Itinerant worker – a “tax classification” the general public may never have heard of. Historically, taxpayers worked 40 hours a week in the same office(s), to which they commuted 5 days a week… until 2020.
Once the worldwide pandemic struck, a fair majority of businesses found themselves closing their doors – both to the public and to their workers. Some of those businesses were able to shift their workers from an onsite presence to telecommuting… working from home, remotely connecting to the business via the internet. While most of these workers telecommuted from their primary residence, some found that telecommuting offered them a unique opportunity… an opportunity to work remotely while vacationing from state to state, perhaps even out of the country.
Workers who took advantage of the opportunity to travel while telecommuting subjected themselves to becoming an itinerant worker – a tax classification for workers who have no regular “tax home.” A tax home has less to do with where a taxpayer lives, and everything to do with where a taxpayer works. According to IRS Pub 463, your tax home is:
“Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.
- If you have more than one regular place of business, your tax home is your main place of business.
- If you don’t have a regular or a main place of business because of the nature of your work, then your tax home may be the place where you regularly live.
- If you don’t have a regular or main place of business or post of duty and there is no place where you regularly live, you are considered an itinerant (a transient) and your tax home is wherever you work. As an itinerant, you can’t claim a travel expense deduction because you are never considered to be traveling away from home.1“
There are three factors the IRS considers when determining a taxpayer’s tax home:
- “Business is conducted in the area of a main home and the taxpayer uses that home for lodging while doing business in the area.
- The taxpayer’s living expenses at a main home are duplicated when business requires the taxpayer to be away from that home.
- The taxpayer has not abandoned the area in which both his or her historical place of lodging and claimed main home are located, or the taxpayer’s family member lives at the main home, or the taxpayer often uses that home for lodging.1“
The IRS will then determine the taxpayer’s tax home based upon how many of the factors are satisfied/true:
- “If all three factors are satisfied, the taxpayer’s tax home is where the taxpayer regularly lives.
- If two factors are satisfied, other circumstances must be considered.
- If only one factor is satisfied, the taxpayer is an itinerant (transient) worker.1“
A taxpayer determined to be an itinerant worker will be subject to the rules for itinerants when filing their tax returns. This WEBlog will not cover every aspect of you (or your client’s) scenarios – as each scenario is different based on the facts and circumstances; but it is designed to create awareness of itinerant work in general and, therefore, certain tax limitations. If you find yourself in the position of being an itinerant worker, it will be important for you to assess the situation carefully, document your unique facts and circumstances, and ensure that you’re entitled to any travel expenses or other deductions you list on your tax return.
A common misconception by the average taxpayer is that travel expenses while performing work are deductible; but more often than not, that’s false. Let’s look at a few scenarios:
Mr. & Mrs. Traveler both telecommute for work 5 days a week. Mr. Traveler is an engineer who works for Ace Construction, a company that builds bridges across America. Mrs. Traveler also works for Ace Construction, as an accountant. Their primary residence is in MyHometown, USA. They wish to take advantage of the opportunity to vacation while they telecommute for work.
During Year 1, Mr. & Mrs. Traveler spend two weeks of each month at their main home in MyHometown, USA and telecommute for work while they are there. The rest of the month they travel, sightsee and telecommute from their vacation spot.
Applying factors 1-3 provided by the IRS to determine if they are itinerant workers, Mr. & Mrs. Traveler believe they are not itinerant workers, and provide the following reasons:
- Two weeks out of each month they live and work from their main home.
- They maintain their main home year-round, effectively duplicating their living expenses when traveling.
- They have not abandoned the area of their main home, and telecommute from their main home 2 weeks of every month.
Since all three factors are satisfied, Mr. & Mrs. Travelers are not itinerant workers for tax purposes. However, their travel expenses are not deductible because their travel is not for a “business” purpose – the travel is vacation.
Using the same facts as in Year 1 above, let’s consider some additional facts.
Ace Construction suggested to Mr. Traveler that he make onsite visits to any projects near where he is traveling and check on the progress. They don’t offer to reimburse him for out of pocket travel expenses. Mr. Traveler agrees.
Because Mr. Traveler is not an itinerant worker in Year 1, and because a certain portion of his travel has a legitimate business purpose, his travel costs associated specifically with the onsite visits may be deductible, depending upon facts and circumstances; Mrs. Traveler’s costs would not be deductible since there is no business need for her to make an onsite visit.
In Year 2, Ace Construction arranges for Mr. Traveler to work on location at several of their construction sites. This is a temporary assignment, and is expected to last less than 12 months. Ace Construction will provide an office for him at each site, and they will reimburse him for the many, but not all, of his travel expenses. Since Mr. Traveler will be spending a great deal of time working at each construction site, Mrs. Traveler decides to remain in the family home for Year 2. Mr. Traveler leaves on January 5th, and returns home December 15th the same year.
We’ll apply the three factors to determine the Traveler’s tax home for Year 2:
- Mr. Traveler conducted his business on-site at various locations across America; he did not perform any work from his main home during the 21 days he lived there. Mrs. Traveler conducted 100% of her business from their main home.
- The Traveler’s paid all expenses to maintain their primary residence. Mr. Traveler incurred travel expenses, for which Ace Construction made a partial reimbursement.
- Mr. Traveler was away from home virtually all of Year 2, but his spouse continued to both live and work from the main home the entire year. Mr. Traveler’s work assignment is temporary, and his intent is to return to his main home when the assignment ends.
Mr. & Mrs. Traveler will apply the factors for determining itinerant work separately during Year 2 – because their facts and circumstances during Year 2 are not the same.
Mrs. Traveler meets all three factors, so she is not an itinerant worker for Year 2. Mr. Traveler fails Factor 1, but meets Factors 2 & 3. Facts and Circumstances must be used to determine his status as an itinerant worker – and with the facts presented, Mr. Traveler does not appear to be an itinerant worker. The preparer of the tax return will need to ask additional questions to determine the deductibility of any travel expenses since only a portion of the expenses were reimbursed by the employer.
Mr. & Mrs. Traveler decide in Year 3 to turn their main home into a rental and live in their RV full time for at least the next two years. They remain in their main home through May 31st, telecommuting from home while they make the home ready to rent. On June 1st, the Traveler’s drive away from the main home and spend the rest of Year 3 and all of Year 4 telecommuting from their RV as they traveled. The Traveler’s return home May 1st, Year 5.
- The Traveler’s both lived and worked from their home January – May during Year 3. On June 1st, they placed their home in service as a residential rental property.
- Beginning June 1st, the Traveler’s living expenses are no longer duplicated.
- The Traveler’s abandoned their house as their primary home June 1st, the day the renter’s moved in.
January through May of Year 3 the Traveler’s met all three factors; they are not itinerant workers. Beginning June 1st, the Traveler’s fail all three factors; beginning June 1st, the Traveler’s are itinerant workers. They remain itinerant workers for Year 4, and at least until May 1st of Year 5. As itinerant workers, the Traveler’s have no regular tax home, and therefore their tax home is wherever they are working.
The rules for itinerant workers are clear – by definition they cannot be traveling away from their tax home at any given time, and none of their travel costs are deductible on the tax return. The idea that the tax home is wherever the taxpayer works brings to mind a question: In what state does an itinerant worker file their state tax return? Is a state tax return required? Both great questions, and both questions for a separate WEBlog discussion.
At this time, the best resource I’ve found to help sort through the requirements for deductibility of travel expenses for itinerant workers is IRS Pub. 463. Each situation must be evaluated based on its own set of facts and circumstances, and careful consideration must be given equally to the intentions as well as the actions of the taxpayer with respect to where they live and work.
WEBlog research links
1 https://www.irs.gov/publications/p463#en_US_2022_publink100033754 – IRS Pub 463, Travel
Additional information regarding itinerant workers may be found in The TaxBook Deluxe Edition TY22, Page 8-10