Tax Implications of Reimbursements for Mystery Shopping Expenses

[Nancol]

I recently started working as a mystery shopper on the side, primarily evaluating restaurants. My expenses for these assignments are reimbursed. For example, if I spend $100 on a dinner, the company reimburses me for that amount. I’m wondering how this works for tax purposes. Since the $100 is an expense that gets reimbursed and not actual income, do I still need to report it as income on my taxes? Or, because it’s just a reimbursement, can I exclude it from my tax filings?

[KNDavis]

Hi Nancol,

I’ll assume that you’re getting paid for your services in addition to the expense reimbursements and that you will receive a 1099-NEC for the amounts paid to you.  You will report your business income and expenses on Schedule C of your personal taxes. 

If the company includes the expense reimbursements in the 1099-NEC, you can deduct the expenses.  Be sure to keep all your receipts.  If they don’t include the expense reimbursements in the 1099-NEC, then you would not deduct the expenses.    

Thanks for participating in today's Ask The Expert event!

Kimberly, CPA for over 30 years

[synaps]

Hi, I’m seeking clarification on the tax treatment for reimbursements and additional costs as a mystery shopper. I understand that I’ll receive a 1099-NEC that includes both the reimbursed expenses (like meals) and payments for my services.

1. Reporting Income and Deductions: Since the 1099-NEC includes both my reimbursed expenses and pay, I plan to report the full amount on Schedule C as business income. Then, I would deduct the reimbursed expenses to avoid paying tax on that part, as well as any unreimbursed expenses like parking or mileage. Is this approach correct?

2. Standard Deduction vs. Itemizing: Can I still take the standard deduction in addition to deducting these business expenses on Schedule C, or would I need to itemize instead?

I’d appreciate it if you could confirm or correct this approach and clarify any parts I may have misunderstood. Thank you for your help!

[KNDavis]

Hi synaps,

You are correct in your description of how you will report your income and deductions.  If the 1099-NEC includes all amounts paid to you, whether for your compensation for services or reimbursement of expenses, then you will report the amount on the 1099-NEC as income on Schedule C.  You will also report the reimbursed expenses you incurred on Schedule C, which will reduce your net income.  You can also include any non-reimbursed expenses connected to your work as a mystery shopper.

For the second part of your question, yes, you can still take the standard deduction when you report business expenses on Schedule C.  The decision whether to take the standard deduction or itemize is not related to your business expenses.   Expenses which qualify as itemized deductions are different from business expenses and include expenses such as mortgage interest, real estate taxes and charitable contributions.

Thanks for participating in today's Ask The Expert event!

Kimberly, CPA for over 30 years

[synaps]

Thank you, Kimberly! To clarify, you mentioned that the decision to take the standard deduction or itemize is not related to my business expenses. Does this mean I can still claim the standard deduction even though I'm filing a Schedule C for my mystery shopping income and expenses?

Also, I'm in California. Do the same rules apply to my California state tax return? Can I claim the standard deduction on my state return while also reporting my mystery shopping income and expenses on a Schedule CA (540)?

I want to make sure I understand this correctly for both my federal and California state returns.

[KNDavis]

Hi synaps,

You are correct - you can take the standard deduction on both your Federal return and your California return, even when you claim expenses related to your business on Schedule C. 

Thanks,

Kimberly, CPA for over 30 yrs

[synaps]

Thank you, Kimberly! That clarifies the standard deduction question. I'm also trying to understand what kinds of expenses are typically deductible for mystery shoppers. I've organized my potential expenses into categories, but I'm not sure if I'm on the right track or if I'm missing anything.

Here are the categories and some examples of expenses I'm considering:

Technology:
Computer/Laptop
Smartphone
Internet Access
Software (tax preparation, mystery shopping apps, cloud storage)
VPN Service
Transportation:
Mileage (using the standard mileage rate)
Vehicle Expenses (if using actual expenses instead of mileage rate)
Ride-Sharing
Home Office:
Portion of rent or mortgage interest
Utilities
Home insurance
Depreciation of home office furniture
Other Expenses:
Supplies (pens, paper, notebooks)
Continuing Education (courses, workshops)
Tax Preparation Fees
Potentially Deductible (with Careful Documentation):
Clothing (if required for assignments and not suitable for everyday wear)
Meals (if traveling overnight or for business meetings)
Could you please provide some guidance on these points:

Are any of these expense categories typically not allowed as deductions for mystery shoppers?
Are there any special rules or limitations I should be aware of within each category?
Are there any other common deduction categories or specific expenses for mystery shoppers that I might have overlooked?
What kind of documentation do I need to keep to support these deductions in case of an audit?
I want to make sure I'm claiming legitimate deductions and following IRS guidelines. Any advice you can offer would be greatly appreciated!

[evelynm]

Common categories for self-employment are included in this link:  Tax tips for self employment taxes - this also has further details for taking the home office deduction.

What kind of documentation do I need to keep to support these deductions in case of an audit?

• Tax forms and supporting documents

  Keep these for at least three years after filing your taxes. The IRS can look back further if you fail to report income or claim a loss. 
• Asset records

  Keep records for assets like stocks, bonds, and your home until the statute of limitations expires for the tax year in which you sell them. 
• Expense records

  Keep records of expenses related to buying, maintaining, or repairing business assets. 
• Income records

  Keep records of transactions that lead to income for your business, such as tax invoices, receipts, cash register tapes, and sales records. 

  Below is a link detailing record keeping:

  Record retention 

[Nancol]

Thank you! Since I only recently started earning income through side gigs such as Mystery Shopping, I want to ensure I’m meeting my tax obligations correctly. Could you provide some guidance on the following questions?

1. Do I need to make quarterly estimated tax payments to the IRS to avoid penalties? 

2. How do I make these payments? I’ve never done this before and would appreciate instructions on where and how to submit them.

Any advice on how to estimate my quarterly payments would also be helpful to ensure I don’t underpay or overpay. Thank you for your time, and I look forward to your guidance!

[evelynm]

TurboTax has a great tax estimator to determine your Federal tax liability:   Tax Caster 

The IRS offers two "safe harbor" methods for determining whether you are subject to a penalty. If you meet one of these safe harbor amounts, the IRS won't charge an estimated tax penalty, even if you owe more than $1,000 at the end of the year.

The requirements are that you pay:

• 90% of the tax you owe for the current year. Estimate what you may owe and pay at least 90% of this amount by making timely quarterly estimated tax payments or through paycheck withholding.
• 100% (or 110%) of last year's tax bill. Pay 100% of the tax shown on your prior-year tax return before applying estimated payments, withholding, or refundable tax credits. If your adjusted gross income is more than $150,000 (or $75,000 if you're married and file a separate return from your spouse), the safe harbor is 110% of your prior-year tax.

If you’re at risk for an underpayment penalty next year, we'll automatically calculate quarterly estimated tax payments and prepare vouchers Form 1040ES for you to print.   You can also remit payments directly to the IRS.  Additional estimated tax payment options, including direct debit, credit card, cash, and wire transfer, are available at  IRS payments