Per Diem- Third Party Contractor

[dresiap]

I am employed as a third party contractor. My employer pays my salary W2. But the per diem and expenses I receive are paid by the company that employs my employer. So I received a 1099 NEC from that company. It includes all of the per diem (per government rates) and expenses that I was paid. I also had to do expense reports with all information included before I received the reimbursements. I know that I add the 1099 NEC as income. But how do I offset this because it is not supposed to be taxed since all requirements are met with the expense report. 

[maglib]

@dresiap  As you are an employee and not a contractor, this is somewhat sticky.  As a contractor you would have entered the 1099-NEC as schedule C income and then the related expenses but, you should not have to file a Schedule C as an employee as then you get charged self employment taxes.  If the expenses are accountable expenses vs. if they are non-accountable matters greatly. Example is per diem is non-accountable. Business expenses reimbursed under a non-accountable plan are considered income to the employee and must be included as such in the employee's W-2. This type of reimbursement is also subject to employment taxes both for the employee and employer that can include withholding taxes, FICA, and federal and state unemployment taxes. 

Employee Expenses Eligible for Tax Write-Offs

Employee expenses deemed necessary to their job can be deducted for tax purposes, regardless if they are reimbursed. Common examples include:

• Required tools and equipment. Some employers require employees to purchase items that are considered primarily for the benefit or convenience of the employer (tools used in the employee's work, for example). Under the FLSA, non-exempt employees may not be required to pay for any of the cost of such items if, by so doing, their wages would be reduced below the required minimum wage or overtime compensation. Again, state law may differ.
• Uniforms. If an employer requires employees to wear a uniform, the cost and maintenance of the uniform is considered a business expense of the employer. If the employer requires the employee to bear the cost, it may not reduce the employee's wage below the minimum wage or cut into overtime compensation as outlined by the FLSA.

After you enter the 1099-NEC, keep going and you will come to a screen that says, Does one of these uncommon situations apply?  Select This is not money earned as an employee or self-employed individual, it is from a sporadic activity or hobby

This will take it out of the self-employment category and put it in as other income. 

Now if these were accountable expenses or expenses not subject to taxes where you were reimbursed what it cost and not per diem, then you would have to offset that 1099-NEC and add a negative 1099-Misc and in the description write accountable expense reimb. on 1099-NEC offset.  I would speak to my employer too.

Your employer has an obligation too. as an employee this should be on your w-2. You should speak to them.