Should reimbursed expenses to a contractor be included in the 1099 - Misc?

Thanks!

Either way is legal.
http://www.irs.gov/pub/irs-pdf/i1099gi.pdf

Thanks!

Agreed, although I am going to give a slightly different answer. If the customer (you) report gross payments (including expenses), then you are 100% off the audit hook. If instead you choose to report net basis 1099s, then you just picked up the audit responsibility for those expenses. One might ask why the customer would think that this is a good idea?

If the vendor really is an arm's length independent contractor (IC), then handling their own business expenses is one of the qualifying issues used in worker classification. Having their customer net out the 1099s does not by itself violate the IC classification, but it is not a good sign. And the people who ask for net basis 1099s tend to be marginally classified in the first place.

At companies I have worked for, AP and PR generally both reported to me. As a matter of formal company policy, the only payees who ever got net basis 1099s were outside Board of Directors, who tends to be the definition of having friends in high places. Past that, this was a group of people that we had a legal argument that they were statutory IC, handled on a 1099 solely because the law says so, and not because they passed the common law tests. There is arguablly reasons (SOX for one) why companies want to be a little hands on regarding BofD expense reimbursements. Nothing moves the audit responsibility of the company, so a net basis 1099 makes more sense.

I have had fights with Purchasing on the particular issue, Purchasing wants it to be vendors-choice. I have worked for big enough companies to have in house Legal departments, who without exception thought that net basis 1099s fell on their really-bad-ideas list. Legal in the same way that sky diving without a parachute was legal.

I give the short answers. David gives the "why" answers.

Patty,
Can you tell me what page references this? I've got an "IC" who is questioning my inclusion of his expenses, and I can't find the page now.

Silly me for "assuming".

How about page 32 here:
http://www.irs.gov/pub/irs-pdf/p463.pdf

The IC can deduct the expenses that are included in the 1099 and included in the IC's gross proceeds. If the reimbursement is not included in the gross proceeds (regardless of whether in the 1099), the IC cannot deduct the associated expenses. That would be double dipping.

There are business taxes that are based on gross proceeds rather than net income. In those cases, it might be beneficial for the IC if the expense reimbursement was not included in gross proceeds.

Believe me, he's not paying any business taxes because shouldn't have been classified as an IC in the first place and probably has no idea how to file taxes as a self-employed person. But that was beyond my power to change.