This is an excerpt from IRS Publication 463, “Travel, Entertainment, Gift, and Car Expenses”, Chapter 6:
Rules for Independent Contractors and Clients
This section provides rules for independent contractors who incur expenses on behalf of a client or customer. The rules cover the reporting and substantiation of certain expenses discussed in this publication, and they affect both independent contractors and their clients or customers.
You are considered an independent contractor if you are self-employed and you perform services for a customer or client.
If you received a reimbursement or an allowance for travel, entertainment, or gift expenses that you incurred on behalf of a client, you should provide an adequate accounting of these expenses to your client. If you do not account to your client for these expenses, you must include any reimbursements or allowances in income. You must keep adequate records of these expenses whether or not you account to your client for these expenses.
If you do not separately account for and seek reimbursement for meals and entertainment in connection with providing services for a client, you are subject to the 50% limit on those expenses. See 50% Limit in chapter 2.
If you are a client or customer, you generally do not have to keep records to prove the reimbursements or allowances you give, in the course of your business, to an independent contractor for travel or gift expenses incurred on your behalf. However, you must keep records if:
- You reimburse the contractor for entertainment expenses incurred on your behalf, and
- The contractor adequately accounts to you for these expenses.