When a hospital unit feels comfortable and the pay is steady, extending a 13-week travel nursing contract for a second, third, or fourth term is tempting. However, remaining in the same metropolitan area for close to or beyond 12 months is one of the quickest ways to trigger an IRS audit and lose your tax-free stipend status.
The Internal Revenue Code draws a strict line between temporary employment and indefinite employment. Once your work in a single geographic area is no longer temporary, your tax home moves to that city.
The IRS one-year rule explained
Under Revenue Ruling 93-86 and Internal Revenue Code Section 162(a)(2), employment away from home in a single location is treated as temporary only if it is realistically expected to last for one year or less. If employment is realistically expected to last for more than one year, or actually exceeds one year, the assignment is classified as indefinite.
When an assignment becomes indefinite, that location becomes your new tax home. As a consequence, you are no longer traveling away from home, and all travel stipends paid to you become taxable compensation subject to federal income tax, state income tax, and FICA.
Review official tax code provisions through the Legal Information Institute at Cornell Law School.
When expectations change: The retroactive tax trap
A critical detail in Revenue Ruling 93-86 concerns the exact date your tax status changes. The transition from temporary to indefinite occurs at the moment your realistic expectation changes, not necessarily when you cross day 365.
For example, suppose you complete three consecutive 13-week contracts at a hospital in Denver, totaling 39 weeks (about 9 months). If you sign a fourth 13-week extension at the start of month 10, bringing your total planned stay to 52 weeks, and the agency offers another future extension, the IRS argues that you expected your stay to exceed one year.
At the exact date you sign an extension that causes your total expected stay to exceed 365 days, all stipends become taxable from that date forward.
You can simulate how converting stipends to taxable wages affects your take-home pay with our Contract Analyzer.
How long must you leave to reset the one-year clock?
To reset your temporary status in an area, you must break both physical presence and economic ties with that metropolitan region.
While the tax code does not establish an exact number of days, tax court precedent indicates that a brief two-week vacation is insufficient. Most tax professionals recommend spending at least three to four months working outside the metropolitan area or working in your permanent tax home before returning to the same hospital system.
Check whether your contract extension plans jeopardize your tax status by completing our Tax Home Quiz.
Frequently asked questions
What is the IRS one-year rule for travel nurses?
Under Section 162(a)(2), employment away from home is temporary only if realistically expected to last for one year or less. Assignments lasting over 12 months become indefinite.
When do stipends become taxable if I extend my contract past 12 months?
Stipends become taxable on the exact date your realistic expectation changes to exceed one year, not necessarily on day 366.
How long must I leave a city to reset the one-year clock?
Tax professionals recommend spending at least three to four months working outside that metropolitan area or working in your permanent tax home before returning.