Tax Implications of Reimbursed Expenses for the Self-Employed (2024)

FAQs

Tax Implications of Reimbursed Expenses for the Self-Employed? ›

If a self-employed professional receives any reimbursem*nt for vehicle use that applies for a tax deduction, the amount is not taxable on the self-employed person's taxes and are deductible on the business's taxes.

In short, no. But that's provided your employer completes the pay stub accurately as part of their expense reimbursem*nt process. If they incorrectly lump the reimbursed amount with your wages, it's taxed. If you're worried, talk to your accounting department before your employer reimburses you.

Although not employees for most employment tax purposes, independent contractors are treated as employees for this purpose and are, therefore, eligible to receive nontaxable reimbursem*nts as working condition fringe benefits. Taxable fringe benefits for independent contractors are generally reported on Form 1099-MISC.

There must be a business reason for the expense. The expense must be in connection with the performance of services as an employee. The expense must be substantiated or deemed substantiated. There must be receipts and invoices that document the nature and amount of the expenditure(s).

Often, an employer will be able to deduct those reimbursem*nts, but the deduction amount may be limited. IRS Publication 535, Business Expenses, states the following: “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry.

Even if the funds are reimbursed through payroll, the expense reimbursem*nt amount should appear as a separate item that is not subject to any taxes. For the business, an expense reimbursem*nt is considered an expenditure and will likely reduce the amount of tax you'll pay.

Should reimbursem*nts to sub-contractors be included in 1099 tracking? No, UNLESS the Payer does not keep track of these expenses using an accountable plan (substantiation such as receipts are provided).

Such reimbursem*nts are not taxable, provided the amounts claimed are properly substantiated. Unsubstantiated amounts must be reported as income to the contractor, on the appropriate IRS instrument (e.g. Form 1099, Form 1042-S, etc).

In addition to recording the information in your account book, etc., receipts are required for all expenses of $75 or more. Each receipt should include the date, place, person entertained, type of entertainment, business purpose, and business relationship.

Add the expense and reimbursem*nt to your accounting records. You may choose to add the reimbursem*nt as a short-term loan so that it disappears from your books after the client pays it. Another option is to list your original payment under expenses and the repayment from the client under revenue or income.

Does the IRS ask for proof of business expenses? ›

What is a business tax receipt? If you plan to include business expenses as deductions on your tax return, the IRS requires you to keep supporting documentation that shows what you bought, how much you paid, and when you bought it.

Lost or stolen personal property (including cash) Costs incurred at home, such as childcare, pet care or lawn/home maintenance, cleaning services. Personal expenses such as haircut, toiletries, clothing, etc. Costs incurred due to unreasonable failures to cancel transportation or hotel reservations.

Form W-2 - Employee Expense Reimbursem*nts. Substantiated employee business expense reimbursem*nts are reported on Box 12 of Form W-2 Wage and Tax Statement. If you don't use this expense, the unused amount would be taxed as wages.

Is cell phone reimbursem*nt taxable by the IRS? Reimbursem*nts made for work-related personal cell phone use aren't taxable.

Can expenses be reimbursed through payroll? While the IRS does allow employers to reimburse employee expenses through payroll, some tax implications can come with doing it this way. For example, if the reimbursem*nt is not made as part of an accountable plan, it will be taxable to the employee as wages.