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Tax considerations equipment rental vs labor


orionflood

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This is closely discussed in another thread about how to or wanting to seperate labor monies paid on an invoice vs gear rental paid on an invoice, but what wasn't addressed is why:

Why is it necessary to seperate these? Is being taxed on gear rental much better than being taxed on labor?

Yes I get my labor taxed and my gear is non taxed... but doing taxes at the end of the year are there any benefits... and if I do will it not be suspicious to the irs if I start reflecting that starting this year?

Thanks.

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I don't know how you are NOT being taxed on income from equipment rental unless you are just failing to report that income. Not a great idea --- they will catch you. The better approach is to have the income you get from rentals taxed AFTER you take the deduction for having purchased the gear, expenses maintaining and repairing equipment, insurance, transportation to and from, storage and shipping, etc. In other words, business expenses incurred by your rental business to offset taxes owned on the income. If you don't separate the two incomes, labor and rental, your tax burden will all be treated as ordinary income and you will not be able to make use of any of the tax reducing benefits of an equipment rental business.

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Labor is subject to SS and Medicare Taxes, Equipment rental is not.

 

I'm not a tax professional so I invite Al (and others) to check me on this. I believe that the opposite is true and that equipment rental income is not only taxed for SS and Medicare but it's taxed at twice the rate.

 

The way it works, as I understand it, is that the Social Security and Medicare taxes are assessed against both the worker and the employer equally. The current rates are 6.2% for Social Security (OASDI) and 1.45% for Medicare (HI). The total taxes are 12.4% and 2.9% respectively with the employer and employee each paying half.

 

A self-employed person, or anyone earning money from a business (like equipment rentals), is responsible for both the employer and the employee portions of the tax - that is, the full 12.4% and 2.9%.

 

Usually this is not as great a burden as it sounds because, as Jeff points out, you get to declare all those deductions, like depreciation, that substantially reduce the taxable income. So, your $18,000 rental income likely yields only $6000 taxable profit and the need to pay the full 15.3% isn't so onerous.

 

David

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I'm not a tax professional so I invite Al (and others) to check me on this. I believe that the opposite is true and that equipment rental income is not only taxed for SS and Medicare but it's taxed at twice the rate.

 

The way it works, as I understand it, is that the Social Security and Medicare taxes are assessed against both the worker and the employer equally. The current rates are 6.2% for Social Security (OASDI) and 1.45% for Medicare (HI). The total taxes are 12.4% and 2.9% respectively with the employer and employee each paying half.

 

A self-employed person, or anyone earning money from a business (like equipment rentals), is responsible for both the employer and the employee portions of the tax - that is, the full 12.4% and 2.9%.

 

Usually this is not as great a burden as it sounds because, as Jeff points out, you get to declare all those deductions, like depreciation, that substantially reduce the taxable income. So, your $18,000 rental income likely yields only $6000 taxable profit and the need to pay the full 15.3% isn't so onerous.

 

David

David,  according to my tax preparers, this is not the case.

Of course, my LLC is renting the equipment, and taking deductions for operating that rental business

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"A self-employed person, or anyone earning money from a business (like equipment rentals), is responsible for both the employer and the employee portions of the tax - that is, the full 12.4% and 2.9%."

 

So, the confusion arises if ALL you were doing was renting equipment and the equipment rental company was the employer paying you a salary. When you are working on a job (employed by the Big Movie Company, Inc.) they are only required to take out for Social Security stuff for your work, your labor. Additional money paid out for equipment rental is not subject to employer or employee taxes. 

 

"Of course, my LLC is renting the equipment, and taking deductions for operating that rental business"

 

If your LLC "employs" you to manage the rental business, then you will in fact have to pay out both your personal portion of SS AND the LLC's portion of SS. My Corporation employs me on an annual basis and has to write me a salary, pay Payroll Taxes, SS and SDI and all sorts of stuff, just like any other employer, but it still works out as beneficial, for me, to do it this way. 

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We all have differing scenarios.

A majority of my income was from 1099 sources, it is the way my market was organized.

I had an IRS Enrolled Agent who over a period of 20 years taught me how to legally avoid, but not evade  taxation.

I paid SS  and Medicare Taxes on the Labor part of the invoice.

The Equipment rentals were not subject  to them even though I had been paying taxes on it.  Since the rented equipment never left my possession there was no sales tax due to the State of Florida. The same Tax pro suggested I Incorporate  to further reduce the SS & Medicare taxes.  I typically work as a loan out company for the payroll companies.

His rule was it is not how much money you make but rather how much money you get to keep.

This is a business and someday you will want to retire, start planning now.

If you are working a regular weekly show look at the 8% of your gross pay that goes to SS & Medicare.

How can you make that money work for you ?

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WE: " your labor is a service, "

well actually, the labor part is typically employment, and equipment rental is a business; when going the IC route, it is all business income with personal income involved, but the tax issues (Fed, state, local) are more complex:

 

hire a tax PRO...

Edited by studiomprd
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WE: " your labor is a service, "

well actually, the labor part is employment, and equipment rental is a business; when going the IC route, it is all business income, but the tax issues (Fed, state, local) are more complex: hire a PRO...

Not always exactly the case. The OP's question was why should the two be sperate? I was simply pointing out one difference between the two if you are billing for both.

If you bill production through a loan out corp, your labor is billed as a service, and rental as a retail transaction. You are then paid as an employee of the loan out corp, but you still have to bill for it. Not every situation is as clear cut as you make it sound.

I agree that hiring a tax professional is well worth it.

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