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Sara Voight's headshot
Sara Voight Controller

Reimbursement of Contractors (1099) as a non-taxable item?

Asked on Feb. 2, 2016

reimbursement of contractors (1099) as a non-taxable itemWe have a contractor who will be submitting weekly invoices to us for his work at our company. No issue as we will track this and provide him with a 1099 at year end for his services. The scope of his work is now changing such that he will be traveling between two locations to work for us.

Do we cover/reimburse his mileage through paying his time for travel, or do we have him add a line to his invoice which breaks out his mileage for reimbursement? I lean towards the first item, but if the latter is appropriate, then is it also ok to remove those dollar amounts from his 1099? (This is much easier when we are reimbursing for the actual purchase of a physical item.)

Answers

Ken Mason's headshot
Ken Mason Controller • October 11, 2011

Hi Sara,

I discussed this issue with my tax advisor in connection with a proposal I was about to submit to provide interim CFO services to an out-of-town client. His advice was to have the client include all my payments on the 1099, as I would be able to deduct my expenses, such as mileage and housing. Your first option is thus preferable for sheer simplicity for you. The onus is on your contractor to track and deduct his mileage properly.

comment-icon 1
Sarah Jackson's headshot
Sarah Jackson Associate Editor • January 21, 2015

Yes, and we also have this free white paper on

and "Expense Management For A New Decade:"


https://www.proformative.com/whitepapers/expense-management-new-decade

Best... Sarah

Ron Lathouwers's headshot
Ron Lathouwers CFO • October 11, 2011

I agree with Ken. Anything you pay to a contractor is 1099 income. However, I have created two vendors codes, mainly for small contractors, one for reimbursed expenses like air travel and hotels(not 1099) and another for their fees. Especially when they are turning oringial receipts. However this is just a convenience, saves year headaches when the vendor says that the 1099 was more than I made.

Keith Perry's headshot
Keith Perry Director of Global Accounting • October 11, 2011

I did the same as Ron....but:
If the contractor gave me receipts (which was typical) I did *not* 1099 that portion. So this may simply be a clarification to Ron's "Anything" comment.

The contractor indicated that desire by having *two* invoices for my convenience. Certainly it is easier to 1099 it all, but that is part of your relationship/agreement with the contractor.

Un-answered is the "is it implicit in paying for his time while traveling, or is mileage a separate line item". That is a negotiation point. The contractor can certainly claim travel as an expense on her taxes...but whether you pay for that *and* their time while traveling (1099able) is up to you. Note; if you are paying a blanket rate for time while traveling, it is their job to carve out the "cost" offset...not yours. If they are billing separately or additionally for the mileage, go the Ron route.

KP

Wayne Spivak's headshot
Wayne Spivak President & CFO • August 7, 2014

Weekly invoices, issued to a 1099 contractor is a red light to whether or not they are actually employees.

As you didn't mention what they do, make sure the relationship is at arm's length and that you don't cross the IRS threshold.

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Jaime Campbell's headshot
Jaime Campbell Chief Financial Officer • January 31, 2016

Frequency of payment is not an official factor in the contractor/employee classification. Control is the most important.

Why do you mention it, Wayne? Have auditors in your experience used payment frequency as part of their determinations? No auditor I've worked with has mentioned it.

Wayne Spivak's headshot
Wayne Spivak President & CFO • February 1, 2016

I've has the DOL try to claim employee status because of the number of checks written to individuals (not corps). It was resolved when they read the contracts.

Company names always make the decision easier (not foolproof) vs individual names. I guess they don't pop out as much to the auditor.

Patrick Dunne's headshot
Patrick Dunne Chief Financial Officer • September 19, 2014

I would propose option 2 and at the same time report all on a 1099. The contractor will have to reflect any costs or deductions on his return.

Mark Perlin's headshot
Mark Perlin Business Consultant • January 29, 2016

Patrick's approach is really the only way to do this. You really need to report everything you pay the contractor. If you don't you really are giving the contractor the opportunity to deduct expenses they were reimbursed for and not having the payments included on the 1099. Yes, you said they will give you the original receipts - so what. The rules are really quite clear. Report everything you pay on the 1099.
Also, you definitely, need to consider Wayne's comments. Is this person really a contractor or an employee. Paying weekly doesn't automatically make them an employee but is something to look at in light of Wayne's comments.

Anonymous's headshot
Anonymous Controller • January 29, 2016

How do you handle the reimbursement of travel expenses paid to a candidate? It seems strange to ask for a W9 from someone you are flying in for an interview.

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Wayne Spivak's headshot
Wayne Spivak President & CFO • January 29, 2016

It's a corporate expense. That person is neither an employee or IC. They are not working when they come to you for an interview.

Jaime Campbell's headshot
Jaime Campbell Chief Financial Officer • January 31, 2016

To Wayne's point, I usually have an account called Recruiting and Hiring Expense for purposes such as this.

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