1099 for Reimbursed Expenses: Accountable Plans and Fixes

A 1099 for reimbursed expenses is required only when the contractor failed to properly account for those expenses to you. If the contractor gave you receipts, dates, and a business purpose for every dollar, you leave the reimbursements off Form 1099-NEC. If they didn’t, the entire reimbursement gets added to their service fees and reported in Box 1 as nonemployee compensation.¹

The Accounted-For Test

The 1099-NEC instructions define reportable payments to include “a fee paid to a nonemployee, including an independent contractor, or travel reimbursement for which the nonemployee did not account to the payer.” The phrase “did not account to the payer” is the whole rule. When the contractor accounts to you, the reimbursement drops out of your reporting calculation entirely.¹

IRS Publication 463 spells out the framework for contractors. A contractor who receives a reimbursement for travel or business expenses must provide detailed documentation to the paying client. If the contractor fails to account for the expenses, the contractor must include the reimbursement in income, and the payer must report it on the 1099.²

You cannot split the 1099 to separate the reimbursement from the service fee. Once the arrangement fails the test, Box 1 shows one combined number. The 2026 filing threshold is $2,000 in total payments to the contractor during the year, and that total includes any unaccounted-for reimbursements.³⁴

What Adequate Accounting Requires

For a reimbursement to stay off the 1099, three conditions have to be satisfied.

Business connection. The expense must relate directly to the work the contractor performs for you. A contractor flying to your office for a project meeting qualifies. A contractor buying office furniture for their home does not, even if they work remotely for you.

Substantiation. The contractor must give you enough detail to identify the business nature of each expense: amount, date, location, and business purpose. For travel, that means a log of where they went and why. The IRS treats substantiation provided within 60 days of the expense as timely.⁵

Return of excess. If you advanced funds or reimbursed more than the documented expenses, the contractor has to return the difference. An arrangement that lets the contractor keep unsubstantiated amounts fails automatically.²

You, as the payer, carry the burden of enforcing all of this. If your reimbursement policy doesn’t require substantiation, or if the contractor never actually turns in receipts and you keep paying anyway, the arrangement fails. A failed arrangement converts every dollar of reimbursement into reportable compensation. Keep the substantiation records the contractor gives you for at least three years from the filing date of the return that reports the payment.⁶

How the Common Expense Types Work

Mileage and Per Diem

You can reimburse a contractor using the IRS standard mileage rate (72.5 cents per mile for 2026) or GSA per diem rates for meals and lodging without needing a receipt for every gallon of gas or restaurant meal.⁷ Using the standard rate satisfies the dollar-amount substantiation. The contractor still has to document the date, destination, and business purpose. A log reading “drove 180 miles to client site in Dallas for project walkthrough on March 12” works. A flat monthly car payment with no log does not.

Reimbursing above the standard rate creates an excess. If the contractor doesn’t return it, the overage hits the 1099. Pay $1.00 per mile when the IRS rate is 72.5 cents, and the extra 27.5 cents per mile is reportable compensation unless returned.

Materials and Supplies

If you buy materials directly from a vendor, no reimbursement to the contractor happens, so nothing goes on the contractor’s 1099. You may owe a separate 1099 to the vendor if the payment meets the reporting threshold.⁸ If the contractor buys the materials and you reimburse them, the standard rules apply: receipts showing date, amount, and business purpose keep the reimbursement off the 1099; no receipts, and the full amount lands in Box 1.

Fixed Monthly Allowances

A flat periodic payment to cover general expenses, say $500 a month for “office costs” with no receipt requirement, fails the test by design. There is no substantiation and no mechanism to return excess amounts. Report fixed allowances as compensation in Box 1 of the 1099-NEC.

What Happens on the Contractor’s Return

When unaccounted-for reimbursements land in Box 1, the contractor reports the full amount as gross income on Schedule C. That increases both income tax and the amount subject to self-employment tax, which runs 15.3% (12.4% Social Security on earnings up to $184,500, plus 2.9% Medicare on all earnings).⁹

The contractor can offset the inflated income by deducting the actual expenses on the same Schedule C. A contractor who received a 1099-NEC for $25,000, including $3,000 in unaccounted-for travel reimbursements, would report $25,000 in gross receipts and then deduct $3,000 in travel expenses, assuming they kept the receipts. Net effect on taxable income: zero for that $3,000.

In practice, a contractor who didn’t substantiate expenses to you probably isn’t keeping tight records for their own return either. Without documentation, they can’t claim the deduction and end up paying income tax plus self-employment tax on money that only reimbursed their out-of-pocket costs. Both sides come out better when the arrangement works on the front end.

Two Situations Where No 1099-NEC Issues at All

Even an unaccounted-for reimbursement doesn’t go on a 1099-NEC if one of these exceptions applies.

Corporate contractors. You generally don’t issue a 1099-NEC to a contractor operating as a C-corporation or S-corporation, including an LLC that elects corporate tax treatment. The main carve-out is payments for legal services, which get reported on a 1099-NEC regardless of the attorney’s business structure.¹ A W-9 collected before the first payment tells you the contractor’s tax classification.

Payments through card networks or third-party apps. If you pay a contractor by credit card, PayPal, Venmo, or another third-party payment processor, you typically don’t issue a 1099-NEC for that payment. The processor handles it on Form 1099-K. When a payment is reportable under both sets of rules, it goes on the 1099-K only.¹⁰ Payments by check, ACH, cash, or wire remain your responsibility to report.

Fixing a 1099 That Got Reimbursements Wrong

If you filed and then realized you incorrectly included an accounted-for reimbursement in Box 1, or failed to include an unaccounted-for one, file a corrected 1099-NEC. Paper corrections follow the procedures in the General Instructions for Certain Information Returns. Electronic corrections go through FIRE, IRIS, or the IRS Portal system. Do not check the “VOID” box on a paper correction, because that tells IRS scanning equipment to skip the form.¹¹

File the correction promptly. The IRS matches 1099 data against the contractor’s return, and a mismatch between what you reported and what the contractor shows on Schedule C creates audit exposure for both sides.

1
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (Rev. April 2025)
2
Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses
3
Internal Revenue Service. General Instructions for Certain Information Returns – 2026 Returns (Draft)
4
Internal Revenue Service. Reporting Payments to Independent Contractors
5
Internal Revenue Service. Revenue Ruling 2003-106
6
Internal Revenue Service. How Long Should I Keep Records?
7
Internal Revenue Service. Standard Mileage Rates Updated for 2026
8
Internal Revenue Service. Am I Required to File a Form 1099 or Other Information Return?
9
Social Security Administration. Contribution and Benefit Base
10
Internal Revenue Service. Form 1099-K FAQs – Third Party Filers of Form 1099-K
11
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (04/2025)