Q: Tax Playa, I work as a contractor. I bill the company for my wages and they pay me a "per diem" of $110 a day to cover travel expenses. However, my 1099 includes all money received. Do I have to show it all as income? Shouldn't it only show my "wages"?
Tracy, Somewhere USA
A: This comes up more than one might think. People who are contractors often have some expenses reimbursed by their payers. In this case, the payer can either deduct the expenses from their own taxes, or (as more often happens) simply add the expenses to the 1099-MISC at the end of the year...
In my experience, companies that reimburse expenses of contractors simply add the reimbursement amount to the 1099-MISC at the end of the year about 80% of the time.
What's a contractor to do in that situation? Simple. The inflated 1099-MISC income is reported as income. The expenses that were reimbursed are then deducted from contractor income.
In the case Tracy mentions, her payer reimbursed her travel expenses, but added the value of the reimbursement to her 1099-MISC. Therefore, Tracy, must deduct the value of her travel expenses from her income.
This isn't always straightforward. Below are some common examples of how straight-reimbursements can lead to asymmetrical contractor deductions:
- Meals and entertainment may have been 100% reimbursed by the payer, but they are only 50% deductible as a business expense;
- A payer may give a "per diem" or reimburse actual travel costs--the contractor may choose to deduct the reverse of what is reimbursed, creating an asymmetry;
- Actual car expenses may have been reimbursed by the payer, but business mileage (plus tolls and parking) may be the preferred deduction method for the contractor--the reverse may also be true;
- The cost of a home office may be reimbursed by the payer, but there are special rules and limitations for contractors;
- Health insurance premiums and HSA contributions may be paid for by the payer, but these are not a SECA-preference item for contractors;
- The cost of assets may have been reimbursed by the payer, but the contractor may choose to (or have to) depreciate the asset over time rather than expense it;
- The contractor may maintain an inventory, which cannot be deducted as a business expense;
In your case, Tracy, I would feel comfortable with your deducting the per diem allowable under the law as an ordinary and necessary business expense. Keep in mind that per diem rates vary based on location, and that you must be traveling away from your tax home overnight on business in order to use them. A per diem calculator is on the right hand side of this web page.
The bottom line is that the method of reimbursement (and its tax reporting) should be agreed-upon ahead of time by the parties to make sure everything runs smoothly. This should also be done in consultation with an experienced tax professional.
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