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Break-in-service rules need to be more robust for traveling professionals

Staffing Stream

Break-in-service rules need to be more robust for traveling professionals

Joseph Smith
| January 27, 2025
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For traveling professionals working temporary assignments, the IRS has rules that determine what is considered a temporary versus indefinite assignment. For example, one limitation is that the individual cannot work in the same area for more than a year. If they agree to work beyond a year the IRS considers that an indefinite work arrangement and the providers’ tax home shifts to the new location. Any payments for lodging or meals then become taxable as the job is no longer considered temporary.

A way for staffing firms to avoid such situations is to have a break in service rule. A tax residence is not where an individual lives but their main place of work. The limitation is in place to prevent a series of short-term assignments from becoming the main place of work (a tax home). This creates a compliance requirement not only for the provider but also for the staffing agency employer when pre-qualifying the provider for tax free reimbursements.

Staffing agencies are required to screen the recipient of lodging and meals for situations that would nullify the tax-free treatment of these reimbursements. When onboarding a provider, it is usually evident through their employment history that the candidate will potentially be in the same area more than a year with the completion of the proposed work period. This is where break-in-service policies are important.

The IRS has addressed break-in-service rules for assignments of various lengths. Every taxpayer is going to have different circumstances, but the most common situation that arises in the contingent staffing industries is one where the provider has already been working in the same area for 12 months and wants to continue for another 12. In this scenario, IRS chief counsel memorandums would require a minimum break of seven months, preferably 12, for it not to be considered a continuation of the original series of assignments. Since agencies are not a compliance arm of the IRS, a reasonable break-in-service requirement needs to be in place.

One alarming trend since the end of the pandemic is many agency employers only requiring a 30-day break between two 12-month sets of assignments. This is not a good practice for several reasons. For one, it creates a situation in which 24 of 25 months of work are potentially being done in the same area. Since a tax home is defined as one’s main area of work, an audit of this 25-month period (which spans three calendar tax years) will easily conclude that this individual’s tax home shifted at some time during the assignments. Another problem with this practice is that extensions tend to be signed during the previous contract. For example, the provider is ending an assignment, and before that assignment terminates, they signed an extension to return after 30 days. Since the “main area of work” rule focuses on continuous employment and the extension is agreed to before the end of the previous assignment, it is continuous employment in the eyes of the IRS and the break is counted.

NATHO (National Association of Travel Healthcare Organizations) members have a Tax Best Practices policy available to them. This policy recommends three months as a break in service after 12 months of work in the same area. Even though a three-month break could result in 24 out of 27 months in the same area (potentially making it a regular place of work), the policy is more reasonable, as it reflects standard assignment lengths and comes with the suggestion that the provider consult their tax professional before accepting the contract.

Thirty-day breaks do not reset the 12-month limitation. Thirty days at home are required to maintain a tax home, but that’s when the provider is working in separate geographical areas with each assignment.

Break-in-service policies are significant compliance tools, and it is good practice to train recruiters to spot these situations and adjust the policies where needed.