Client Wants to Issue 1099-MISC - Need Help!

hcunited · #1 (**permalink**) 01-22-2009, 10:33 PM

I have a 9-5 FT job but do IT consulting on the side for a few clients. No one has ever issued me a 1099 until now. I did work for a client that included parts and labor. I marked up parts, had several hours of labor, and on my invoice to him, I charged him his state's tax rate (I did work out of my state). I was simply trying to recoup the taxes I paid for the parts in my state (7%) and charged him his state's rate (6%) on my SALE price for the parts. I charged her no tax on labor.

I am new to this and was not planning on having this small project have tax ramifications (I know this is not right and will make changes starting now) but now it does. I specifically charged him a reduced labor rate, less markup on equipment, no tax on labor, and no travel expenses because this was supposed to be off the books. Now since it is not, I will pay dearly which is fine, but I wanted to know how to go about any possible deductions that I may be eligible for. What can I deduct? If I do one or two projects a year over $500 and get issued 1099 forms, I do not know what I am legally allowed to deduct and also, what should I do about charging taxes on parts and/or labor. I am a completel novice and am looking for some real advice that can get me on the right track now and moving forward. Thanks in advance, I truly appreciate your help.

TaxGuru · #2 (**permalink**) 01-23-2009, 10:42 AM

The IRS has been very strict with businesses that do not issue 1099-Misc to "Outside Contractors or Consultants" that are paid money for performing some type of service work. In the light of these tough positions and a much more stricter enforcement of these positions many corporations have come around to issuing 1099-Misc to its non-employee workers. These 1099-Misc are only to be issued to Non-Corporate clients.

You should not be concerned that they issue you a 1099-Misc for the total amount that you were paid in 2008. This is because you are entitled to deduct all the expenses that were incurred in connection with that particular assignment or job where you earned the consulting fee.

Thus, you can deduct the parts, travel expenses and any other direct expenses that you incurred on that job. In addition, if you had to purchase a new computer or printer, these may also be deducted. When you meet your Tax professional, he will familiarize you with more expenses that you are legally entitled to deduct against the 1099-Misc income.

hcunited · #3 (**permalink**) 01-27-2009, 09:59 PM

Thanks for your speedy reply. I sent my client a line item invoice showing material costs and labor. I specifically only charged tax on material and not labor thinking that this was not going to be reported. In the future, am I allowed to charge tax on material and labor in the state in which the client resides when I am just a freelancer doing some side work and not a company? Or do I never charge tax? The only reason I showed tax on the invoices was because it was the tax that I paid originaly for the material and I was just trying to recoup this. Also, I charged no travel fees and the job was 250 miles away. I did charge for lodging and per diem for meals. The client's accountant asked for all receipts so they could deduct from the invoice total and then would send the 1099 to me. Can I just refuse that and deduct this on my tax return after I receive the 1099-MISC?

Are the taxes I will pay from the 1099-MISC simply the rate form my overall tax bracket?

TaxGuru · #4 (**permalink**) 02-02-2009, 01:42 PM

You should always charge tax whenever required to do so by the State Law! Furthermore, you have to report your sales tax collected in the event that you are required to collect sales taxes from your various jobs. These can be electronically filed, discuss with your CPA and he will assist you with this effort.

I think the best way forward for you is to let your client provide you an 1099-Misc net of all your direct expenses. It will reduce the amount included on the 1099 Misc/

You would pay regular income taxes on the amounts from your 1099-Misc, but, in addition you would also have to pay Self-Employment taxes on this amount in the amount of 15.3%.