taxes - income reporting for self-employment

[JohnEyles]

First of many, I'm sure, questions on income tax
(should we have another forum area ?) ...

On self-employment income, for income received
via Form 1099-MISC, which tax year does payment
for December 2007 apply to, if it's not billed and
paid until January 2008 ? I've consulted Pub. 334,
but the answer doesn't seem definitive to me.

Thanks.

 

[eridanus]

First of many, I'm sure, questions on income tax
(should we have another forum area ?) ...

On self-employment income, for income received
via Form 1099-MISC, which tax year does payment
for December 2007 apply to, if it's not billed and
paid until January 2008 ? I've consulted Pub. 334,
but the answer doesn't seem definitive to me.

Thanks.

You should pay taxes for whatever your 1099 shows. If you bill and get paid in Jan 2008, you should receive another 1099 in Jan 2009. I'm not an accountant, but that's how I've do it.

 

[Martha]

If not billed and paid until 2008, I wouldn't think it would show up on a 2007 1099.

 

[JohnEyles]

If not billed and paid until 2008, I wouldn't think it would show up on a 2007 1099.

I sure hope you're right. But, of course, for W2 wages, one doesn't
normally get one's final paycheck until sometime in January of the
following year, yet it seems to be part of the previous year's income.

I realize the situation is somewhat different, since the W2 income is
defined by the end of December (whether salaried of filling out a
timecard), while 1099 income really isn't decided until sometime
in 2008 when I decide how much time to bill.

 

[emilylynn]

I'm not sure I understand the question, but if the company with which you are doing business is 1099-ing you in 2007 for work that was not billed or paid until 2008, I'd have a little "issue" with them. Undoubtedly it is to their advantage to have the deduction in 2007, but that doesn't make it legal--or fair to you.

The fact that you've been 1999ed for something that was neither paid nor received in 2007 most certainly does not require you to play along with this company's fraud. Unfortunately, their playing "fast and loose" with the IRS has put you between a rock and a hard place. Accounting for things correctly is likely to cause your return to raise a red flag with the IRS.

If it were me, I'd have a little discussion with the firm for which you work, advising them that you intend to report the income properly and urging them to correct the 1099. If they've got any sense at all, they'll realize that any inquiry into your return will force you to prove something that could be fairly incriminating to them. Keep the envelope.

EDIT: I'm assuming that your accounting is done on a cash, as opposed to accrual, basis. However, I don't think that changes the result in terms of how the income should be reported on a 1099. The purpose of a 1099 is to inform the IRS of the amount of income actually paid to you in a given year.

 

[OAG]

It is based when you are entitled to the money. While you are entitled to your last paycheck of the years on December 31,2007, you may or may not actually cash the check or actually "see" the money in your bank account until after December 31, 2007 - however it is "earned income" in the year 2007 and hence should be accounted for on your tax year 2007 tax return.

As far as a company (Corporation) treatment of expense it is no impact on you. Corporations can "book" expenses when they incur the expense, which could be as early as the date the contract is signed. When they actually take action to disburse the payment will govern the 1099-x year of issue.

Unless the 1099 is clearly an error (which can happen) you should enter 2007 1099-x amounts on your 2007 taxes and account for the payment. Of course you can do what you think is right and maybe deal with the IRS in about 18 months.

 

[emilylynn]

I am not an accountant, but I would question the premise that a company is entitled to 1099 you in a given year for income that was not paid to you that year--regardless of when they "book" the expense for purposes of their own accounting.

 

[frayne]

I would think the year it was billed and paid in. Call the IRS and ask them to be sure.

 

[Martha]

I'll be a bit more definite with my thoughts. The instructions for 1099-MISC say that "Report on Form 1099-MISC only when payments are made in the course of your trade or business". http://www.unclefed.com/IRS-Forms/2007/i1099msc.pdf The 1099 is supposed to reflect payments right up to Dec. 31.

It is possible that someone might not actually receive the check until January of the next year. It seems like you could deal with that issue couple of different ways. You could report the income actually received in 2007. Or you could ignore the discrepancy and include it in 2007 income. Or you could ask for a corrected 1099 but if they sent out the check in 2007, arguably it is properly on a 2007 1099.

But in John's case, the work has not even been billed yet, and no check has been sent, so there shouldn't be any reason for the income to show up on the 1099 for 2007.

 

[TromboneAl]

I dealt with this regularly when I was consulting, it's a very common situation. I could be helpful to you if my memory were better. The basic problem is that you are on a cash basis and your client is on an accrual basis.

I have a clear memory of including a statement with some year's tax returns explaining that the 1099 didn't match my reported income for this reason. This is what I was advised to do by my accountant.

I also used to have my clients delay December's payment so that their records and mine lined up. I'd also coordinate prior to year end so that their totals matched mine.

 

[OAG]

It is based when you are entitled to the money. While you are entitled to your last paycheck of the years on December 31,2007, you may or may not actually cash the check or actually "see" the money in your bank account until after December 31, 2007 - however it is "earned income" in the year 2007 and hence should be accounted for on your tax year 2007 tax return.

As far as a company (Corporation) treatment of expense it is no impact on you. Corporations can "book" expenses when they incur the expense, which could be as early as the date the contract is signed. When they actually take action to disburse the payment will govern the 1099-x year of issue.

Unless the 1099 is clearly an error (which can happen) you should enter 2007 1099-x amounts on your 2007 taxes and account for the payment. Of course you can do what you think is right and maybe deal with the IRS in about 18 months.

"When they actually take action to disburse the payment will govern the 1099-x year of issue."

 

[JohnEyles]

Thanks, folks.

Yes, I use the cash accounting method.

I have gotten NO form 1099 yet. I am simply trying to
predict what the 1099 will show, because some other decisions
depend on how much SE income I'll have (for 2007).

It seems pretty clear, from your consensus answer, that they
shouldn't include the December amount on my 1099; and I believe
they won't (they're pretty above-board); and if they do, I can get
them to correct it, on at worst reduce the 1099 by the December
amount and explain it to the IRS.

This is very good news for me.

 

[RetireeRobert]

Thanks, folks.

Yes, I use the cash accounting method.

I have gotten NO form 1099 yet. I am simply trying to
predict what the 1099 will show, because some other decisions
depend on how much SE income I'll have (for 2007).

It seems pretty clear, from your consensus answer, that they
shouldn't include the December amount on my 1099; and I believe
they won't (they're pretty above-board); and if they do, I can get
them to correct it, on at worst reduce the 1099 by the December
amount and explain it to the IRS.

This is very good news for me.

You got it. As a "cash basis" taxpayer, you report the income in the year you "constructively recieve" it. It is abundantly clear you get paid the cash in 2008. You report it on your taxes in 2008.

If your customer issues you a 1099 showing that money as paid in 2007, you contact them for a correction form 1099.

Just in case they will not issue a correction form 1099 for 2007, if still possible, take a photocopy of their payment check (presumable dated in 2008) and any accompanying remittance paperwork , and save your banking statement showing it depositing into your account in 2008.

To minimize chances of audit, simply attach an explanation to your 2007 tax return explaining the "incorrect" form 1099 from that customer.

 

[TromboneAl]

Best to contact the company now. I used to send an email listing all checks received for the year with the total and say "Let me know if this matches your 1099 numbers."

 

[JohnEyles]

Following up on my thread from a few months ago, these jackasses
finally DID send me my 1099-MISC, and as you'all said, it only
included payments made to me during 2007 (not those billed and
paid in 2008, for work done in 2007). So at least they managed to
get that one right.

But it turns out they included in the 1099 total some payments made
to me as reimbursements of (mostly) travel expenses. I accounted
for these expenses with receipts, billed them separately, and asked
them to be sure to not record them as a payment for services.
But the total includes them.

Yes, I realize I can subtract them back out as expenses on Sch C,
but that means I have to account for them AGAIN, after I already did
it once when I filed for the reimbursement. In some cases I sent
them the originals of the receipts.

Do I have the right to demand they correct my 1099, or can they say
"tough titty, you have to subtract out the expenses on your tax return" ?

Thanks.

 

[Buckeye]

Didn't your receipts only justify your charges to them? I don't think your submitting justification for payment affects what they put onto the 1099. Don't they still have to report the entire amount of funds paid to you on the 1099 no matter whether they are paying you for expenses or for consulting hours? You then offset the income on your tax return by documenting the expense. Just my opinion.

 

[millerjwm]

All payments must be included on 1099

In answer to the question:

Do I have the right to demand they correct my 1099, or can they say
"tough titty, you have to subtract out the expenses on your tax return" ?

They are required by law to include all payments on the 1099 including your travel and other expenses. They have no choice. This was a surprise to me the first year that I did contract work but now I am used to it.

You are right in assuming that you should then deduct the travel and other expenses on Schedule C. That will keep you from having to pay taxes on the expenses.

 

[JohnEyles]

In answer to the question:

Do I have the right to demand they correct my 1099, or can they say
"tough titty, you have to subtract out the expenses on your tax return" ?

They are required by law to include all payments on the 1099 including your travel and other expenses. They have no choice. This was a surprise to me the first year that I did contract work but now I am used to it.

Maybe so, but I read the relevant IRS document differently.
The talked about the expenses being "accountable" or some such,
meaning if I justfified them tomy client (with receipts and such)
then the client should not report them on the 1099.

 

[millerjwm]

Schedule C, 1099, and expenses

My first client just refused to do anything other than report everything they paid to me on the same line on a 1099 and I have not bothered to ask subsequent clients.

 

[RetireeRobert]

Following up on my thread from a few months ago, these jackasses
finally DID send me my 1099-MISC, and as you'all said, it only
included payments made to me during 2007 (not those billed and
paid in 2008, for work done in 2007). So at least they managed to
get that one right.

But it turns out they included in the 1099 total some payments made
to me as reimbursements of (mostly) travel expenses. I accounted
for these expenses with receipts, billed them separately, and asked
them to be sure to not record them as a payment for services.
But the total includes them.

Yes, I realize I can subtract them back out as expenses on Sch C,
but that means I have to account for them AGAIN, after I already did
it once when I filed for the reimbursement. In some cases I sent
them the originals of the receipts.

Do I have the right to demand they correct my 1099, or can they say
"tough titty, you have to subtract out the expenses on your tax return" ?

Thanks.

You can demand anything, but how much do you value this client? If you would as soon be rid of them, then demand.

If you want a continued relationship with them, it is really no big deal---is it?--- for you to just deduct on your tax return the expenses which they reimbursed you and included on the 1099 as payments to you.

Doesn't really seem to be a matter to get your bowels in an uproar over in my opinion.

 

[samclem]

I do consulting work and my client does exactly the same thing--a single 1099 with a single number on it which includes my pay as well as all reimbursements for travel, lodging, meals and incidentals, etc. It s up to me to whittle that number down by claiming all my expenses.

I think this standard.

Given all the different ways there are to claim expenses, I don't know how the payor of the funds on the 1099 could do anything else. For instance, in most cases only 1/2 of meals when traveling are deductible, and some people claim the actual amount they paid for meals while other people claim the "standard" GSA meal rate without bothering to keep receipts. The company that paid you must show the amount that you got paid for the meals, and it is up to you to figure out how to deduct them.

 

[JohnEyles]

Doesn't really seem to be a matter to get your bowels in an uproar over in my opinion.

Good point, thanks.

Main thing is, I thought I could only deduct half of my meals if
doing it this way, but maybe I'm wrong.

Also, I may not have all the receipts (since I sent them to client for
the reimbursement), but I guess that only matters if audited.