It's such a great question, and I agree with the answers given so far.
However, I think there is also an underlying question you might be asking that is still hanging out there.
Everyone is right that the expense you are booking by hiring a contractor is reducing any extra income you are getting paid for *their* services when it comes to taxable income for IRS / state / year end purposes. However, you may still want to change how you book these items to make clear the nature of both the income and the expense.
Some cities and counties base their business license rates strictly on income. I've no doubt there might be other things based upon it as well that vary from locality to locality. This can be gross income before any kind of expense is removed.
I have a Los Angeles business license, and this is absolutely the case here. To make things even more critical, if our income is under 100K we are eligible for a small business exemption, bringing the cost of the license to $0. So income before expenses offset can definitely matter for reasons beyond just year end fed and state taxes!
By treating these transactions in a particular way, you can avoid the appearance of inflated sales for your own company. You will still need to issue a 1099 for the work any contractors/vendors did through you though!
1. Set up a specific expense account called "Contracted Services" or "Outside Labor". If you already have a similarly named account, you may want to preface the account names with "Billable" or "Reimburseable". This needs to be an EXPENSE account, not a Cost of Goods Sold one.
2. Make sure this account is selected as counting toward 1099 income calculations for your vendors who will have costs reflected here. This is a matter of mapping 1099 accounts and is a whole different walk through -- I can point you to a how if needed.
3. When you contract with an outside vendor, enter their bill *before* you submit the invoice to your client for payment.
4. On their bill, mark the appropriate account lines as "Billable" with the checkmark and enter your client's name.
5. When you create your client's invoice, it will list the outstanding billable expenses over to the right. Include the expenses you intend to pass along to them.
The specifics on these 5 steps I've listed here are described as they appear in QB Online. But it can be done on Desktop too.
What happens in the profit and loss is the expense goes to that specific account, but so does the income (since it is marked as billable, it is treated as a reimbursement). SO, if all these kinds of expenses are billed out, then your profit and loss statement should show a ZERO for expenses in this account... or the account won't appear on the P&L at all. That is why it is helpful to have these kinds of expenses in their own specific expense account -- so you can tell at a glance if everything has been captured through billing or if everything has been allocated correctly.
At year end if you go to that specific accout and run a report, you will be able to see all the activity that has resulted in the ZERO. Ditto in the activity report for your particular vendors.
Hope that helps!
If this is too many words and you're still lost, feel free to shoot back with the version of Quickbooks you are using. It is much easier to describe in specifics with that info.