Expert: Arthur Naman - 4/21/2011

Question
I am an independent contractor who up to this year was paid by a client for labor on a 1099 and was reimbursed separately for travel expenses (not reported on the 1099).  Client now wants to pay both labor and expenses together and report on the 1099. Two questions - 1. Does it matter if I list both seperately on one invoice or invoice as a lump sum?  2. I'm confused how per diem is handled.  I wish to claim the gov. standard rate but would it have to be at the 50% rate on the Schedule C or can 100% be used?  I do not entertain clients on the road, the per diem is strictly for myself.  And if I can only claim the 50% rate, should I be billing the client that cost?

Thank you for your help.

Answer
It makes no difference how the labor and expense reimbursement is reported to
you. Both are reported on Sch C as gross receipts. Separately, your travel
expenses will then be shown as such and will offset the expense reimbursement
received by you.

Per diem received by you is income as explained above. Per diem reported as an
expense by you is an expense. Per diem is used when there is no reporting of
individual expenses.

I found the following for reporting of per diem expenses from Pub 535:

Amount subject to 50% limit. If you provide your employees with a per diem
allowance only for meal and incidental expenses, the amount treated as an
expense for food and beverages is the lesser of the following.

 * The per diem allowance.
 * The federal rate for M & IE.

If you provide your employees with a per diem allowance that covers lodging,
meals, and incidental expenses, you must treat an amount equal to the federal M
& IE rate for the area of travel as an expense for food and beverages. If the
per diem allowance you provide is less than the federal per diem rate for the
area of travel, you can treat 40% of the per diem allowance as the amount for
food and beverages.

As for what you bill the client for the meals and entertainment expenses, you
should bill the entire amount. The client should them reimburse you for the
entire amount. The 50% limit on your deduction is a limitation as a result of
the tax laws and is reported on Sch C of your tax return.

If you have additional questions or if anything is written that is not clear. please ask a follow-up.