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Question about 1099 and reimbursement. Minnesota

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  • Question about 1099 and reimbursement. Minnesota

    Alright, straight to the point. Got a friend who works as a contractor and he receives a 1099 at the end of the year. Fairly regularly he will have to use his money to buy equipment for the work site that stays on the work site. He is reimbursed by his employer however I think the reimbursed money is showing up on his 1099. That doesn't seem right. Here's my reasoning for this.

    Let's say he gets paid $100 weekly. The first week goes by, he gets $100. During the second week he needs to buy a $50 piece of equipment and at the end of the week he is paid his normal $100 plus $50 to reimburse for the equipment. Now by his bank account, he has made $200. But as far as I can tell on tax forms, all the IRS knows is that he made $100 one week and $150 the next totaling $250 that needs to be taxed. Let this go over a year and I could see it building up quite a bit.

    Is this the way it should be? Should reimbursed money even show up on a 1099?

  • #2
    There are two very unrelated issues here.
    - The big issue is whether or not the worker really is an independent contractor (IC) or an employee. This is a function of statutory factors (what the law says) and not a function of an agreement between parties.
    http://www.dol.gov/esa/whd/regs/compliance/whdfs13.pdf
    - Assuming that the worker is indeed IC, then it is perfectly legal and perfectly common for the customer to issue "gross value" 1099s to their vendors which include expenses. IC are supposed to be independent vendors who routinely handle all of their business requirements including paying for their own expenses and itemizing expenses on their tax returns. If instead the worker is an employee, then there is no 1099, just a W2 and the issue goes away.

    There is never a time when a customer is required to issue "net value" 1099s to their vendors. Doing so moves the audit responsible from the vendor to the customer and is generally considered to be a really bad idea for customer. I have handled both Payroll and Accounts Payable for long time for some pretty big companies (some of which you have heard of). The only "net value" 1099s I have ever issued were to our Board of Directors, who are statutory non-employees. Issuing net value 1099s can be taken by the government as one more sign that the customer (employer) was not telling the truth when they classified the worker as an IC.

    The fact that this seems to be an issue would make me wonder about the initial worker classification as an IC.
    "Reality is that which, when you stop believing in it, doesn't go away".
    Philip K. **** (1928-1982)

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    • #3
      I think by rights he should be an employee, but the company is so small they're having people work as contractors to keep complexity down. The reason this question came up is because the company had been working under false tax assumptions previously and I thought that this might possibly be another one.

      So would this be a situation where my friend would be able to keep track of the things that he buys for the worksite and write them off at the end of the year?

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      • #4
        I guess. I would say that the correct answer is if the worker is an employee to treat the worker as an employee, and all of these problems go away. I guess what you said is the best remaining option, but IMO, not a very good option. If the worker really is an independant business (what everyone is currently claiming), then the business is supposed to paying for it's own expenses and is supposed to be handling it's own tax situation including itemization.
        "Reality is that which, when you stop believing in it, doesn't go away".
        Philip K. **** (1928-1982)

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        • #5
          Originally posted by praecorloth View Post
          Alright, straight to the point. Got a friend who works as a contractor and he receives a 1099 at the end of the year. Fairly regularly he will have to use his money to buy equipment for the work site that stays on the work site. He is reimbursed by his employer however I think the reimbursed money is showing up on his 1099. That doesn't seem right. Here's my reasoning for this.

          Let's say he gets paid $100 weekly. The first week goes by, he gets $100. During the second week he needs to buy a $50 piece of equipment and at the end of the week he is paid his normal $100 plus $50 to reimburse for the equipment. Now by his bank account, he has made $200. But as far as I can tell on tax forms, all the IRS knows is that he made $100 one week and $150 the next totaling $250 that needs to be taxed. Let this go over a year and I could see it building up quite a bit.

          Is this the way it should be? Should reimbursed money even show up on a 1099?
          Yes. If he is a true independent contractor then every penny that is paid to him should show up on his 1099-Misc. He would then in turn deduct those expenses on his Schedule C....which would result in him being taxed on only his profits....income minus expenses.

          If, as others have argued, he is an employee, then reimbursed expenses should NOT be included in his W2 if they are accountable expenses (he must produce a receipt to be reimbursed).

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