1099 - MISC Box 1 Question

[ETax847]

Client received 1099 Misc with in come in box 1 "rents".  He receives a stipend of x dollars per check for using his own computer at work.  Should this income be linked to a sch c and subject to self employment tax, or would it be considered other income on line 21.  Note ATX does not allow box 1 on the 1099 misc form to be linked to Line 21.  Please advise.

[Gail in Virginia]

Is he a W-2 employee or does he already have a schedule C?  Is he deducting the cost of the computer anywhere as employee business expense?  is this the first year he has done this, or the first year that the company has sent him a 1099?  I must admit I have never seen it handled this way.  Would the depreciation for the computer come anywhere close to wiping out the income from the 1099?  Ordinarily, I would expect that if this payment were subject to social security, it would be included in his W2, and he would only be able to deduct the cost of the computer as an employee business expense on Schedule A, subject to the 2% haircut - provided he is an employee and not a contract hire.  I am curious to see what others think of this.

[Medlin Software, Dennis]

Seen it before.  Either knowingly, unknowingly, or because of bad advice or naivete, an improper method IMO.  Should have been added to taxable wages on their paychecks.

If the employer is only "renting" computers from their employees, then the employee relationship triggers the "rent", so I can see no way to consider it separate from the employment relationship.

The employee is in a bad spot.  Convincing the employer to handle it the proper way is not likely to happen as the employer will give the old "we have always done it this way and have never had an issue" reply.  How it is handled on this return is one thing (I guess Line 21 might make me comfortable enough for a one time deal), but I would probably spend the time with the employee to enlighten them.

[Abby Normal]

Yes this seems like an accountable plan issue. Should be wages. You could put it on Sch E to avoid getting a matching notice, back it out and put it on line 21. It's probably not a huge amount, right?

[Lee B]

This practice has a very long history with lots of court cases.

For example, Auto Mechanics receiving "Tool Rental" for use of their personal tools.

Also, Timber Fallers receiving "Saw Rental" for the use of their own Chain Saw.

There are actually firms that market this approach as a way of reducing employment taxes.

The employee will have to report on Schedule C - EZ and pay the SE Taxes.

The IRS has always taken the position that the rental of personal property is SE Income

and IRS has always prevailed in the numerous court cases in this area.

[BulldogTom]

5 hours ago, cbslee said:

For example, Auto Mechanics receiving "Tool Rental" for use of their personal tools.

The IRS has always taken the position that the rental of personal property is SE Income

and IRS has always prevailed in the numerous court cases in this area.

One of my best audit wins was one of these.  I thought I had no chance on the tool rental part of the audit.  There were several other issues (IRS was trying to get SE tax on gambling winnings, denial of child tax credit, etc) that I knew I was going to win on, even if I lost on the tool rental 1099 issue.  By the end of the 3rd page of my appeal letter, I think the auditor got tired of reading and just issued the no change letter.  Every employee at the shop this taxpayer worked at got audited and they all just sent in the check to the IRS.  I would not have fought it if there were not other issues that the IRS challenged on the return.  Still brings a smile to my face when I remember that audit letter.

Tom
Newark, CA

[SaraEA]

For Sch C and SE to apply, don't you have to be in the business of renting tools, computers, whatever?  Why not Sch E, not subject to SE?  A lot of times I think the people creating the W2s and 1099s just don't know what they're doing.  How many times have you seen statutory employee box checked when the employee is a clerk or foreman or secretary?  I believe the accounting person doesn't know what that means so checks it to be on the safe side.

[Jack from Ohio]

5 minutes ago, SaraEA said:

....the people creating the W2s and 1099s just don't know what they're doing.

I can prove this to be true in any court in the land!!!

[DANRVAN]

2 hours ago, SaraEA said:

For Sch C and SE to apply, don't you have to be in the business of renting tools, computers, whatever?  Why not Sch E, not subject to SE?  A lot of times I think the people creating the W2s and 1099s just don't know what they're doing.  How many times have you seen statutory employee box checked when the employee is a clerk or foreman or secretary?  I believe the accounting person doesn't know what that means so checks it to be on the safe side.

Schedule E is for rental of real property, not personal.  I agree with "cbslee", there used to be a lot improper reporting of "saw rents" on Schedule E.  They would also depreciate their pickups and related expenses on Schedule E. 

In regards to "be in the business of renting tools..", it depends on facts and circumstances.  The key elements are regularity of activities, frequency of transactions, and the production of income. An occasional activity is not subject to SE tax. There are a number of Revenue Rulings that discuss these elements.

Also agree that it should have been reported on W-2.

[kcjenkins]

5 hours ago, BulldogTom said:

One of my best audit wins was one of these.  I thought I had no chance on the tool rental part of the audit.  There were several other issues (IRS was trying to get SE tax on gambling winnings, denial of child tax credit, etc) that I knew I was going to win on, even if I lost on the tool rental 1099 issue.  By the end of the 3rd page of my appeal letter, I think the auditor got tired of reading and just issued the no change letter.  Every employee at the shop this taxpayer worked at got audited and they all just sent in the check to the IRS.  I would not have fought it if there were not other issues that the IRS challenged on the return.  Still brings a smile to my face when I remember that audit letter.

Tom
Newark, CA

Yes, when you win one that you know you can lose, it sure makes you feel good.  Maybe not right, but anyone who's been in this business more than a few years has seen the IRS bully clients into paying when it's not right often enough to enjoy it when they screw up in our client's favor.  

[kcjenkins]

1 hour ago, DANRVAN said:

Schedule E is for rental of real property, not personal.  I agree with "cbslee", there used to be a lot improper reporting of "saw rents" on Schedule E.  They would also depreciate their pickups and related expenses on Schedule E. 

In regards to "be in the business of renting tools..", it depends on facts and circumstances.  The key elements are regularity of activities, frequency of transactions, and the production of income. An occasional activity is not subject to SE tax. There are a number of Revenue Rulings that discuss these elements.

Also agree that it should have been reported on W-2.

Yes, used to be a lot of companies tried to save some payroll taxes by "renting" employee's tools and/or trucks, but the law is clear that even if it was 'rent', to the payer, it's Sch C income to the recipient.  And the net income is subject to SE taxes.  Unless it's an isolated, one time thing, fighting that is a waste of time.  And depreciation can be a nightmare, if the truck, for example, is used for both personal and "business" use, because the clients almost never keep any usage records. 

[RitaB]

14 hours ago, SaraEA said:

A lot of times I think the people creating the W2s and 1099s just don't know what they're doing.

Agree with Jack.  Sara, you just won the thread with this statement.  If I had a nickel for every time I said this, I'd be in a higher tax bracket.

And I'd have a sock full of nickels to hit people with.

 

[Medlin Software, Dennis]

While frustrating, we all get nickels because the tax system is arcane and complicated...  I have to repeat this to myself over and over this time of year, usually on every phone ring or email ding

[RitaB]

4 minutes ago, Medlin Software said:

While frustrating, we all get nickels because the tax system is arcane and complicated...  I have to repeat this to myself over and over this time of year, usually on every phone ring or email ding

Speaking of email ding, I just got a text message ding from my client who calls me "dear".  He wants to know if he owes IRS "anythang".   He means "deer" doesn't he?  #mylife

[Catherine]

59 minutes ago, RitaB said:

If I had a nickel for every time I said this, I'd be in a higher tax bracket.

And I'd have a sock full of nickels to hit people with.

Rita, have I told you recently that I LOVE you?!?!  

[Catherine]

On a related topic, in our copious free time we should go through every post that @RitaB has ever made and extract all her gems.  We could put 'em in a book to sell to fellow accountants and get her into that higher tax bracket she talks about!  

[Medlin Software, Dennis]

 

I saw this last night, I would love to get away with putting this on a card and handing it out as needed...

[kcjenkins]

OMG.  If it were possible, I'd make Medlin's post a 'required read' on this board !!!!   I just know we've all wished we could do that !