May 02nd, 2023

***Hello! I am not an accounting or tax professional. The post below is based on my personal experience, is shared for informational purposes only, and does not constitute legal or financial advice. This is how I operate based on advice from my trusted sources; if you have better or more up-to-date advice, please let me know!***

One of my least favorite parts of tax preparation is checking my 1099s and getting them corrected as necessary. The most common error? Reimbursements being included in compensation totals; the best way to address that error is to stop it from happening in the first place. 

What is a reimbursement? 

When you’re paid back for a purchase of materials required to do a job. As an example for this post, let’s say I’m teaching a kids’ drawing workshop and the school expects me to buy crayons up front, on the understanding that I’ll be repaid after I submit a receipt and a check request. I’m not profiting from this transaction; the amount I spent and the amount I’ll be paid are exactly the same. The reimbursement amount is not income, and I should not have to pay income tax on it. 

Sounds simple enough; what’s the problem?

First of all, I have a fundamental issue with the reimbursement system. I am essentially giving the school a zero-interest loan, which they may take months to repay. Reimbursement is limited to the purchase price of the materials; generally I am not compensated for the gas I used getting to the store, or the time I spent shopping, divvying up the supplies into packets, or filling out the reimbursement paperwork. 

So it’s already a raw deal, but the infuriating icing on the disadvantageous cake comes if I get a 1099-NEC the next year and see that the amount I was reimbursed for the crayons has been added to the amount I was compensated for teaching the class. This means that I will have to request (and possibly argue for) a corrected 1099 and wait to file my taxes until it comes…or suck it up and pay federal income tax on the cost of the crayons.

Yikes! What do you do to avoid these hassles?

1. Wherever possible, I avoid the whole reimbursement issue by giving the class/event organizer a shopping list. 
2. Sometimes having the teaching artist purchase supplies is compelling or unavoidable. Maybe I have a supplier that will only deal with me, or only sells in bulk, or is across the street from my house. If I am required to make class/event purchases myself, I ask to be compensated for my time; not every school is willing or able to do this, but I think that it’s the right thing to do and all teaching artists should ask for it until it becomes the norm. For example, some schools now offer an additional fee for prep time (such as 1 hour of paid prep per 6 hours of teaching, possibly) on top of reimbursement for expenses. This time-based compensation should appear on my 1099 and will be taxed. 
3. Some schools (particularly those offering online classes) will pay me a per-student fee for supply kits. In this case I am essentially selling them a product; I record the sale of the kit just as I would the sale of a sculpture. I will be taxed on this amount so I make sure that the kit price is high enough to cover my direct expenses (materials, packaging, shipping in both directions), indirect expenses (time), and taxes. I track the direct expenses in my spreadsheet of deductible business expenses. 
4. I keep all the receipts, file for reimbursement promptly, and make a note on my calendar to chase the check if it hasn’t appeared by a certain date. The purchases and the reimbursement zero each other out, so although I include them in my bookkeeping for tracking purposes they have on impact on my business income or expenses. 
5. When I get paid, there should be two separate checks: one for the reimbursement, and one for my teaching fee. If both of these are lumped together I will return the check and request that the payment be reissued as two separate checks. (In the past, whenever I’ve been told to just go ahead and cash the combined check and trust my 1099 will not include the reimbursement…the 1099 always includes the reimbursement). 
6. When I get reimbursed, I look to see that the check has “reimbursement” in the memo line and if it doesn’t I write it in myself as an extra reminder for tax time. 
7. When I receive my 1099-NEC, I do the math to make sure that reimbursements have not been included with the teaching fee.
8. If the reimbursement has been included, I immediately request a corrected 1099-NEC with the reimbursement amount removed.
9. I stick to my plan—even when an organization’s  bookkeeper tells me I am wrong or unreasonable. Does this sometimes take more time and therefore cost me more than just paying income tax on the crayons? Sure! But I hold myself to professional standards and in return I insist on being treated professionally. I’ve found that giving in on small issues becomes a habit that soon applies to big issues—and vice versa. 

Again, this is just my personal strategy, and I’m always open to adjusting it. If you are a teaching artist, please take the time to formulate your own plan and have the courage to stick to it. If you are a studio or payroll administrator, please consider the impact that your supply prep and reimbursement policies have on your teaching artists, and on your efforts to attract and retain the best teachers.