self-employed gifting

[mno95666]

My wife is a self-employed published author.  She uses another self-employed individual as a virtual assistant.  In appreciation for her assistant's efforts this year, she gifted her $300, which was essentially, a tip for services rendered.  Three questions:  1.  should that money be reported on the 1099 that my wife will issue for 2022?

2.  is it reportable as income by the virtual assistant?  3.  is it deductible as a business expense by my wife?

[Anonymous_ · Accepted solution]

See https://www.irs.gov/government-entities/federal-state-local-governments/de-minimis-fringe-benefits

$300 is almost certainly more than what would be considered a de minimis fringe. As a result, it would be deductible by the business and reportable as income by the assistant as compensation.

[Mike9241]

a 1099 is not required if the total amount paid to her in 2022 is $600 or less. deductible by spouse taxable to her Va. 

[Opus 17]

1. Yes, anything of value that your wife provides to a contractor in return for their services must be included in their taxable compensation.  If you issue a 1099-NEC, this payment must be included.  A 1099-NEC must be issued if total payments to the contractor were more than $600.

(There are certain fringe benefits that may be provided to employees tax-free if you follow certain rules.  However, its not clear to me that payments to subcontractors would be eligible, even if you followed all the other rules, which your wife is not.)

2. Yes

3. Yes, it is regular compensation to the assistant.  Instead of paying the contracted amount for services, she paid the contracted amount plus extra.  That's perfectly legal as long as it's reported as taxable income.  And the fact that it was more than the contracted amount doesn't change the fact that it is an ordinary and necessary business expense to your wife. 

[Opus 17]

Let me add one more thing, because it is not clear if your wife is using this virtual assistant directly or through an agency.

If your wife normally pays for the virtual assistant through an agency, but made this direct tip to the assistant, then:

1. your wife does not have to issue a 1099-NEC to the assistant because the payment to the assistant was less than $600.  You wife probably doesn't have to issue a 1099 to the agency, although she should request the agency give her a W-9 form which will identify what kind of business the agency is, so your wife can determine if a 1099 to the agency is required. 

2. the direct tip to the assistant is still taxable income to the assistant, but it is not your wife's responsibility to follow up.

3. yes, it's still a business expense. Even if the virtual assistant is paid partly directly and mostly via the agency, it's all part of your wife's business expenses.