2stepps, why do you believe companies are entitled to write off IRS penalties as expenses?

Many good points have been made about meal reimbursements. I agree reimbursements should not be claimed in net income. I also agree with dspeakes' original response that the value of the meals themselves (and not the reimbursements) may be considered income in some cases, and that the OP should discuss his situation with a tax professional. In this case, the OP seems to be operating a business, working with 6 MSCs and doing other types of shops as well. I doubt he is doing casual dining shops solely for a $5 fee. According to the IRS, anything you receive of value in exchange for your services should be claimed at its fair market value. I'm not saying every meal you get free as part of a shop must be claimed. It all depends on the reason you did the shop and other factors.

1099's only show the amount of money they gave you. If some is not taxable, that's up to you to deduct it on the Schedule C.

There are many fines that companies are *not* allowed to write off their taxes.

Why would you try to write off a traffic or parking ticket? Did you read somewhere that you could? Of course you're going to get nasty letters (and I actually doubt they were nasty) for trying to write off something that is not tax deductible.

It's amazing how many things people write off because they think they can but they never look it up. For instance, political donations are not tax deductions but I have clients who list them on their donations list all the time. Raffle tickets (even if the organization is a 501c3) are not a tax deduction. Dog licenses are not deductible. Driver's licenses are not deductible (but the CDL endorsement would be if you are a commercial driver).

Traffic tickets, fines, penalties, bribes -- generally not deductible. Anyone who is in business (and all of us here are) should go read the publications on irs.gov that pertain to self-employment, business deductions, vehicle expenses, and home offices. And if you're not going to do that homework, you prepare your own tax return at your own risk.


If your motive for doing a shop is the $5 fee, then whatever you have to pay and be reimbursed for to get that fee falls under "reimbursements are not taxable" rule. If your motive for doing the shop is the free meal and there is no fee ... then it gets murky and could either fall under hobby rules or bartering rules. If your motive for doing a no-fee shop is to get experience, curry favor with a desperate scheduler, or get your foot in the door with a new company -- then it is not a bartering or hobby situation and the reimbursement is not taxable. So much of the IRS rules have to do with your intentions. And those need to be determined before you do the shop, not while you're trying to figure out how to manipulate the results on your tax return. (Manipulation is perfectly legal as long as you are choosing the more advantageous of two legal options that give different results.) If you find yourself thinking, "If I get audited I can just say ... blah blah blah" then you're probably setting yourself up for a fall.

I receive 2 1099's a year and neither one of them incorporates reimbursement totals into them. I've never reported anything except the fee amount. I've also been told by IRS and Unemployment that since we don't have control over the jobs, we're actually employees, not independent contractors and therefore no Schedule C or business licensing is required. I double checked with L&I here in Philly, and they agreed. I just have to report it as "other income" with an explanation of what it is.

Yes, you can report it as other income. When you do that, you don't get the benefit of all Schedule C expense deductions and you end up with more taxable income, but okay by me.

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Edited 1 time(s). Last edit at 03/30/2015 12:18AM by MDavisnowell.

dspeakes, In response to your posting on 2/26/15 at 12:53 pm.

You request that I “please don’t nitpick” but it feels like that is exactly what your response did. I did not mention anything about reimbursement-only shops. I specifically stated, “…a shop with a fee paid.” And I have no interest to weigh in on the issue of reimbursement-only shops and their potential as barter income.

You correctly state that “cost of goods sold pertains to the thing you sold.” When you are purchasing a meal or other item in the process of a shop, you are not selling anything. No entry should be in the cost of goods sold section of Schedule C unless the taxpayer is selling a product. A service-oriented business, such as mystery shopping, would not have any cost of goods sold.

Indeed, the net income is the most important amount, though I believe it is also important to follow the guidelines to get to that net income. Comparing it to mystery shopping – The end result may be to interact with an associate and get a business card or receipt. Does that mean the guidelines should be ignored to get to that end result? I doubt any MSC would agree with that.

Even if a tax return is prepared in conflict to tax guidelines, chances of an IRS audit are low. However, cost of goods sold in a business that doesn’t sell product or large amounts of returns and allowances could be potential audit triggers. If one chooses to include reimbursements in income (or must because the MSC included it in the 1099), listing an expense category of “reimbursed expenses”, “necessary product purchased for evaluation”, or whatever one wants to label it, is in my opinion a much cleaner, straight-forward approach.

I appreciate that you are taking your time to inform others on this forum about taxes. However, if your goal is to teach non-accounting people an easy way to understand taxes, I would respectfully suggest that using gross receipts and gross income to mean two different things in your explanation is not making it easy but is only complicating the conversation. I would propose that most individuals conducting mystery shops are not concerned with financial accounting, but only accounting for tax purposes.

You referred to me as an IRS auditor. I was not. I wrote that I have IRS audit experience. To clarify, I represented clients in IRS audits and appeals.

You seem to have taken offense to my attempt to educate others on this topic and clarify what I believe to be the proper application of the tax laws. That is unfortunate because it was not my intent to offend you or anyone else. You were not the only person who wrote comments about whether reimbursements should be included.

Taxes are complicated and I am enjoying being retired from that profession. Each person can choose the way they wish to prepare their tax return. Unless I am signing the return as the preparer or the taxpayer, it is of no consequence to me.

Happy shopping everyone and have a good weekend!

@lawaangel wrote:

I receive 2 1099's a year and neither one of them incorporates reimbursement totals into them. I've never reported anything except the fee amount. I've also been told by IRS and Unemployment that since we don't have control over the jobs, we're actually employees, not independent contractors and therefore no Schedule C or business licensing is required. I double checked with L&I here in Philly, and they agreed. I just have to report it as "other income" with an explanation of what it is.

It is 100% incorrect to say that we "don't have control over the jobs." Of course we do. We have control over whether to take the job at all or not. Within the job, we have to ad lib on a constant basis to stay in character and not reveal ourselves. The company doesn't train us. The company doesn't provide the tools to do the job. Who has control over the job if not the mystery shopper? If you are a contractor building a house for someone, sure, they get to tell you what they want, what colors, how big, what kind of wood to use, and what the deadline is, and how early in the morning you can start. That doesn't make the contractor their employee. The home owner doesn't tell the contractor how to run the power saw, how to hammer the nails, or how to wire the outlet. The MSCs tell us what needs to be done, what questions they need answers to, and what the deadline is. But they don't tell us which door to enter, whether to go clockwise around the store, what we should be looking at when we are browsing to see if we are helped, whether to say good morning to the clerk first or wait for them to say it, what backstory to use in our role play.

Reporting it as "other income" is correct if you are not in the business of mystery shopping. But the net effect is identical to reporting it as hobby income, except with hobby income you can still deduct your expenses up to the amount of income on your schedule A if you itemize. Reporting the income you got as "other income" does not allow for deduction of expenses. And you do realize that under any scenario at all, you have to report the income whether it was reported on a 1099 or not, don't you? did you only work for two companies or did you only get two 1099's? All the fees you earned need to go on that "other income" line if that's how you want to handle it -- not just the 1099 income.

There are *many* factors that go into the determination of employee status versus contractor. Meeting just one of those criteria does not make the case. All facts and circumstances are considered, and one of those circumstances is our agreement that we are contractors and will pay our own taxes etc -- and that is evidenced by all those ICA's we signed.

If we were really employees, instead of putting that 1099 on the "other income" line we should be returning the 1099 to the company and demanding a W-2 and making them pay the payroll taxes and cover us with unemployment insurance and worker's comp.

If anyone at the IRS or unemployment office told you mystery shoppers are employees because we don't have control over the job, they did not understand what mystery shopping is about.

The IRS gives out incorrect information and is not liable for the misinformation unlike Canada
where you get a tracking number and if they give you incorrect informatione,they can not fault you. Mystery Shoppers are not employees. We are not covered by Workman's Compensation, the MSC does not withhold income tax or pay into Social Security, they do not schedule us, they do not give us our tools, and they require thatC yousign an independent contractor agreement. We are not employees. You got very bad information.

@lawaangel wrote:

I receive 2 1099's a year and neither one of them incorporates reimbursement totals into them. I've never reported anything except the fee amount. I've also been told by IRS and Unemployment that since we don't have control over the jobs, we're actually employees, not independent contractors and therefore no Schedule C or business licensing is required. I double checked with L&I here in Philly, and they agreed. I just have to report it as "other income" with an explanation of what it is.

If an MSC does not send me a 1099 form do they still report what they paid me to the IRS? I am worried I might forget one or 2 companies where I have only done a couple of $10-20 shops.

No

How could you forget? Don't you keep track of your receivables?

I thought food, even if reimbursed, is not income. It is a tool that must be bought to perform the job. Try to evaluate restaurant without buying food. The same thing with a movie shop that reimburses you for pop corn and a drink. Your shop would be violated if you did not purchase that. Any thoughts?

amandad, the company does not report your income individually, as in a line on their tax return that says "amandad, $25.11". However, your income is accounted for in the company's records and would be apparent in case the company is audited. It's possible but highly unlikely an audit of the company would trigger an audit of you.

The best thing eliminate worry is keep up with all your income, prepare a Schedule C, and take all allowable expenses including mileage. You will have a very small number remaining, perhaps even a negative number. With proper and legal accounting, your mystery shopping business should show a low or negative number on the bottom line. If you have a positive number you may owe some self employment tax, which is about 15% of net profits. If you do owe self employment tax, you may owe a slightly higher income tax figure if you have other income.

If you do not understand keeping records for your business, the IRS has a publication called Record Keeping for Small Businesses (may not be the exact title but close). You can download it from IRS.gov or order it online.

Nothing political, Just an observation. All of the forgoing in this topic proves one thing. The American People who pay taxes have no idea how to read and comprehend the tax code and over 10,000 amendments that contradict and are ambiguous. The American taxpayers are intimidated and bullied. Advertisement on the radio and TV offering to “fix your tax problems and that is a shame. Americans should not have tax problems or surprises at the end of the year and have to pony up money they do not have. The government is creating a situation that gives scammers an avenue to prey on taxpayers.

Would it not be better if the tax payer went to a merchant and bought something with the income they made. The merchant would tally the purchase and add the Federal sales tax like the States add the sales tax "pay as you go". There is no intimidation, no forms, it does not matter if you earned the money or came by the money illegally. When you spend the money the STATE governments collect the tax. The Federal government should make paying taxes as easy as the states do.

I personally was audited. I got money back because I probably did not take deductions I was entitled to or did not use a tax code because I had no idea I could. I do not know how they figured I paid too much. I am sure many Americans are giving money away to the government because they just do not know. That is wrong.

There is nothing more simple to buy something see the sales tax on the register receipt and know you will not be audited by the state asking for more. The State will not ask me HOW I got the money. If I was a criminal I would not have to worry about my 5th amendment rights to self incrimination. If I was an illegal alien I would pay the government and not have to reveal I am an illegal. If I was a millionaire I would buy higher priced items and pay a higher tax, but then why shouldn't I, the middle class and poverty class is supporting my business. I should not be exempt because I can lobby a loop hole.

Apparently, while others have posted the same thought that reimbursements should not be considered income, I was called out for not being qualified to post my opinion. Well, I have an MBA in finance. I was the assistant controller and controller of international and national corporations. I was responsible for all the accounting and regular IRS audits, so I feel qualified to post my thoughts on the question. I am very aware of tax versus financial accounting and well as reimbursement accounting. .

It is exceptionally unlikely that anyone here is really concerned with tax v. financial accounting and just looking for SIMPLE answers to filing taxes for their mystery shopping activities. If one wants to educate people on such topics, it's best to know one's audience and not sound like one knows what one is talking about, but not provide real world answers.

For one to suggest that meal reimbursements could be considered sales allowances, returns or even cost of goods sold leads me to believe that person really does not have an understanding of those basic accounting concepts. Because meal reimbursements could not possibly ever be classified as those items in any universe.

Whatever. They are not post-gross income expenses, therefore they need to be deducted pre-gross income. On the tax form the choices to accomplish that are Returns and Allowances, Cost of Goods Sold, or not reporting them in Gross receipts at all, which creates conflicts with the 1099's and a lot of unnecessary bookkeeping that serves no useful purpose. Since they *are* part of Gross Receipts, that option doesn't really work anyway. Cost of Goods sold doesn't really apply since no goods are sold. That leave Returns and Allowances. Since the client ultimately is getting the money that was paid for that meal, it's of the nature of a Return. The only difference being you returned the money to the client before they paid it to you.

What if we were advanced the money to do the shop? Would you agree that the money we paid for the reimbursed item could be considered a "return" then? (Not all reimbursements are for meals, BTW; are you suggesting we should have a different procedure to account for meals than for other reimbursements?)

What's the difference *when* the money was returned? It still went back to the client.

I'm trying to help these people get to an accurate Net Income figure. All you're doing is muddying things up by saying they should request a corrected 1099, but if they don't get one, then they have to do the deduct and explain thing which is totally unnecessary by simply doing what I suggested they do. Count it in Gross Receipts and deduct it back out -- *on* the tax return, where the IRS can see what was done and know that all the 1099 income is accounted for. I got a letter audit on myself once because I had an incorrect 1099 and I shorted the reported amount (a late December check didn't reach me until January) instead of declaring it and then deducting it. They accepted my explanation, but had I done then what I am suggesting people here do now, the letter audit, explanation, and waiting for resolution would have been totally unnecessary and the IRS still would have gotten every dime they were owed.

Which ultimately is what the tax return is all about.

I wish someone would tell me how to go about getting a "corrected" 1099. A MSC once reflected payment for an assignment I cancelled due to weather which they never paid me for at all and I couldn't get that corrected. What good will it do with companies who made it clear from the beginning they were including all payments to their contractors and it was up to the contractors to take the appropriate deductions?

One thing our new Finance expert doesn't address either is when a company requires a purchase but doesn't reimburse for it -- they just pay a flat fee. Little Caesar shops are like that. Flat fee of $12.00. The pizza you have to buy is $5-something plus tax. But it's not stated as a reimbursement at all. Where should we deduct that? Meals and entertainment and only get to take 50%? Miscellaneous expenses? It's not an expense; it specifically ties back to the service we provided. It's a reduction to Gross Income. But it's not a reduction you can back out of Gross Receipts because it's a non-taxable reimbursement. It's not a reimbursement at all. It's the *cost* of doing the shop.

So we have two odd situations that don't fit the "norm" -- the reimbursement-only shop, and the purchase required but no reimbursement shop.

One of the best investments I make is in a qualified tax accountant to prepare mine every year. If it's anything but a 1040EZ I'm lost.

I think people like to write a lot of stuff to appear like they know what they are talking about, but provide little actual real world help.

You don't understand the basic definition of a return. A return is the ACTUAL return of a product, so how one can return an eaten meal is beyond me.

It's really simple and you accuse me of "muddy" the waters. For any reimbursement shop, there is no issue of post vs. pre gross, that's just complicating matter. And making some additional issue of meal vs non meal or fee only shop is creating more mud. If it's a flat fee, whatever is left over from the flat fee from the required purchase is then income and the amount paid out is a reimbursable expense. Again, you make an issue out of nothing.

The BEST situation is to get a 1099 from the MSC that only has fees. If they do includ reimbursements, contact them and ask for a corrected 1099 that only has the fee portion. If they do not or will not do so, then it's really simple, declare the total 1099 amount as income, then deduct the amount you paid out (reimbursed by MSC) on line 27a "Other expenses" and enter reimbursed fees on line 48.

I'm not surprised you received an IRS audit letter.

I feel that some of this discussion is very confusing in the language being used. Can we get some real life examples? I have a 1099 for a company that I mostly did meal reimbursements. It was about $1100. My food cost me $900. I probably made $200. I have all of my receipts and I have the location and my transportation (using the train in the city, walking, or driving). I should claim the $1100 as income but deduct the $900 as expenses so I am left over with $200 for Social Security and Medicare taxes as part of being self-employed. Since I work for a few companies that do this, I will probably have at least a quarter for social security ($1,200 a quarter).

Should we list companies that have tax issues with reimbursements? Most of the companies I work for is mostly reimbursement.

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Edited 1 time(s). Last edit at 03/29/2015 11:39PM by MDavisnowell.

@Piled Hip Deep, PHD wrote:

Nothing political, Just an observation.

[not a political statement][makes political statement]

But since you opened this can of worms. No, that's a bad idea. I have two brothers. One of them has a household income of about $500,000 and the other has a household income about $120,000. In my old job I had a household income of about $60,000. My two brothers spend roughly the same amount on taxable purchases, making my brother who makes $500k a year have a much smaller tax percentage than the other. Meanwhile I probably spent a significantly larger percentage of my income on taxable purchases. When you look at how much money goes into the government by a percentage, I make the least and pay the largest percentage, my oldest brother makes the most and pays the lowest percentage. That seems fair.

Additionally, as a mystery shopper, this would kill me. I will spend significantly more $$ this year on taxable purchases than I will report in net income.