I woke up this morning to an email with a variation of a question I get a lot:
“If we pay a costume designer a stipend and we contract to reimburse them for materials up to a certain agreed limit, must we include the cost of materials in the amount we list on their 1099?”
My answer:
The answer is, sadly, “it’s complicated.”
It depends upon whether the company has an “accountable” or non-accountable” plan. Legalzoom handles the description of the differences well (it covers employees but the same standard holds for 1099s):
https://www.legalzoom.com/articles/accountable-vs-nonaccountable-expense-reimbursement-plans#:~:text=An%20accountable%20plan%20is%20an,tax%20liability%20for%20the%20business.
So basically, if you have stated policies and procedures that reconcile the expenses, and you use those policies for everyone, then you could separate out those expenses and not 1099 them. Best practice would be to do a separate check to the contractor for solely the materials. Please note that you would need to save those receipts and reimbursement info (or the payback if the contractor underspent) as part of your financial records. In an accountable plan, if the contractor used sub-contractors, you would also want to get proof that they sent them 1099s in January, as applicable.
Please note that the disadvantage to this is that the contractor can’t use items “from stock” (for example, of they have 10 yards of fabric they used for you that they had already and then charged you for). Perhaps more importantly, they cannot deduct these expenses as a business expense (either on a schedule C or their corporate taxes, depending on how they file.)
Per diems are always taxable, but I doubt this applies here
So if your company wants to establish and maintain an accountable plan, then reimbursements don’t need to be included on the 1099. Otherwise, they do. (now whether the IRS is really going to check on a small business is another thing altogether.).
The other way to get around this in the future is to establish a limited purchasing account the designer can use directly. Let me know if yow want to get connected through me to Divvy (now a division of Bill.com), which is a cross between a credit card and a line of credit that ties to the corporate assets rather than an individual and allows you to establish short term, limited cards. For example, you could give a designer a budget of $1000 and an expiration date of 1/31, and they could just charge directly to the card; as part of it they are required to upload receipts. It’s very slick.
A couple of other things you should know as you are preparing for year end:
1) You don’t 1099 people you pay by PayPal or Venmo (or a credit card, not including a service like Divvy), since they send them a 1099-K. The disadvantage to this is that these services aggregate all their payments to a vendor, so if you pay them less than the 1099 threshold, but they have other payments that put them over it, they still receive a 1099. The limit for this year was supposed to go down to a $600 aggregate, but the IRS just announced they would keep it at $20K for 2023, and it looks like going forward it would be a higher threshold, likely $5K. More here:
https://www.cbsnews.com/amp/news/irs-delay-600-reporting-form-venmo-paypal-1099k-2024/?fbclid=IwAR0QMRANgCCLkLTPgRciTnG6k-rIvMMl_BclJKOrZ4dnu3ECItmR5cgCNqY
2) Stating in Jan 24 (for tax year 2023), companies must e-file all year end paperwork of they have 10+ forms (aggregate of W2s and 1099s). So, for example, if you have 2 W2s, 7 1099-NECs,a nd a 1099-MISC for rent, you must e-file.
I live a pretty wild weekend morning, don’t I?