages are not the litmus test. It is how these wages interact with other financial commitments that could trigger an audit. For example, if you have a high mortgage interest payment (the IRS gets a report) and your taxable hourly would struggle to keep up with this, one could question whether you had other sources of income that are not being reported. Also, an agency whose tax returns show a smaller amount of wages in comparison to a larger amount of travel expenses could trigger an audit that would require a review of the travelers return.
Lastly, should I take the contract? There is no right or wrong answer to this if the conditions noted earlier are met. The answer really rests in the other areas that we mentioned. Also, don’t decline a contract for this reason alone especially when you have a trustworthy recruiter (very important), its a destination you really want (you’ll have a lifetime of memories). or the agency has a lot of contracts to choose from. Loyalty does have its perks.
Wrote this article for The Staffing Stream regarding cross-border providers. If you’ve ever been curious how taxes could affect Her Royal Highness the Duchess of Sussex, Meghan Markle, click below for an interesting read!