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As a nurse, you may have heard a few myths about taxes. It wasn’t exactly covered in clinicals or pathophysiology class. However, it’s essential to understand the truth behind tax misconceptions to make informed financial decisions and achieve your goals. Don’t let tax myths hold you back; take the time to educate yourself and make informed decisions about your finances.
Myth 1: You can’t reduce your taxable income as a W2 employee.
According to Alex Ishmael, Tax Senior Manager at Mazars, W2 nurses can reduce their taxable income. What is the best way to do it? Save for retirement by making tax-deferred contributions to a 401k or a 403b retirement savings plan. Ishmael says, “For 2023, up to $22,500 can be deferred out of W2 wages and a catch-up contribution of $7,500 for taxpayers aged 50 and older.” Many employers also match a percentage of the plan contributions, which is extra money at retirement.
Another tax expert, Tom Wheelwright, CPA, CEO of WealthAbility®, and the tax accountant for Robert Kiyosaki (author of Rich Dad, Poor Dad), also weighed in on the topic. Wheelwright claims the way to approach paying taxes is to “become someone the tax law favors. Then, when you invest in things that help the government achieve its priorities, the government offers incentives.”
- Owning a business
- Owning and investing in real estate
- Contributing to your retirement
- Donating to charity
W2 nurses can reduce their taxable income through all of these mediums. Some of these methods, like owning a business, require additional time and effort. Others are more passive, like setting up regular contributions to your retirement.
Myth 2: Accepting a sign-on bonus will ruin your tax return.
Have your eye on a sweet sign-on bonus? Although you might fear a sign-on bonus will affect your tax return, a sign-on bonus is treated like any other bonus. Wheelwright says a nursing sign-on bonus is considered supplemental income. Therefore, it is subject to a higher withholding rate than regular income, and a flat 22% of the bonus will likely be withheld from your paycheck.
However, the way it impacts your tax return will depend on many factors, including:
- Your income
- Your withholdings
- Your deductions
- Your tax credits
Wheelwright suggests consulting with a professional because “a good tax advisor can help you plan ahead, so you aren’t surprised come tax time. A great tax advisor will help you create a tax strategy to ensure you keep as much of your hard-earned money as possible.”
Myth 3: You should always itemize your deductions.
According to Wheelwright, the best way to determine if itemizing deductions is right for you is to do the math. Deductions are expenses that may be subtracted from your taxable income. The IRS sets guidelines for yearly standardized deductions, depending on your tax filing status. Both W2 and 1099 employees can choose to take this standardized deduction, or they may decide to list and itemize all their possible deductions.
W2 employees who are also travel nurses have many possibilities for deductions, including:
- Travel between home and work
- Business use of a rental car or personal vehicle at work destination
- Dry cleaning and laundry services
The caveat for travel nurses is that they can’t deduct expenses already reimbursed by their employer. In addition, all travel nursing tax-free stipends also can’t be deducted from taxes, as the benefit of the stipends is that they are already tax-free.
You need to have a “tax home” different from your work location to receive tax benefits on travel stipends or tax deductions. However, Ishmael also says, “travel nurses should be aware of working less than one year in one location, or the work location would be considered their tax home by the IRS, and the stipends will be taxable. Therefore, the best practice would be to return home well before the one-year mark.”
Myth 4: Self-employed and 1099 nurses pay less in taxes.
It’s a common misconception that business owners and contractors don’t have to pay as much in taxes. However, Ishmael says there are many tax benefits to being a W2 employee.
W2 employees have the following withheld from their paychecks:
- Income taxes
- Social security taxes (which are also employer matched)
- Medicare taxes
- Medical benefits from a subsidized health insurance
- Retirement benefits (which are also employer matched)
- Miscellaneous benefits (HSA, FSA, and more)
On the other hand, Ishmael says, “1099 contractors are responsible for 100% (both employee and employer portions) of social security and Medicare taxes.” Additionally, 1099 contractors must make quarterly estimated tax payments since no taxes are withheld. This requires an efficient financial system and often the cost of hiring an accountant to oversee these quarterly payments. Nurses who are 1099 contractors also must secure their health insurance and set up their retirement plans without any employee matching benefits.
Myth 5: Learning about taxes should be left to the experts.
While seeking help from an expert might be ideal for you, educating yourself about taxes will help you make the most of your financial situation. Ishmael recommends that nurses learn about taxes through tax authorities.
Here are a few options:
- IRS.gov: The official website of the IRS offers tax information, including tax forms, tax calculators, and answers to frequently asked questions.
- Government resources: Your state and local government may also offer resources and assistance with taxes, such as tax workshops and free tax preparation assistance for low-income taxpayers.
- Tax preparation software: Tax preparation software, like TurboTax and H&R block, offer resources to help you prepare and file your taxes.
- Tax professionals: A financial advisor or CPA can provide personalized advice and guidance on tax-related topics.
According to Wheelwright, “a great CPA will be an advisor who helps you create a roadmap for building wealth.” In addition, he recommends that anyone concerned with making more money and paying less tax would benefit from working with a professional.
Understanding taxes can be daunting for nurses, but it’s to ensure you’re not overpaying or underpaying come tax time.
Ultimately, taking the time to understand taxes and how they fit into your financial situation can save you money, reduce stress, and help you achieve your long-term financial goals. Whether you learn through self-education or working with a tax professional, it’s a critical step toward financial success.
Are you interested in the ease and benefits of a W2 nursing job without sacrificing flexibility? Visit connectRN.com to learn more.