Traveling Therapists: State Tax Liability - What's The Verdict?

Traveling therapists are liable for state taxes depending on the state they are in and their income level. In the United States, therapists are required to pay income tax on 100% of their taxable income, regardless of the state they work in. This means that if a therapist works in multiple states, they may be required to pay taxes in each of those states. However, there are some states that do not charge income tax on travel therapists, such as Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Additionally, therapists who are self-employed or own their practice may have different tax responsibilities and deductions than those who are employees. It is important for traveling therapists to understand the tax laws and regulations of the states they work in to ensure they are complying with the tax requirements.

Income tax nexus

In the context of state tax laws, a nexus is a connection between a business or an individual and a state that gives the state the authority to impose its taxes on that entity. A nexus is typically established when a business has a physical presence in a state, such as having employees or property in that state.

For travelling therapists, this means that their income is taxable in the worksite state, even if they reside in another state. This is known as having a "physical presence nexus" in that state. In the case of the state of Washington, for example, a business or individual is considered to have a physical presence nexus if they meet any of the following criteria:

• Having an employee working in the state
• Having real or tangible personal property in the state
• Having a stock of goods in Washington, including inventory held by a third party
• Renting or leasing tangible personal property in Washington
• Soliciting sales in Washington through employees or representatives
• Providing services in Washington, such as accepting returns or providing product training

It's important to note that the specific criteria for establishing a physical presence nexus may vary from state to state, and it's always a good idea to consult with a tax professional or refer to the relevant state's department of revenue for the most accurate and up-to-date information.

In addition to physical presence, other factors can also create a nexus between a business or individual and a state for tax purposes. These factors can include economic activity, ownership of property, or other connections to the state. Each state may have its own specific rules and thresholds for determining when a nexus has been established.

For travelling therapists, understanding the concept of nexus is crucial for complying with state tax laws and avoiding double taxation. By being aware of the criteria for establishing a nexus in each state they work in, therapists can ensure they are paying the correct amount of state income tax and taking advantage of any applicable tax advantages or reciprocity agreements between states.

State taxes and tax homes

The state taxes you pay as a traveling therapist depend on the state in which you are registered and the state in which you are working. If you are a sole proprietor, you will be required to pay income tax in the state where you trigger the income tax nexus. This means that if you are serving a client in a different state on a recurring basis, you will likely fall within that state's income tax nexus and be required to pay income tax there.

The income tax nexus varies from state to state, and some states do not charge income tax at all. Currently, 41 US states have an income tax, while the remaining 9 do not: Florida, Alaska, New Hampshire, Texas, Nevada, Tennessee, Washington, Wyoming, and South Dakota. If your tax home (the state in which you are registered) has an income tax, you will be required to pay it even when working in a state without an income tax. However, if your tax home is in a state without an income tax, and you travel to another state without an income tax, you will not be liable for income tax in either state.

If your therapy practice is registered as a Limited Liability Company (LLC) or a C corporation, and you plan to do business in other states, you will need to apply for foreign qualification in the states where you plan to practice. This means informing the state that you will be doing business there and providing them with information about your business.

As a traveling therapist, it is important to understand the tax laws and regulations of the states in which you plan to work to ensure that you are complying with all applicable laws and avoiding any penalties or disciplinary action.

Federal taxes

As a travel therapist, you are required to pay federal income tax on all of your taxable earnings. You also pay FICA taxes on your earnings, which go toward your future Medicare and Social Security benefits. FICA taxes are equal to 7.65% of your taxable income.

The federal tax rate depends on your income level after any applicable deductions, including 401k contributions. Federal, and most state, taxes are marginal. Marginal tax rates are more beneficial for lower-income earners. As a travel therapist, you can have a low taxable income and adjusted gross income (AGI), and with good advanced planning, you may be able to pay $0 in federal taxes.

If you are a sole proprietor or other business entity that does not pay yourself through payroll, your income is likely to be subject to self-employment taxes. These are different from income taxes and comprise Social Security and Medicare taxes, which must be paid quarterly.

If you own a pass-through business, you may be entitled to a 20% deduction on qualified business income (QBI). This is known as the Qualified Business Income Deduction (QBI) and was signed into law as part of the Tax Cuts and Jobs Act in 2017. Many self-employed taxpayers and owners of sole proprietorships, partnerships, and S corporations can deduct up to 20% of QBI, as well as 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income. This deduction excludes any deductions from self-employment taxes.

Self-employment taxes

There are a variety of deductions available to therapists, including home office deductions, marketing and advertising expenses, and employee benefits. Here are some of the most common deductions for self-employed therapists:

• Advertising and marketing: The cost of marketing or advertising your therapy practice is tax-deductible. This includes website design and maintenance, professional headshots, SEO tools or consultation, promotional items, and monthly fees for directory listings.
• Accounting and bookkeeping: The cost of accounting and bookkeeping services for your private practice is tax-deductible. This includes any money spent on an accountant or tax preparation.
• Business meals: Business meals are 50% deductible. The meal must be purchased from a qualifying establishment, such as a restaurant with takeout or sit-down service, and must be shared with a business associate.
• Business travel: If you travel for business, you can deduct most of the costs, including travel, lodging, laundry, and 50% of business meals.
• Bank fees: You can write off certain bank fees, such as overdraft and maintenance fees, as tax expenses.
• Vehicle expenses: If you use your personal car for business purposes, you can deduct some of the cost of fueling and maintaining it. You can calculate your tax write-off using the mileage rate or actual expenses.
• Professional organization membership: The cost of membership in a professional organization, such as the American Counseling Association, is tax-deductible.
• Continuing education: You can deduct the cost of courses, workshops, and certification programs related to your profession as a therapist, as long as they help you improve or maintain your skills or are necessary to obtain a license to practice.
• Office rent and utilities: If you practice in an office outside your home, the cost of rent and utilities is fully deductible. If you work from home, you can deduct a portion of your mortgage payments or rent, as well as your utilities, through the home office deduction.
• Supplies and equipment: Any supplies or equipment you purchase for your office, such as computers, printers, phones, and therapeutic aids, are tax-deductible.
• Personal therapy: Money spent on personal therapy sessions may be deductible on your tax return, as it can be considered an expense that helps you improve your mental health and grow in your profession.
• Payment processor fees: Fees paid to payment processors such as Square or Stripe are 100% tax-deductible.
• Booking and billing software: The cost of software used for booking client appointments, invoicing, or providing receipts is 100% tax-deductible.
• Insurance: The cost of professional liability insurance and general liability insurance is generally considered tax-deductible as ordinary and necessary business expenses.
• Student loan interest: You may be able to write off the interest paid on your student loans if it exceeds $600 during the year.
• Qualified Business Income (QBI) deduction: The QBI deduction allows you to write off up to 20% of your income, and most solo therapists qualify for it, provided they meet certain income thresholds.

Tax advantages of travel therapy

Being a travel therapist comes with some tax advantages, which can be a huge factor in higher earnings. Here are some of the key tax benefits of working as a travel therapist:

Tax-Free Stipends

A travel therapist with a tax home is eligible for tax-free stipends for housing, meals, and incidentals. These stipends can often amount to $1,000 or more per week, resulting in significant savings over the course of a year.

Per Diem Tax Rules

The per-diem rates earned on travel assignments can provide a substantial tax advantage. The IRS allows deductions for some travel expenses or reimbursements and tax-free per diem allowance payments. By understanding the IRS's per-diem tax rules, travel therapists can maximize their tax savings.

State Income Tax Exemptions

Currently, 41 US states have a state income tax. However, Alaska, Florida, New Hampshire, Texas, Nevada, Tennessee, Washington, Wyoming, and South Dakota do not tax travel therapy jobs or physical therapist salaries. By strategically choosing their work locations, travel therapists can minimize their state income tax liability.

Tax Advantage Plans

Some companies offer Tax Advantage Plans that can boost a travel therapist's take-home pay. These plans can put more disposable income in therapists' pockets, potentially increasing their annual earnings by up to $10,000.

Deductions and Reimbursements

The IRS may allow travel therapists to claim deductions on their taxes for certain travel expenses, such as transportation, lodging, and meals. Additionally, some companies may offer reimbursements for travel expenses, further reducing the tax burden on travel therapists.

While the tax advantages of travel therapy can provide significant financial benefits, it is important to consult with a tax professional or attorney to ensure compliance with the applicable tax laws and regulations.

Frequently asked questions