For the last few years I've been paying for all my travel and meal expenses on my personal credit card and then adding the expenses to my invoice. This is great for my credit cards points which is why I don't mind doing it, but I can't seem to figure out if this is somehow making me pay more in taxes?
I file as a sole proprietor, last year let's say I made $120,000 in gross 1099 income, but $60,000 of that was strictly travel/meal expenses that the clients reimbursed for and included all together without separating in the 1099. Am I paying more in taxes than I should be? I keep track of all receipts and do deduct them in turbo tax in the appropriate fields, but are some expenses not actually fully being deducted from my taxable income? Is an S-corp a better filing status for someone in this position?
Thank you so much for the help.
No. Your tax bill would be the same whether or not your expenses were included on Form 1099-NEC because you pay tax on net profit.
If you made $120,000 and deducted $60,000 your taxable net profit would be $60,000. If your Form 1099-NEC showed only $60,000 of earnings and no expenses, you would still be taxed on $60,000.
As a non-employee, your clients should report all the money they gave for compensation and expenses on Form 1099-NEC.
You can deduct any additional ordinary and necessary business expenses that you would not bill a client for, such as home office, internet, cell phone, and overhead plus other expenses such as cash tips that you made not bill since you have no receipts.
From a tax standpoint, an S-corp can save you some money in self-employment tax. As an owner and employee of an S-corp, the owner’s portion is not subject to SE tax. However, you would have to put yourself on salary.
For example, if you charged $60,000 but believed you could hire someone to do comparable work for $50,000 then you could issue yourself a W-2 for $50,000. The remaining $10,000 would be S-Corp income not subject to SE tax.
The downside is that you would contribute less to Social Security, so your Social Security benefits at retirement would be lower.
However, you may be able to contribute a larger share of your income towards a self-employed retirement plan with an S-Corp.
@ErnieS0 Thank you for all the details, this is very helpful. It sounds like currently, everything is correct where earned income & expenses all are included in box1 "nonemployee compensation" on 1099NEC from the client. From there it is up to me to deduct the expenses from my tax return for full deductions.
The only one that gets tricky is 50% and 100% meal deductions. I would assume all reimbursed meal expenses from the client would be filed under the 100% meal deduction category?
Thanks again
Yes, if these meals were provided by a restaurant they would be 100% deductible.
Take a look at the following TurboTax help article for more information:
What types of meal and entertainment expenses are 100% deductible on a business return?
For self-employed contractors, who incur meals when traveling, but are reimbursed in full by the client, per IRS website, 100% of the meals can be deducted by the self-employed contractor. Where do you enter these meals in TT?
The examples TurboTax gives are:
"- Company parties, picnics, team-building offsites, outings for all employees
- Fees to rent space for company gatherings, offsites
- Cost of hosting charitable events and meals for the general public
- Meals provided to the public as a means of advertising
- Meals for children at a daycare facility (if you use the standard allowance for meals and snacks, and you are reimbursed for them, you can only deduct the portion of the standard allowance that exceeds the reimbursement)"
Is this the correct place to enter reimbursed meals?
If you are being reimbursed for the meals by your client, you don't have an expense to include. You would not include meals as an expense.
But if they include the reimbursed expenses in 1099 form, then you have to account for them, don’t you?
(My client used to not include reimbursements on my 1099-NEC, but they recently quoted guidance from IRS and changed their policy, and now they include reimbursed expenses in the 1099 form)
Yes, if your 1099-NEC includes the reimbursements, then you would be able to take a deduction for the meal expenses that they reimbursed you for. However, the meal expenses are not based on what they reimbursed you. In general meal reimbursement is 50% of what you spent or you may be able to use the per diem rate.
After you enter your 1099-NEC, you will be given the chance to Add Expenses. This is where you will add your meal expenses along with any other expenses you have for your 1099-NEC work
To enter your self-employment income click the following:
This income will be reported on Schedule C which is part of your overall tax return. This also means you will be subject to SE Tax. If you did not pay SE Taxes in 2023, and if you plan to do this again in 2024, it may be a good idea to make quarterly estimated payments to cover your SE taxes of 15.3% and avoid penalties.
If you have health insurance through a non-employer, you may also be able to deduct your health insurance premiums as a business deduction. The Self-Employed Health Insurance deduction is limited to your earnings. Meaning, you cannot deduct more than you earned. This is also entered in the business expense section.
In publication 463, I think I fall under exception #3:
Your meal expense isn’t subject to the 50% limit if the expense meets one of the following exceptions.
3—Self-employed reimbursed expenses.
You have these expenses as an independent contractor.
Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform.
You provide adequate records of these expenses to your customer or client. (See chapter 5.)
In this case, your client or customer is subject to the 50% limit on the expenses.
Example.
You are a self-employed attorney who adequately accounts for meal expenses to a client who reimburses you for these expenses. You aren’t subject to the limitation on meal expenses. If the client can deduct the expenses, the client is subject to the 50% limit.
Where do I enter these expenses? In the category for 100% deduction in TT, it gives many examples, but none are similar to this IRS example..