In most cases, yes. Reimbursements paid to contractors should be included in the total you report on Form 1099-NEC. The IRS treats these payments as taxable income to the contractor unless specific conditions are met.

The exception exists when you have a documented expense arrangement that works like this: the contractor submits actual receipts for expenses, you reimburse only the documented amounts, any excess gets returned, and the expenses clearly connect to the work performed. When all of these conditions are met, you can exclude those reimbursements from the 1099 total.

Most contractor relationships don’t work this way. Businesses typically add a general expense allowance to the contractor’s payment or reimburse estimated amounts without requiring itemized receipts. When that happens, the full amount becomes reportable income. Adding $200 to a payment for “materials” without documentation means you report the full payment on the 1099.

This catches a lot of small businesses off guard. They assume that because the payment covered actual expenses, it shouldn’t count as income. But without proper documentation, the IRS has no way to distinguish a legitimate expense reimbursement from additional compensation. The default is to treat it all as income.

A cleaner approach is to build expenses into the contractor’s rate and let them handle their own costs. Instead of paying $2,000 for labor plus $300 for materials, pay $2,300 total and let the contractor buy their own materials. You report the full $2,300 on the 1099, the contractor deducts their expenses on their return, and neither of you has to track reimbursements separately.

If you do want to exclude reimbursements, keep detailed records. Get itemized receipts before paying, match reimbursements to specific documented expenses, and maintain a paper trail showing the business purpose. This level of documentation is more common in construction and contractor relationships where materials and travel costs are significant.

Don’t forget that payments made through credit cards or payment processors like PayPal may be reported on 1099-K instead of 1099-NEC. The same reimbursement rules apply to how you categorize the payment, but you may not need to issue a 1099-NEC if all payments went through card transactions.

Getting business tax preparation right means tracking contractor payments accurately throughout the year. By the time you’re preparing 1099s in January, you need clean records showing exactly what was paid, how it was paid, and whether any documented reimbursements qualify for exclusion. Trying to reconstruct this from bank statements alone rarely works well.