A couple of my clients have included sales tax I collected and reimbursable expenses in the total of the Non-Employee Compensation on the 2010 1099-MISC form. The advice I got was to file based on the amount on 1099-MISC and then simply add the sales tax and reimbursable expense as an expense on the taxes to compensate for the mistake. I assume this procedure is correct and wanted to know what I need to put to explain expense the expense description box. This is what I had in mind.
"Reimbursable expenses and Sales tax collected but mistakanly included as Non-Employee Compensation on 1099-MISC of Payer FEIN ID# XX- XXXXXXX"
Is this sufficient to explain the reason for the expense and/or is there another way I should go about correcting this discrepancy?
The other option is to include your full revenues on the first line and subtract off as "Cost of Goods Sold" the sales tax revenue. Depending on your business, this might be a better way to look at your margins. Tax wise, however, the end result is the same as Art suggests.
You've gotten some very good advice from Art Kamlet and D. Stussy, but I'd like to take it just a bit further, if you please.
There was NO mistake on your 1099. You are a contractor NOT an employee. You are NOT entitled to reimbursements. Whatever you were paid IS income to you. Whatever you spent to make that money is a reportable expense. There is no mistake to compensate for - report your income, all of it. Then deduct your expenses, all of them.
I see this "position" all the time, especially when it comes to things like meals and entertainment. The contractor wants to get "reimbursed" because if he claims the deduction he only get half - nice try but no cigar. The limitation on deductibility happens at the entity level - the business paid the contractor who "wined & dined" the vendor to get a good price on equipment used on the project. The business wants to deduct all of its costs without limitation. And after all THEY did NOT take the client to dinner, the contractor did. So the limitation happens at the contractor level.
In your case, the business DID NOT pay any sales tax, they paid YOU. YOU paid the sales tax. It goes on YOUR return.
All I would like to add is that Gene's comment that you are not an employee and are not entitled to reimbursement is not absolute. Many companies have accountable travel expense plans for ICs. They tend to be very strict on timeliness of filing for reimbursement, the use of actual expenses and copies of receipts for the expenditure. As an accountable plan, the reimbursement is not taxable gross income and is excluded from Box 7 of the 1099-Misc.
=================================================================Rules for Independent Contractors and Clients
This section provides rules for independent contractors who incur expenses on behalf of a client or customer. The rules cover the reporting and substantiation of certain expenses discussed in this publication, and they affect both independent contractors and their clients or customers.
You are considered an independent contractor if you are self-employed and you perform services for a customer or client.
Accounting to Your Client
If you received a reimbursement or an allowance for travel, entertainment, or gift expenses that you incurred on behalf of a client, you should provide an adequate accounting of these expenses to your client. If you do not account to your client for these expenses, you must include any reimbursements or allowances in income. You must keep adequate records of these expenses whether or not you account to your client for these expenses. ================================================================== ..and later on...
=================================================================Contractor adequately accounts. If the contractor adequately accounts to you for entertainment expenses, you (the client or customer) must keep records documenting each element of the expense, as explained in chapter 5. Use your records as proof for a deduction on your tax return. If entertainment expenses are accounted for separately, you are subject to the 50% limit on entertainment. If the contractor adequately accounts to you for reimbursed amounts, you do not have to report the amounts on an information return. ====================================================================
I have never come across any company that was reimbursing employees and ICs for actual expenses that did not have a written policy, plan, document, accounting procedure, etc. that spelled out the procedure and requirements to obtain reimbursement of expenses. We always thought that met the requirements of an accountable plan.
At this point, I have no idea what you are saying. So, I'll just repeat my original point with some clarity:
Gene said that because the person was not an employee, all reimbursements were income. I said, that was not absolute. There are employers out there who reimburse independent contractors for their travel expenses in conformity to IRS rules. As such, the reimbursement is not income to the IC and the 1099-MISC does not contain the reimbursement in Box 7.
Organizations Not Required To File Form 1023 Some organizations are not required to file Form 1023. These include: ? Churches, interchurch organizations of lo- cal units of a church, conventions or as- sociations of churches, or integrated auxiliaries of a church, such as a men?s or women?s organization, religious school, mission society, or youth group. ? Any organization (other than a private foundation) normally having annual gross receipts of not more than $5,000 (see Gross receipts test, later). These organizations are exempt automatically if they meet the requirements of section 501(c)(3).
As a lawyer I bill clients for services and also out of pocket costs. Is it their responsibility to keep track of which are which, and only send a 1099 for the fees?
That would also mean additional paperwork for me, because I'd have to remember which costs were reimbursed and which weren't when I calculate my gross income.
The rules for self-employed people (ICs) were really not meant for professionals. There just a set of rules for employers who want to handle travel expenses via reimbursement. I experienced this first hand, many moons ago, in Silicon Valley. There are loads of ICs working for high tech companies in the Bay Area. Just about every major employer had procedures in place to reimburse ICs for their travel away from home. The IC completed an expense account form, attached the receipts and received reimbursement that never showed up in the 1099. After I retired, my former employer hired me back as an IC for a few months and I filled out the same paperwork I filled out as an employee except the the expense account sheet had a different heading.
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