DOLLARS & SENSE

We submitted an invoice for work on a manuscript that included a line item for out-of-pocket expenses for reference procurement. That's not unusual for us. When we provide a project estimate for assignments that will include bibliographic research, we always state that out-of-pocket expenses for reference procurement will be additional. Who could possibly estimate that sort of thing in advance? Besides, some of our clients have excellent medical libraries, so we don't always have to go to our wallets to cover out-of-pocket expenses.

But in this particular circumstance, passing through this out-of-pocket cost was not at issue. Our client's accounts payable department asked us to revise our invoice to omit the expense and submit it separately on an expense reimbursement form. We'd never encountered this request before, but whatever makes our client happy makes us happy, as long as we don't suffer any untoward consequences.

We respectfully agreed to this unusual request and asked our friend in accounts payable (the people in accounts payable should always be your friends) why she requested we split out-of-pocket expenses from our project invoice. She explained she was doing it for us, because including out-of-pocket expenses on the same invoice with our project fee would mean that at the end of the year the 1099 they send us would include those expenses and inflate our taxable income. We gladly revised and reissued the invoice with the original invoice date, filled out and submitted the expense reimbursement form separately for the out-of-pocket expenses, and then wondered how this could be true.

Brian's freelance business is an S-Corp and Cyndy is a sole proprietor. Despite the difference in business structure, we thought out-of-pocket expenses are out-of-pocket expenses no matter what and we would never pay taxes on that portion of income even if it is included in a 1099. (NOTE: Clients do not have to send 1099s to S-Corps and LLCs because they are recognized business entities, even though they often do. Clients are required to issue 1099s to sole proprietors.) Our business sense told us that although reimbursement for out-of-pocket costs comes through to us as income when our client pays our invoice, our balance sheet deducts the same amount as a direct business cost in expenses--before taxes. Therefore, although a client's payments to us may include reimbursement for out-of-pocket expenses, and they might include those expenses in a 1099, we do not actually pay taxes on those expenses.

To test our theory we consulted an expert, our accountant and friend Mike. He confirmed our thinking was correct that we would not pay taxes on revenue from reimbursement of out-of-pocket expenses even if the amount was included in a 1099. He also agreed with our explanation for why that would be true. He did offer us a word of caution though, that we're happy to pass onto you here. Mike told us that clients sometimes ask suppliers to divide invoices to be paid separately and from different pockets so they can delay one or the other payment. We never even considered this! Fortunately, our particular client is one of the best a freelance could ever have and we've worked very closely with them for many years, so we're not worried about this particular concern. But if a client you don't know well asks you to divide invoices for payment from different sources, you should confirm with them that doing so won't affect the timely payment of either invoice before you agree. 

Planning remains fast and furious for the 2013 AMWA Annual Conference in Columbus, OH. The AMWA Annual Conference is the ultimate resource for medical communicators around the world, offering educational and networking opportunities beyond compare in the field. Now you can become a greater part of the AMWA conference experience