Do Reimbursements Go on a 1099? Substantiation, Per Diem, and Mileage

Reimbursements paid to an independent contractor go on a 1099-NEC only when the contractor failed to account to you for the expense. If the contractor handed you receipts or an itemized expense report proving a legitimate business cost, and you reimbursed the exact substantiated amount, that money stays off the form. If you paid a flat allowance, accepted no documentation, or let the contractor keep an unspent advance, the reimbursement counts as compensation and belongs in Box 1.

When a Reimbursement Stays Off the 1099-NEC

The IRS instructions for Form 1099-NEC say a travel reimbursement paid to a nonemployee is reportable only if the contractor “did not account to the payer.”¹ Accounting to the payer means the contractor gave you documentation proving the expense was real, tied to your work, and for the exact amount reimbursed. When that happens, the payment just offsets a cost the contractor already paid, so it isn’t income.

You’ll hear this framework called an accountable plan. Technically, accountable plans under Section 62(c) apply to employees, but a parallel set of substantiation rules under the Treasury regulations produces the same result for independent contractors.² Three conditions have to be met:

Business connection. The expense must relate directly to the services the contractor performed for you. Personal costs, commuting, and unrelated purchases don’t qualify.
Adequate substantiation. The contractor must give you records showing the amount, date, location, and business purpose of each expense. Receipts, invoices, and itemized expense reports all work.
Return of any excess. If you advanced funds that exceeded the substantiated expenses, the contractor must return the difference. Letting the contractor pocket the overage turns the whole reimbursement into reportable pay.

A contractor who buys $800 in project materials, hands you the receipt, and gets reimbursed exactly $800 has given you adequate accounting. That $800 stays off the 1099-NEC.

When a Reimbursement Must Be Reported

Anything that fails the substantiation test gets added to Box 1. The scenarios that trip businesses up most often:

A flat monthly expense allowance with no receipts required. The whole allowance is reportable.
A missing or lost receipt for an otherwise legitimate business trip. Without documentation, the reimbursement is taxable income.
An advance where the contractor substantiated less than you paid and kept the difference. The unreturned excess is compensation.
An informal arrangement with no expectation of documentation. Without a system requiring substantiation, every reimbursement defaults to income.

Most compliance problems start here. Businesses reimburse contractors casually, never ask for receipts, and then aren’t sure what to put on the form. The safe rule: if you can’t prove a reimbursement was substantiated, report it.

Per Diem and Mileage Payments

The IRS has a clean per diem safe harbor for employees: pay at or below the federal rate, get substantiation of time, place, and business purpose, and the payment is non-taxable.³ That automatic safe harbor doesn’t extend to independent contractors in the same way. The contractor still has to substantiate actual travel. If the contractor accounts for the business purpose of the trip, the payment may be excludable; if not, the full amount is reportable on the 1099-NEC regardless of whether it stayed within the federal rate.¹

Treat per diem paid to a contractor the same way you’d treat any other reimbursement. Require documentation. A per diem that skips substantiation is a flat allowance by another name.

The 2026 Threshold Change

For payments made after December 31, 2025, the minimum that triggers a 1099-NEC filing obligation increased from $600 to $2,000. Starting in 2027, the $2,000 figure adjusts annually for inflation.⁴

The threshold looks at total reportable compensation for the year, not any single payment. If you pay a contractor $1,500 in fees plus $400 in unsubstantiated reimbursements, the $1,900 total falls under the threshold and no 1099-NEC is required. Keep tracking payments anyway. The total can cross $2,000 at any point in the year, and you need the running figure to know when it does.

Payments to Corporations Are a Separate Question

Not every contractor gets a 1099-NEC in the first place. Payments to C corporations and S corporations are generally exempt from the reporting requirement, and an LLC that elects corporate tax treatment qualifies for the same exemption. The one exception you can’t overlook: payments for legal services must be reported on a 1099-NEC even if the law firm is incorporated.¹

This is why collecting a Form W-9 before you pay anyone matters. The W-9 tells you the payee’s tax classification, legal name, and taxpayer identification number.⁵ If it comes back showing a corporation, the reimbursement analysis is moot. If it comes back as an individual, sole proprietor, partnership, or single-member LLC, the substantiation rules apply.

Records That Protect the Exclusion

Your records are the only thing standing between a valid reimbursement exclusion and a reporting failure. For each expense you plan to exclude, keep:

The original receipt or invoice showing the amount and date.
A written note of the business purpose. For a client meal, that means who attended and what was discussed.
Proof the contractor actually paid: a receipt, canceled check, or bank statement.

The IRS applies the same standards to electronic records as to paper. Scanned receipts, photos, and accounting software entries are fine as long as they capture the required details and you can produce them on request.⁶

Timing

The Treasury regulations governing employee accountable plans set out timing safe harbors: advances made within 30 days of the anticipated expense, substantiation within 60 days of the expense, and return of excess within 120 days.⁷ Those windows are written for employer-employee arrangements, but using the same timeframes with contractors is a practical way to show reasonableness if anyone asks.

A Written Policy

A written reimbursement policy in place before any payments are made is your strongest protection. Spell out what qualifies for reimbursement, what documentation you require, when it has to be submitted, and what happens if it isn’t. Without a written arrangement, arguing after the fact that a substantiation requirement existed is difficult.

Fixing a 1099-NEC That Included a Substantiated Reimbursement

If you already filed a 1099-NEC that swept in a properly substantiated reimbursement, you can file a corrected form. Paper and electronic filers each have their own correction procedures set out in the IRS instructions. One trap on paper corrections: do not check the “VOID” box on the corrected form. IRS scanning equipment ignores voided forms, so checking that box makes your correction vanish.¹

File the correction as soon as you catch the error. The longer you wait, the more likely the contractor has already filed a return based on the original figure, and that mismatch can generate notices on both sides.

What Happens if the Reimbursement Is Reported Anyway

A contractor who receives a 1099-NEC that includes a reimbursement isn’t stuck paying tax on money that covered a real business cost. The contractor reports the full Box 1 amount as gross receipts on Schedule C, Line 1, then deducts the underlying expense on the appropriate expense line of the same form.⁸ If a $25,000 form includes $3,000 of reimbursed materials, the contractor reports $25,000 in gross receipts and deducts the $3,000 as a business expense. Net taxable income lands in the same place it would have if the reimbursement had been excluded.

The catch is that the contractor now carries the recordkeeping burden alone. That’s another reason substantiation is worth the effort on both sides: it keeps the paperwork clean, keeps Box 1 accurate, and keeps the contractor from having to defend a deduction that mirrors a reimbursement you could have simply excluded.

1
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (04/2025)
2
Internal Revenue Service. Nonresident Aliens and the Accountable Plan Rules
3
Internal Revenue Service. Per Diem Payments Frequently Asked Questions
4
Internal Revenue Service. Publication 1099 (2026), General Instructions for Certain Information Returns
5
Internal Revenue Service. Form W-9 (Rev. March 2024)
6
Internal Revenue Service. What Kind of Records Should I Keep
7
GovInfo. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements
8
Internal Revenue Service. Instructions for Schedule C (Form 1040) (2025)