I emailed the client to ask what this income was all about, and if he had any unreimbursed “out of pocket” expenses connected with the income.
A prompt response explained the source of the income and included the statement –
“I had no unreimbursed expenses. Everything was covered in the checks they gave me.”
While this was a proper direct answer to my question it was not adequate. The fault was mine – I did not ask the question properly.
Here is the story. If you, like the private detectives on tv, charge “$200 a day plus expenses” for your services, and you present the client with a detailed list of specific expenses for travel, informant fees, research, supplies, etc for which you are reimbursed, the amount of this reimbursement should not be included in the amount reported to you on the Form 1099 you receive from the client. The 1099 should only include the “$200 a day”.
If you worked 5 days and submitted a detailed expense report to the client for $527.36 the Form 1099 you are given should be for $1,000 only ($200 x 5 days), and not $1,527.36. You would report the $1,000 as income on your tax return, but you can not deduct the $527.36 in expenses you incurred because they were directly reimbursed and were therefore not “out of pocket”.
If your fee is $200 a day plus a flat $50 a day for expenses (whether or not you actually spend $50 a day) then the Form 1099 should be for $1,250. You would report the full $1,250 as income on your return and deduct any expenses you incurred. If your expenses for the job were only $38, less than the $50 per day you charged, you would deduct only $38. If the expenses totaled $296 you would deduct $296.
While in the first example the Form 1099 should only be for $1,000, it is possible that the client will actually report the full $1,527.36 (or $1,527) on the 1099 you are issued. If this happens you would report the full $1,527 as income on your return and deduct the $527 in expenses, so that you are only taxed on the net $1,000.
I should note that the $1,000 fee you receive is taxable income, whether or not you receive a Form 1099 from your client. If you do not receive a Form 1099 you would still report the $1,000 as income and not deduct any of the $527 in expenses.
I emailed my client back, explained the above, and asked if the amount reported on his Form 1099 represented his hourly “wage” only or if it included the reimbursements for expenses, and if it included reimbursements to itemize them.
The client had told me, “I had no unreimbursed expenses. Everything was covered in the checks they gave me.” This led me to believe that he did indeed incur expenses, which were reimbursed.
The client responded with the complete information necessary for me to properly report the income on his return.
The moral of the story – for taxpayers – is that if you receive a Form 1099 for “Miscellaneous Income” provide your tax professional with a detailed explanation. Tell him/her what the income for, if you had any expenses connected with earning the income, if these expenses were reimbursed, and if the amount of reimbursement is included in the amount reported on the Form 1099.
The moral of the story – for tax professionals – be sure to ask your questions properly and completely, providing the client with any information needed to provide a complete and proper answer.