Tax Scenario - Independent Contractor Expense Reimbursements

As part of the negotiated amount to perform services for the University, an Independent Contractor (Consultant) asks for a fee for services and "expense reimbursement". The department and Procurement agree and a purchase order is issued, but only the fee is encumbered. The independent contractor then submits an invoice and their original receipts to the department for payment at the completion of the assignment. The department authorizes payment for the invoice and creates a Check Request to reimburse the independent contractor for their travel expenses, using object code 6240 - out-of-state travel.

Issue: If the University allows the payment of the consultant's travel expenses under object code 6240, then we are treating the payments as nontaxable under the "accountable plan" which is only applicable to our employees.

The proper treatment should be to reimburse the expenses under object code 3230. This would allow the University to report the entire amount of the payments to the consultant on IRS Tax Form 1099.

Optimally, the department and consultant should submit an estimate of the expenses to be reimbursed as part of the total amount to be paid to the consultant, so that the amount can be encumbered. The department should ask the consultant to list their expenses on the invoice and provide "copies" of their original receipts as support for the amounts. The department can validate the expenses and submit the invoice for payment against the encumbrance, and the consultant would retain their original receipts and use them as expenses incurred in the operation of a business to reduce their taxable income.