Per Diems on 1099s

Today TaxMama hears from Rita in Oklahoma, with this question. “I will issue several 1099’s this year. I need to know how to categorize their ‘’per diem’’ pay. Is it broken out; or does it get lumped together in Box #7-Nonemployee compensation?”

Dear Rita,

If your outside contractors are receiving per diems and submitting invoices to substantiate them (and paying back the unused portion), don’t issue 1099s for those amounts at all. That’s called an accountable plan. Folks who get paid that way get really annoyed when they get 1099s reporting non-taxable income.

If they are getting per diem payments without having to submit invoices to back them up – then include the per diem amounts in the ONE 1099 you send the contractor. Yes, it’s all lumped together under non-employee compensation.

And if they are truly independent contractors, that means they are in business for themselves. That means they are responsible for including ALL their income and reimbursements as gross receipts. And it’s up to them to do their own bookkeeping for their expenses.

And yes, you are going to get calls from them when you do this. They really hate it when you issue 1099s that include their expense reimbursements. Because most independent contractors are really employees in disguise and don’t understand that they are being treated like businesses – and have to behave like businesses.

On the other hand, in February, IRS will start conducting payroll tax audits. They will be looking for 1099s issued to people who really should have been on payroll. So, folks, considering reviewing your independent contractor payments before year-end and see if you need to convert them to payroll before the year ends.

And remember, you can find answers to all kinds of questions about payroll vs. independent contractors and other tax issues, free. Where? Where else? At TaxMama.com.

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