Jane and Sally are independent contractors who provide education consulting to public school systems. They are separate business entities (both sole proprietors) but they frequently partner together. They obtained a contract with a school system in which they would each be paid $8,000 for providing services to the school.
Erroneously, the school system wrote the contract to pay all $16,000 to Jane, with the understanding that Sally is Jane's subcontractor and would be paid by Jane. Jane did not catch the error and approved the contract. She later realized the error, but the school system was unable/unwilling to revise the contract since it was already approved.
Thus Jane will receive $16,000 and will pay $8,000 to Sally. The school system will send a 1099 at the end of the year reflecting the $16,000 payment to Jane.
How does Jane properly report this adjustment on her tax return? Should she report her income from the school as $8,000 (which won't match the 1099 sent to the IRS), or should she report $16,000 as her income and record an $8,000 expense to Sally?
