Understanding which states have the best tax rates for travel therapists can be very important depending on the situation. The majority of new travel therapists choose to travel to get ahead financially. This is certainly true for most new grad travelers who we mentor. On average, a travel therapist can expect to make 1.5-2x more on a yearly basis than they would at a permanent job. If you’re unfamiliar with how travel therapy pay works, our guide to travel therapy pay will be helpful. The higher earnings can be used in a variety of ways including: paying down student debt, taking extra time off throughout the year with the flexibility travel contracts provide, or even choosing to semi-retire.
Tax Advantages of Travel Therapy
It’s no secret that the tax advantages that come along with being a travel therapist are a huge factor in those higher earnings. A travel therapist traveling with a tax home, is eligible for tax free stipends for housing, meals, and incidentals. These tax frees stipends can often be $1,000/week or more which means a lot more money in the pocket of the travel therapist throughout the course of a year. Outside of understanding the tax home rules and ensuring compliance there, most travel therapists are lost when it comes to taxes.
That was certainly the case for me when I started as a new grad travel physical therapist in 2015. At that time, I’d never filed my own taxes and didn’t understand federal taxes, much less how state taxes would work with being employed in multiple states throughout the year as a traveler. Filing multiple state returns correctly is intimidating but isn’t nearly as difficult as you’d think once you have an understanding of taxes in general.
In this article, I hope to shed some light on federal and state taxes and use that to rank the states in terms of tax rates for travel therapists.
Federal Versus State Tax Rates
The first thing to understand is that you pay both federal income tax and state income tax on all of your taxable earnings. You also pay FICA taxes on earnings, which go toward your future Medicare and Social Security benefits. This may sound obvious and basic to some of you, but I’ve talked to many therapists that are confused when they see federal taxes and FICA taxes withheld on their paychecks while working in a 0% income tax state. You see, states can determine their own income tax rates, but this does nothing to change the tax rates that the federal government implements. You’re the on the hook for those no matter what state you work in or which state your tax home is in.
FICA taxes owed are equal to 7.65% of your taxable income, and your federal tax rate will depend on your income level after any applicable deductions including 401k contributions. The reason that federal tax rates vary and FICA taxes don’t is because federal, and most state, taxes are marginal. Marginal tax rates are more beneficial for lower income earners. In fact, this is why it’s actually possible to pay $0 in federal taxes as a travel therapist with some good advanced planning since we can actually have quite a low taxable income and adjusted gross income (AGI).
Fixed, Marginal, and Effective Tax Rates
Fixed Tax Rates
A good example of a fixed tax rate is the FICA taxes that you pay. Whether your taxable income is $10,000/year or $100,000/year, you’re still going to be paying 7.65% of that income toward FICA taxes. The rate you pay doesn’t change with your income level (up to certain income caps).
Marginal Tax Rates
Marginal tax rates on the other hand change (increase) as taxable income increases. Someone earning only $10,000/year will owe significantly less in income taxes as a percentage of their total income than someone earning $100,000/year. How much more the higher earning person will owe depends on how quickly the marginal income levels and tax rates increase in the tax code. The reason for this is that your marginal tax rate tells you how much you owe on each additional dollar of income based on the tax bracket you’re in. Not how much your owe on your entire income.
Effective Tax Rates
Your effective tax rate is how much you actually owe in taxes relative to your total taxable income. If you owe $400 on $10,000 worth of taxable income, then your effective tax rate is 4% on that $10,000 of income. This may sound the same as your marginal tax rate at first, but it isn’t. This is confusing for many people. The best way to illustrate the difference is with an example.
Marginal Tax Example
Let’s say you earn $20,000/year and your state tax rates look like this for up to the $20,000 level:
- 1% owed on income from $0 – $10,000
- 3% owed on income from $10,001 – $15,000
- 5% owed on income from $15,001 – $100,000
- 8% owed on income $100,000 or higher
In this example, with your $20,000/year income, you’d be in the 5% marginal tax bracket, but your effective tax rate would be less than that. The reason for that is that you only owe 1% on the first $10,000 that you earned, 3% on the next $5,000, and 5% on the last $5,000. To determine the effect tax rate in this example, we can do it with this formula: ((10,000*.01)+(5,000*.03)+(5,000*.05))/20,000. Simplified: (100+150+250)/20,000 = 0.025 = 2.5%
For this example, your effective tax rate would be 2.5%, even though your income level puts you in you in the 5% marginal tax bracket. The most common misconception with marginal tax rates is that you pay that marginal tax rate on all of your income, when in fact you only pay the highest marginal rate on the portion of your income that carries over into that tax bracket.
You’ve probably heard people say something like working overtime often isn’t worth it because it puts you in a higher tax bracket and you earn less. This is a misunderstanding of the tax code, because in a marginal tax system you’d never pay higher taxes on prior earnings by earning additional money. As you can see from the above example, you only actually pay the higher marginal tax rate on dollars earned over the prior bracket.
Why Do Marginal Tax Rates Matter?
The reason it’s vital to understand marginal tax rates when determining which states have the lowest taxes for travel therapists is because often states that are thought to have very high income taxes, have very reasonable tax rates when it comes to lower income levels. The most glaring example of this is California. If you ask any travel therapist what state they think they’ll pay the highest tax rate in, the vast majority of the time California will be the answer given. In reality for a normal travel therapist, California isn’t even in the top half of highest tax states!
What matters to travel therapists is the total amount paid in taxes on their income (effective tax rate) and the way the marginal tax rates for each state are structured determine this. Since some travel therapists choose which states to work in based on tax rates, understanding the true tax rate for you is vital.
State Income Tax Rates Ranked
Since taxes owed under a marginal rate tax code vary depending on taxable income level, in order to rank the states we need to try to determine the average taxable income for a travel therapist. Most Travel PT’s, Travel OT’s and Travel SLP’s have a taxable hourly pay rate between $20-$25/hour and work full time between 42-48 weeks per year. The hourly rate for Travel PTA’s and Travel COTA’s would be lower, maybe more in the $15-20/hour range.
For this example, we’ll assume that a travel therapist works 40 hours per week for 46 weeks per year, earning a taxable hourly rate of $25/hour. $25/hour * 40 hours/week * 46 weeks/year = $46,000/year in taxable income.
Before we move on in discussing the state tax rates, I want to further hammer home this point because it’s extremely important to understand. While travel therapists do earn higher income and can expect to take home well over $100k per year in most cases, what we need to look at in determining state taxes, is only the taxable portion of our pay. Since for most travel therapists who meet the tax home rules, our stipends are untaxed, you do not consider this portion of your income when determining taxes. Taxes are only based on your hourly, taxable income. So again, in this example, let’s assume that the average taxable income for a travel therapist is $46,000/year.
Below are the states (plus Washington D.C.) ranked based on effective tax rate* from lowest to highest for a travel therapist earning $46,000/year in taxable income.
*Based on state tax data for 2021 tax brackets (most recent tax filing year)
- Alaska- 0% (Marginal- 0%)
- Florida- 0% (Marginal- 0%)
- Nevada- 0% (Marginal- 0%)
- New Hampshire- 0% (Marginal- 0%)
- South Dakota- 0% (Marginal- 0%)
- Tennessee- 0% (Marginal- 0%)
- Texas- 0% (Marginal- 0%)
- Washington- 0% (Marginal- 0%)
- Wyoming- 0% (Marginal- 0%)
- North Dakota- 0.8% (Marginal- 1.1%)
- Ohio- 1.12% (Marginal- 2.77%)
- Arizona- 1.98% (Marginal- 3.34%)
- New Jersey- 2.16% (Marginal- 5.53%)
- Vermont- 2.58% (Marginal- 3.35%)
- Louisiana- 2.65% (Marginal- 4%)
- Rhode Island- 2.67% (Marginal- 3.75%)
- California- 2.68% (Marginal- 6%)
- New Mexico- 2.96% (Marginal- 4.9%)
- Pennsylvania- 3.07% (Marginal- 3.07%)
- Missouri- 3.07% (Marginal- 5.4%)
- Indiana- 3.16% (Marginal- 3.23%)
- Colorado- 3.27% (Marginal- 4.5%)
- Arkansas- 3.54% (Marginal- 5.9%)
- Mississippi- 3.58% (Marginal- 5%)
- Nebraska- 3.75% (Marginal- 6.84%)
- Maryland- 3.77% (Marginal- 4.75%)
- Iowa- 3.77% (Marginal- 6.25%)
- Michigan- 3.80% (Marginal- 4.25%)
- Maine- 3.81% (Marginal- 6.75%)
- Oklahoma- 3.79% (Marginal- 5%)
- Wisconsin- 3.82% (Marginal- 5.3%)
- Washington D.C.- 3.93% (Marginal- 6%)
- South Carolina- 3.94% (Marginal- 7%)
- West Virginia- 3.95% (Marginal- 6%)
- Kansas- 3.99% (Marginal- 5.7%)
- North Carolina- 4.02% (Marginal- 5.25%)
- Montana- 4.03% (Marginal- 6.9%)
- Minnesota- 4.09% (Marginal- 6.8%)
- Alabama- 4.12% (Marginal- 5%)
- Idaho- 4.2% (Marginal- 6.5%)
- Delaware- 4.3% (Marginal- 5.55%)
- New York- 4.42% (Marginal- 5.97%)
- Georgia- 4.46% (Marginal- 5.75%)
- Virginia- 4.51% (Marginal- 5.75%)
- Massachusetts- 4.52% (Marginal- 5%)
- Connecticut- 4.57% (Marginal- 5%)
- Illinois- 4.69% (Marginal- 4.95%)
- Kentucky- 4.71% (Marginal- 5%)
- Utah- 4.81% (Marginal- 4.95%)
- Hawaii- 6.07% (Marginal- 7.9%)
- Oregon- 7.66% (Marginal- 8.75%)
Tax Rate Surprises for Travel Therapists
Most people only look at the highest marginal tax bracket when considering the affordability of a state’s income taxes. In reality, when considering which states have the best tax rates for travel therapists, the top marginal tax bracket doesn’t mean anything. It took me a while to realize and really understand this. Had you told me a few years ago that I paid more in state taxes in my home state of Virginia than I would California as a travel therapist, I would have thought you were crazy… but it’s true.
Despite Virginia having a top state tax rate of 5.75% and California having a top state tax rate of 12.3%, an average travel therapist will pay an effective tax rate of only 2.68% in California versus 4.51% in Virginia. Almost double! That’s because the state marginal tax rate for California never exceeds 8% until income levels over $50,000/year of taxable income (accounting for the standard deduction), and the rates increase very gradually. Whereas in Virginia, anyone earning over $22,000/year (accounting for the standard deduction) is in the highest marginal tax bracket of 5.75%.
Tax Home Impact
Another important thing to consider when thinking about state tax rates as a travel therapist is your home state tax rate. The reason is because in most cases you end up paying the higher rate between the state you work in and your tax home state, which can negate purposely trying to work in favorable income tax states. We discuss this more in depth in this video. For example, if your home state is Oregon and you purposely take a full year’s worth of contracts in Florida due to the 0% income tax rate in Florida, you’ll be disappointed at tax time when you end up having to pay state taxes on your Florida earnings to your home state of Oregon.
On the other hand, if your home state is Texas, then it would make a lot of sense to try to take contracts in another 0% tax state to avoid paying state income taxes on your taxable income.
How Much Do State Tax Rates Really Matter?
Of course, state tax rates have a relatively small impact on how much you’ll earn over time as a travel therapist, but it isn’t trivial by any means and can be pretty large in some instances. If you take the highest tax state and the lowest tax state above, the difference in taxes owed is about $3,500/year for the average travel therapist. For most travelers that is equal to 1.5-2 weeks of pay, which is significant. This may be most applicable to a traveler whose tax home is a 0% income tax state, in making decisions to try to work in other 0% income tax states, or lower tax states, instead of working in the highest tax state, Oregon.
Those are the extremes though, so realistically choosing a low tax state over a high tax state will probably amount to $1,000-$2,000/year on average depending on the traveler’s tax home state. Choosing to work with a high paying travel company based on your situation or a great recruiter that can find you high paying contracts will often have a much bigger impact than state taxes. So, for you, it may not be worth stressing about avoiding high tax states.
Which state in the rankings above is the most surprising to you? Do you consider the state tax rate when considering whether to take a contract? Let me know in the comments below!
Disclaimer: Jared is not a tax expert or financial advisor. All information provided here is based on Jared’s understanding of the tax code and was gathered using public tax information. If you have questions about your personal taxes, you should consult a CPA or other tax expert.