View Full Version : Are hard costs taxed as income?

12-05-2011, 01:44 PM
I'm a single-member LLC operating as an independent, marketing consultant. My clients are largely paying for my time, but occasionally there are other hard costs that I need to add to the monthly invoice. An example would be: a domain name I buy for a campaign, a freelance graphic designer who is a subvendor for a short time, or a fee for an email marketing list.

My question is, if those hard costs are reimbursed to me through a client's monthly invoice, won't that be viewed as "income" by the IRS? Is there another way I should account for expenses like that so they do not appear as income?

Many agencies and freelancers in my field will charge a "mark up" on hard costs that they pay in advance, but it seems to me that the typical mark up (17-25%) would need to be closer to 40% to cover all taxes if the IRS is viewing hard costs as income when they are reimbursed.

12-05-2011, 03:52 PM
Generally, your tax liability isn't based on your total revenues (billings to clients) but rather on the net amount by which those revenues exceed your expenses.

So while you do report on your return all the revenues received from clients---including the portion of the billing you've added to cover various costs---you'll also report those same costs as deductions*, leaving you to pay tax only on the net profit.

*(To the extent such costs are indeed deductible, or at least depreciable or amortizable.)

12-05-2011, 06:37 PM
Thank you, that helps!