Contractor is usually paid $20 per hour, but when traveling they are paid $25 per hour to include per diem. Do I report all of the $25 per hour on the 1099?
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Per diem expenses, and the tax treatment thereof, can be a complicated issue.
For example, a full answer would include a discussion of "Accountable" vs. "NonAccountable" plans, as well as a detailed treatment of the concept of a tax home. You can learn much more about these topics by referring to IRS Publication 463 (Travel, Meals . . .), which can be downloaded here:
https://www.irs.gov/pub/irs-pdf/p463.pdf
You are respectively encouraged to read this material, or at least skim through it.
That said, if you are paying an independent contractor via Form 1099-MISC, in the manner suggested by your question, then a very reasonable approach would indeed be to proceed as you suggest. You could simply report the full amount of their annual compensation on Form 1099-MISC, Box 7 (Non-employee compensation) and effectively be done with it. Both $20 per hour and $25 per hour totals would be added together for the entire year to arrive a final figure.
This would be perfectly fair to the contractor, you see, because when they file their own tax return to report the 1099 income from you (whether on a Schedule C for self-employment as an individual, or a Form 1120 as a corporation, etc.) they will be able to deduct, for income tax purposes, their own expenses for working out of town, or away from their tax home, if any, for what are commonly known as per diem expenses. Thus, fairness is preserved in the tax code.
If you chose to generate your 1099 this way, and you have an agreement, or understanding, with your contractor that you have paid them $20 for in-town work and $25 for out-of-town work, then you might do them the additional favor of reminding them how you are reporting their compensation for tax purposes, and also suggest to them that they may, in turn, be able to deduct some of their out-of-town travel, meal, and lodging expenses (a.k.a. per diem costs). In other words, you could politely recommend to them that they should remember to ask their own tax advisor about deductible expenses for working away from home, if applicable.
Thanks for asking this important question.
Per diem expenses, and the tax treatment thereof, can be a complicated issue.
For example, a full answer would include a discussion of "Accountable" vs. "NonAccountable" plans, as well as a detailed treatment of the concept of a tax home. You can learn much more about these topics by referring to IRS Publication 463 (Travel, Meals . . .), which can be downloaded here:
https://www.irs.gov/pub/irs-pdf/p463.pdf
You are respectively encouraged to read this material, or at least skim through it.
That said, if you are paying an independent contractor via Form 1099-MISC, in the manner suggested by your question, then a very reasonable approach would indeed be to proceed as you suggest. You could simply report the full amount of their annual compensation on Form 1099-MISC, Box 7 (Non-employee compensation) and effectively be done with it. Both $20 per hour and $25 per hour totals would be added together for the entire year to arrive a final figure.
This would be perfectly fair to the contractor, you see, because when they file their own tax return to report the 1099 income from you (whether on a Schedule C for self-employment as an individual, or a Form 1120 as a corporation, etc.) they will be able to deduct, for income tax purposes, their own expenses for working out of town, or away from their tax home, if any, for what are commonly known as per diem expenses. Thus, fairness is preserved in the tax code.
If you chose to generate your 1099 this way, and you have an agreement, or understanding, with your contractor that you have paid them $20 for in-town work and $25 for out-of-town work, then you might do them the additional favor of reminding them how you are reporting their compensation for tax purposes, and also suggest to them that they may, in turn, be able to deduct some of their out-of-town travel, meal, and lodging expenses (a.k.a. per diem costs). In other words, you could politely recommend to them that they should remember to ask their own tax advisor about deductible expenses for working away from home, if applicable.
Thanks for asking this important question.
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