Sloppy 1099ing

by on February 23, 2012

Today TaxMama® hears from Gary in the TaxQuips Forum who has this problem. Let me paraphrase:  “Gary has already filed his LLC’s tax return, reporting all his income properly. Suddenly, nearly three weeks past the 1099 deadline, he gets a 1099 showing income he received, plus reimbursements for materials and supplies – that were not income to him. That’s sloppy 1099ing. The client’s accountant won’t correct the 1099-MISC. What should he do?”

Dear Gary and other freelancers,

This is an important concept – and one that has caused a lot of trouble for people in business for themselves, who provide services and get reimbursed for supplies, material, travel and other things. This turns into a 1099 battle every year. And often results in audits where IRS makes unpleasant assessments on one side or the other.

Let me make this perfectly clear. Anything your client or customer pays you is INCOME to you. Period.

Account for it on your books. If they are reimbursing you for your expenses, or the supplies you bought, or the materials you used in the course of making something, building something or fixing something, it’s still income to you. Those reimbursements become part of your total Gross Income.

But wait. Never fear! You won’t have to pay tax on that income. You will deduct the cost of those things for which you are being reimbursed. Be sure to keep a copy of the invoices you submitted for those reimbursements. You will take deductions for the expenses on your own tax return.

So, yes, the 1099-MISC IS supposed to include the total amount paid to you by your client or customer. In fact, if you read the instructions for the 1099-MISC, you will see that it specifically says so. On the very first page, under “Specific Instructions”, it says

  • · At least $600 in rents, services (including parts and materials). 

So please, stop yelling at the poor accountant who issued the 1099 to you – and start recording all your income on your books. OK?

And remember, you can find answers to all kinds of questions about small businesses and other tax issues, free. Where? Where else? At www.TaxMama.com.

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{ 2 comments… read them below or add one }

TaxMama February 23, 2012 at 2:41 pm

Hi Doris,

That’s a good question.
Always make copies.
Attach a copy of the reimbursement check you receive to the copy of the receipt.
If you don’t have receipts for last year’s reimbursements, ask for copies.
If they’re going to give you a 1099 for the reimbursements, you can probably jolly them into giving you copies of the expense reports or receipts you submitted.

Hugs
Eva

Doris Johnson February 23, 2012 at 9:33 am

What do you suggest for the situation where the client demands the original receipts? Will the IRS accept copies, should an audit befall? What if poor Gary didn’t even keep copies?

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