1099 Myth #1: Expenses Aren’t Included in 1099 Totals
You may know about the need to issue 1099 forms in January. Heck, you may have purchased those blank forms already! But do you know what to include in those figures that you’re reporting on a 1099-MISC form? One of the biggest myths out there is that you don’t need to include expenses in those totals. But should you? The answer is … it depends!
A business owner has two options when preparing expense reimbursements to independent contractors:
Option #1: The business can require independent contractors to follow an accountable plan. Under this option, the independent contractor is required to provide documentation that expenses are business-related (no massages or mani-pedis can be reimbursed!) and that the amounts are substantiated. What this boils down to is that there are receipts for each of the expenses. If the business requires independent contractors to follow this procedure, then those reimbursements will NOT be included in the independent contractors’ Form 1099-MISC.
Option #2: If the business does not have an accountable plan and does not require independent contractors to provide receipts, then reimbursed amounts WILL be included in the totals on the Form 1099-MISC. It will then be up to the independent contractor to deduct those business-related expenses on their own tax return.
So, what does this mean for you?
If you are the business that is paying independent contractors, it is better for you to NOT have an accountable plan and leave the responsibility for finding and keeping receipts to your independent contractors. It is simpler and easier to simply report all payments on the Form 1099-MISC and it saves you from the liability of retaining documentation and receipts for years and years. For the tax geeks out there, choosing to NOT have an accountable plan also passes the 50-percent limitation on meal and entertainment deductions on to your independent contractor.
If you are the independent contractor, then you need to know which option your client will be using. If your client reimburses you for expenses and includes those reimbursements on the 1099-MISC form, then simply deduct those expenses on your own tax return. In the event that your client does NOT include those expenses reimbursements on your 1099-MISC form, then you have two options:
- You can report the reimbursements as income anyway and deduct the corresponding expenses. This may sound like extra work, but if you are already using QuickBooks Online or another accounting system to track your bookkeeping, then the numbers will already be in your totals. Or …
- You can not report the income and not report the expenses either. (Sorry folks, if you don’t report the reimbursement as income, then you can’t deduct the expenses that they paid for!)
Interested in more details on 1099 reporting? Download our 1099 Cheat Sheet today for all the information you’ll need to cross 1099s off your list in January! Click Here
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Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.