When issuing a 1099 misc does it include only labor or include expenses reimbursed to contractor

[suerudy811]

I am a small business. I paid contractors labor and reimbursed expenses. When I issue the 1099 misc, is it for labor only and not the reimbursed expenses? or both?

[ChelsiE2 · Accepted solution]

Labor only.  Reimbursed expenses should be reported elsewhere on your Schedule C.  

For Example: if you were a General Contractor and your laborer went to buy drywall for you and you paid him back, then the cost of the drywall would be reported as materials expense on your Schedule C.

[triplemcpa]

Actually,  in the instructions for the Form 1099-MISC the IRS provides this guidance:

Specific Instructions: File Form 1099-MISC, Miscellaneous Income, for each person in the course of your business to whom you have paid during the year: 

At least $10 in royalties (see the instructions for box 2) or broker payments in lieu of dividends or tax-exempt interest (see the instructions for box 8);

 At least $600 in: 1. Rents (box 1); 2. Services performed by someone who is not your employee (including parts and materials), box 7;

[mroemen]

I nominate this for best answer. Facts are a good thing.

[bluecollarsocialist]

I  have been a General Contractor for 10 yrs and I  honestly do not understand why I should have to pay tax on materials that I already paid tax on when I purchased the material.  How does that make any sense? If you 1099 my business it should ONLY be for services rendered, period.  Not to mention the way supply/demand have been since COVID hit, so I should have to pay more tax because some executive in a suit decided 2x4 lumber should inflate from $3.49 to over $20 for the same exact piece of lumber? Meanwhile my margins already have been razor thin, the small business guy has to take the bullet?

[VolvoGirl]

@bluecollarsocialist   What?  You do not pay tax on it again.  If you get a 1099NEC that includes materials, you report the full amount as income then expense the materials.  You only pay tax on the Net Profit.   If they included the cost on the 1099NEC  they must have paid you for it or you charged them for it.  

You need to post an example.   Like if the 1099 was $1,500 (1,000 for labor and 500 for material).   Did they actually pay you 1500?  So you had 1500 income minus the 500 you spent leaving you a Net Profit of 1,000.   You only pay tax on the 1,000.

[VolvoGirl]

Continuing my train of thought.   If they paid you the 500 for materials but only gave you a 1099 for 1,000 labor you would underreport your net income.   You would only be reporting $500 of profit instead of the real 1,000.  

Are you filling out Schedule C for your Contractor income or do you file a separate Business return like a 1120 or 1065?

[SLSB]

This is my favorite answer.  100% accurate.  I work for a small business GC and I actually create the 1099s, that is what brought me here.  My thought is to manually deduct any reimbursements from the amount put on the 1099-NEC.

[Carl]

The 1099-NEC shows what was paid to the business. It does not show what was paid "for". If I charge you $500 for materials and $1000 for labor, the 1099-NEC you issue me will be for $1,500. Then I will enter that amount as income because it is "in fact" income that you paid me.

In the expenses section, I will show that I paid $500 for materials and that will be deducted from the $1,500 gross income, leaving me with $1,000 of taxable income. That's how it's always worked. Nothing difficult about it, and there is no double-taxation.

[Hal_Al]

@SLSB  said "My thought is to manually deduct any reimbursements from the amount put on the 1099-NEC."

Don't do that. The amount your report as "Gross receipts or sales" (line 1 of Schedule C) must match or exceed the amount shown on your 1099-NEC(s) or the IRS computers will be triggered. 

As @Carl  said, you report all1099-NEC amount as income, then you deduct the material reimbursement part as expenses.