Some businesses include reimbursed expenses when reporting their contractors' pay.
Generally, if these expenses were reimbursed using an accountable plan (substantiation such as receipts are provided), there is no need to include these amounts in box 7. Depending on the accounting of the business, some will still include reimbursed expenses as Nonemployee Compensation (box 7).
If you have received a 1099-MISC that has reimbursed expenses included in the amount listed in box 7, you should take a deduction for these expenses when you complete your Schedule C.
What happens when the exposes that was reimbursed and included in Box 7 on 1099 Misc, was for not only my own travel, but for a film crew for a project. For example, Box 7 stated $70K, which included $20K of reimbursed expenses. In reality, I made $50K in income. The $20K was for meals and travel expenses for 4 people. I paid from my own pocket and got reimbursed.
1) Can my employer add the $20K to my $50K income in Box 7? Taxes for me on $50K vs $70K minus business expenses will not be the same, especially considering some expenses are 50% deductible).
2) Since I am paying out of my own pocket, isn't the $20K like a short term loan? (Especially, I was paying for other people.
3) Can I enter the $50K on my tax form, even though the 1099 Misc Box 7 states $70K?
Thanks
I have the same question and nobody seems to have an answer for getting a dollar for a dollar balance. When we invoice clients for the direct expense, we have to give up the receipts so there's no supporting document for the IRS either.
"you should take a deduction for these expenses when you complete your Schedule C."
How?
TurboTax has no way for us to do that.
You enter the expenses in the appropriate place on schedule C like Supplies or Travel, etc. Just like any regular expense.
Where to enter expenses in the Online Self Employed version
I have this problem too. And while I have read in a few places and forums that you can deduct those expenses - I’m confused as to what category. Can you list it in Schedule C under miscellaneous expenses?... with a possible description saying “out-of-pocket expenses reimbursed but added as 1099 income”?
because otherwise if you separate it out into supplies, meals, etc...you might only get a 50% deduction on some of those things. Did anyone that previously posted on this find any answers?
Categorizing these as miscellaneous expenses works as well as anything else.
One question that has not been addressed is that you will pay social security tax on this income if reported on your 1099. I understand how you can show the reimbursed item as an expense and thus your bottom-line profit for income tax purposes will not be impacted but how do you modify this so you don't pay social security and other self-employment taxes as turbo tax automatically takes box 7 and calculates the self-employment tax (you do get a 50% write-off as a deduction but still you have now overpaid on self-employment taxes.
I would appreciate feedback and suggestions on this. Thanks!
No. You only pay the SE self employment tax on the Net Profit on Schedule C. Not on the 1099Misc or gross income.
Self Employment tax (Scheduled SE) is automatically generated if a person has $400 or more of net profit from self-employment. You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400. The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare. So you get social security credit for it when you retire.
The SE tax is already included in your tax due or reduced your refund. It is on the 1040 Schedule 2 line 4 which goes to 1040 line 15. The SE tax is in addition to your regular income tax on the net profit. You do get to take off the 50% ER portion of the SE tax as an adjustment on 1040 Schedule 1 line 14 which flows to 1040 line 8a. Turbo Tax automatically calculates the SE Tax and Adjustment.
For 2019 Schedule C Net Profit or Loss now goes to 1040 Schedule 1 line 3. Then the total on schedule 1 line 9 goes to 1040 line 7a.
If you reimbursed expenses are included in your box 7 of your 1099 that is okay as long as you take the expenses to offset that on your return. You would take the reimbursable expenses as actual expense on your return. For example, if your lump sum was $10,000, but $2,000 of that was reimbursable expenses you would report $!0,000 as income, and split the $2,000 out as actual expenses on the return i.e. $1,000 office supplies, $250 dues and subscriptions.
Here is Schedule SE to see how it works
I up-fronted some expenses for the company I work for, and they gave me a 1099-MISC showing that amount as nonemployee compensation. Now, do I have to enter that amount anywhere or not? It's not income I made, it's just my money being returned. I am not a self employee of private contractor so I don't know exactly how to deal with this.
I will go ahead and inject my opinion on this since I've had this come up a lot before. This may have already been answered satisfactory but I thought I'd chip in. If the reimbursements are included on the 1099 and the expenses are accountable to the payor from the payee/contractor, then these are 100% deductible as "reimbursed expenses". If for example the expense reimbursed includes meals those meals are part of the reimbursed expenses and 100% deductible and not reduced by the otherwise 50% reduction. The payor would be responsible for the 50% reduction for meals paid.
Hope this helps.
In response to the @Faragone issue, since the expense reimbursement was reported on a form 1099-MISC, the correct way to deduct the expenses would be to treat the reimbursement as self-employment income, which would allow you to deduct the expenses. If the reimbursement was more that the expenses, it will be treated as self-employment income, subject to self-employment tax in addition to income tax.
If your employer has an accountability plan, however, and you complied with it by providing receipts for your expenses, they should have not reported the reimbursement, which would have saved you the expense of having to use TurboTax self-employed software to account for it.
The answer to the general question is NO. Reimbursed expenses should not be included in box 7 of a 1099; however, as many have said, a) it depends on the accounting of the business issuing the 1099, and b) depends on an accountable plan. I saw one question thats concerning which is "meal reimbursements being included in 1099". This is a really nasty reimbursement for someone thats uninformed to attempt to handle because M&E are deductible at a 50% rate. If you get $20k as a reimbursement that means you'll get a $10k deduction thereby overpaying of SE tax for the amount not deducted.
Someone offered putting 100% of the MEAL EXPENSES into the MISCELLANEOUS EXPENSES category; good idea. I advice this as well but, be aware that you WILL get an audit letter from the IRS and possibly from the state tax department in the state you live. Be prepared to provide documentation in the form of daily expense totals, description of activity and with whom, a reason why the MEAL EXPENSE is fully deductible by you. Recent changes to the tax code have excluded businesses from deducting meals they provide their employees for the convenience of the business. For example: Giving employees for discounts at the building cafe used to be deductible and now they are a non-deductible business expense. Due to COVID-19 the IRS is looking to change these rules temporarily or permanently.
BEWARE: The IRS maintains stats on all business by the business code you identify as your trade/business. Separate each 1099 into its own schedule C, if you can, so that you have a greater likelihood of success in winning an audit. The IRS computers are specialized to detect anomalies in income and expense deductions for schedule C filers.
Although deducting expenses on Schedule C that shouldn't have been included on the 1099 form in the first place results in the same net income and the same federal tax on that income, a problem arises when doing business in more than one state. Many states determine the percentage of state income tax owed to the non-resident state by taking the percentage of business GROSS REVENUE (not income) earned in that state. If the 1099 for the work done in the non-resident state includes expenses, that would increase the percentage of revenue earned in that state, and the tax liability due to that state would increase.
Right?
@J9999 A state will use gross income to calculate percentages. Gross income includes the net of the business, not the gross, usually. You could have a business loss included in your gross income. Please contact the Department of Revenue for the specifics of your state.
If this does affect you, contact the issuer again.
[Edited 2/3/2021 |5:45pm PST]
Not my state, unfortunately. New Jersey's Form NJ-NR-A, Business Allocation Schedule, Section 3, lines 2a-2c specifically refer to "Total Receipts from All Sales, Services and Other Business Transactions" in New Jersey and everywhere. The instructions emphasize that "receipts" means gross revenue, not net income. The Business Allocation Percentage, which is subsequently applied to the tax due, is the ratio of the Total Receipts in N.J. to Total Receipts everywhere.
The first paragraph of the form NJ- NR A says:
If business activities are carried on both inside and outside New Jersey, business income may be allocated to determine the amount of income from New Jersey sources.
You are correct about the actual line wording. I feel like that could be a gray area. I don't have the time to look for a lawsuit. Curious little caveat. This only applies to non-residents. That also feels biased.
@J9999
Thanks. I don't want a lawsuit, either! 🙂
Take a look also at New York IT-203-A, Business Allocation Schedule. Very similar form, same thing. Line 6 specifically says "Gross income percentage," and the instructions specifically call for "total gross sales made or charges for services performed." They clearly don't want net income, but gross receipts.