How to Report Sales Tax and Expense Reimbursements on 1099

Sales tax and expense reimbursements paid to an independent contractor generally go into the gross amount reported on Form 1099-NEC, but sales tax that the state legally imposes on the buyer rather than on the contractor should be left out. That single distinction, plus whether the contractor formally accounted for their expenses, decides almost every close call on how to report sales tax and expense reimbursements on a 1099.

When Sales Tax Belongs in the 1099-NEC Amount

The IRS treats sales tax as reportable compensation when the tax is legally imposed on the service provider and the buyer pays it to the provider as part of the bill. If instead the tax is imposed on the buyer and the contractor is only collecting it on the state’s behalf, that portion should not be included in the 1099-NEC total.¹

Which side of the line a given tax falls on depends on the state and the type of service. Some states impose sales tax on the person performing the service, treating it as a cost of doing business baked into the contractor’s price. Others impose the tax on the purchaser, with the contractor acting as collector. The invoice itself often signals the answer. If sales tax is broken out as a separate line item collected on behalf of the state, the payer may have grounds to exclude it. If the tax is folded into the contractor’s fee with no separate line, it stays in the reported amount.

Getting this wrong in either direction causes problems. Overstating the 1099-NEC forces the contractor to reconcile phantom income on their return. Understating it exposes the payer to penalties for filing an incorrect information return.

When Expense Reimbursements Belong in the 1099-NEC Amount

Money paid to cover a contractor’s out-of-pocket costs counts as reportable compensation in most situations. The IRS instructions include travel reimbursements and other amounts paid to nonemployees as reportable when the contractor has not accounted for the expenses to the payer.¹

“Did not account to the payer” is doing the real work in that rule. Accounting means the contractor substantiates each expense with receipts, vendor names, dates, itemized costs, and the business purpose, and returns any excess advance. A contractor who submits an invoice reading “materials: $800” with no documentation has not accounted for the expense, and the full $800 goes into the 1099-NEC.

Most contractor relationships operate this way. The contractor bills for services plus expenses, the payer writes one check, and the whole amount lands on the form. Formal accountable-plan arrangements are much more common with employees than with contractors. For the typical freelancer, the safer working assumption is that every reimbursement will appear on the 1099-NEC, and the deduction happens on the contractor’s own return.

The $2,000 Threshold That Decides Whether Any of This Matters

For tax years beginning after 2025, a payer only files Form 1099-NEC when total nonemployee compensation reaches $2,000 or more during the calendar year. The prior threshold was $600. The new amount will adjust for inflation starting in 2027.²

The $2,000 figure is measured against everything that would otherwise be reportable: service fees, sales tax passed through by the contractor when it belongs in the box, and unaccounted reimbursements. If total payments stay under $2,000 for the year, no 1099-NEC is required, though the contractor still owes tax on the income.

Invoicing Practices That Make the Numbers Line Up

The cleanest arrangement is an invoice that separates three things: the pre-tax service or materials cost, any sales tax charged, and any expense reimbursement. Breaking sales tax out on its own line lets the payer apply the imposed-on-buyer test rather than guess. Itemizing reimbursed costs with receipts attached lets the payer treat those amounts as accounted-for and, where appropriate, exclude them from the 1099-NEC.

Both sides should keep the supporting documents. The IRS expects records that identify the payee, the amount, proof of payment, the date, and a description of what was purchased.³ Bank and credit card statements alone don’t cut it because they don’t break down what was bought, how much sales tax was paid, or the business purpose. Vendor receipts and invoices do.

How Contractors Zero Out Reimbursements on Schedule C

Contractors report 1099-NEC income on Schedule C and subtract legitimate business expenses to arrive at net profit.⁴ When a reimbursement was included in the 1099-NEC, the mechanics are straightforward: report the full gross figure as income, then deduct the reimbursed cost as a business expense. A $500 materials reimbursement that flowed through the 1099-NEC becomes $500 of gross income and a $500 deduction, netting to zero.

Sales tax the contractor paid on business purchases gets a different treatment. It is not a separate deduction line on Schedule C. Instead, the sales tax is added to the cost of the item bought. A $400 supply purchase with $30 of sales tax becomes a $430 supplies deduction.⁵ For assets that must be depreciated rather than expensed, the sales tax folds into the depreciable basis. The bottom-line impact is usually the same, but categorizing it correctly keeps the return clean.

Fixing a 1099-NEC That Got Sales Tax or Reimbursements Wrong

If a filed 1099-NEC includes an amount that shouldn’t have been there, or omits one that should have, the payer files a corrected version. On paper, that means preparing a new Form 1099-NEC with the right numbers, checking the CORRECTED box, submitting it with a new Form 1096 to the IRS, and sending a corrected copy to the contractor.² Do not check the VOID box on a correction. IRS scanners read voided forms as forms to skip, so the correction never gets recorded.¹ Electronic filers correct through the FIRE or IRIS systems.

Contractors who receive a 1099-NEC they believe is wrong should ask the payer for a corrected form first. If the payer won’t cooperate, the contractor can still file Schedule C with the accurate income figures and attach an explanation. The IRS matching program may generate a notice, and clean records on the contractor’s side are what resolve it.

The Short Version

Sales tax goes in the 1099-NEC amount when it is imposed on the contractor and passed through in the price, and it stays out when it is imposed on the buyer and merely collected. Expense reimbursements go in when the contractor did not formally account for them with documentation, which describes most contractor arrangements. Both are measured against the new $2,000 annual threshold that applies starting with tax year 2026. Contractors reconcile the reimbursed portion by deducting the underlying costs on Schedule C, and they roll sales tax paid on purchases into the cost of each item rather than deducting it separately.

1
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
2
Internal Revenue Service. Publication 1099 (2026), General Instructions for Certain Information Returns
3
Internal Revenue Service. What Kind of Records Should I Keep
4
Internal Revenue Service. 1099-NEC and 1099-MISC Income Treatment Scenarios
5
Internal Revenue Service. Instructions for Schedule C (Form 1040)