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IRS Form 1099: "non-employee compensation" or "rents"?


Philip Perkins
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Almost all the people I work for who send me IRS form 1099s put the money they've paid me for equipment rental in the "non-employee compensation" line of the 1099, as opposed to "rents".  Since they almost all do it, assumed that this was correct.  But thinking about it, in cases where my labor was payrolled and the invoice I gave them was only for gear, why wouldn't they classify the 1099 amounts as "rents"?  As does it make any difference anyhow?

Philip Perkins

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  • 2 weeks later...

I don't think it matters either way because it is still income to you.

What does matter is when expenses we encounter on a job are simply listed as income on a 1099. This has happened to me many times and I am always trying to find a way around it. Let's say I fly from Dallas to L.A. for a job. Typlically the hotel and airline tickets are prepaid by the production company, but parking fees are not. A week long trip will run around $100.00. This is charged on the invoice and included on my check that I recieve 30 days later. I have just floated the money for 30 days and it will show up on my 1099 as income, so I will have to pay taxes on the money that I have already paid taxes on.

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What they are doing is incorrect, but good luck training them to pay your gear as "rents"!  The way payment schedules go these days, I'm just glad to get the money.  I don't want to raise a stink about my paycheck and then be remembered as "the guy who complains about getting paid".  If you operate as a sole proprietor like me, then you end up paying Social Security tax on your gear income, which really you are not supposed to be required to do.  The only plus to that is that the gov't does keep track of how much you pay in to SS, and what you get back out later in life is partly based on what you paid in.  Brad is right that now he pays taxes on the $50 parking because it shows up on his 1099, and that just stinks.  (Hi Brad!).  I guess I take my chances with this, but I know that I should have no obligation morally to pay tax on that, so I might deduct it anyhow.  I've chosen a good accountant who knows how to file without raising red flags.

By the way, I've only been paid correctly (1099 income/rents) once in over 10 years. 

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  • 2 months later...

Yes it does matter!  Because this is Schedule "C" income.  Schedule C is where you report business income (from equipment rental and sales) and corresponding depreciation and other deductions.  All 1099s can be "corrected" and refiled by the maker.  Consult your accountant who may want you to request corrected 1099 for larger amounts of rental, etc.

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  • 8 years later...

Hey Guys!

 

I have been getting pretty accurate 1099 tax returns thus far for 2014. Yet I still have a few  production companies that have filed my tax return incorrectly. One of them really do stick out like a sore thumb, because this one production company incorrectly filed $1800 worth of income for my gear as Nonemployee compensation instead of Rents.

 

By doing that, my accountant may have to file the $1800 on schedule C as opposed to E. If my rental income is filed under schedule E, then social security tax is not deducted. Under C it is deducted. 

 

I spoke to the accountant of that production company to exhaustion. And he was stubborn as a mule. Unbelievable. He kept saying that they filed correctly because by paying me they were paying toward my income. And they needed proof of receipts as to where I rented the gear from? I own the gear I told him. They were renting from me. And he would not move from that reasoning. I felt like I was talking to a brick wall.

 

Anyway, I'll see my accountant tomorrow. But doesn't the production company face any penalties if they file 1099s incorrectly?

 

Frustrating!

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I hate to be the bearer of bad news, but rental of personal property (such as sound equipment) should not be reported on Schedule E. Schedule E is for rental of real property only (or, in some circumstances, personal property that is rented along with real property). So, while the production company accountant may be being stubborn, technically it makes no difference which box he reports your rental income in--that income can only be claimed on Schedule C no matter what box it's reported to you in. And consequently it will be subject to Self-Employment tax.

 

If you make enough in rental income each year to justify the effort, it may be worth forming a pass-through entity (such as an LLC or S corporation) and rent all your gear through that entity. If you structure things right, after depreciation of your gear and other operating expenses, you might be able to significantly reduce your Self-Employment tax, or eliminate it altogether. Of course, you would have some other taxes and reporting requirements to contend with. But, like I said, if your earnings in gear rental are substantial enough, it might pencil out in your favor. Ask your accountant for his/her advice about creating a pass-through entity.

 

P.S. I'm not a tax CPA, nor do I play one on television, so please don't consider this professional advice. Just  speaking from my own personal experience.

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My accountant INSISTS that Schedule E is ok for gear. I have questioned him many times about it. He said he'd defend it in an audit.

The 1099 should be in "rents". Every show I've ever done issued 1099 as rents. Those are more often than not studio shows, but small and independent shows did that too. I am assuming, of course, that you were payrolled for your labor as an employee, and you invoiced for gear.

I was on one show a few years ago that was all 1099. I asked for them to split the 1099. I was never able to get the new 1099. So I split it myself and filed it that way.

A while later, I got a bill from IRS for taxes on the portion of 1099 I moved to Schedule E. They hadn't seen I moved it. I returned the form they included with the letter, pointing them to where the income had moved, showing tax had been paid. Shortly after I received another letter showing my case was closed.

Another reason why I'm assuming the Schedule E is ok. They must have had a pretty good look at mine.

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My accountant INSISTS that Schedule E is ok for gear. I have questioned him many times about it. He said he'd defend it in an audit.

 

Well, if your accountant is prepared to defend you in an audit AND not charge you for the defense, then, by all means, go for it.

 

The authority I'm basing my assertion on is the IRS' own tax publications, which I assume to be correct. In particular, I'm referring to two different places where it specifically says income and expenses related to personal property rentals should be reported on Schedule C:

 

- Tax Topics 414 (see first paragraph) http://www.irs.gov/taxtopics/tc414.html

 

- Form 1040 Schedule E Part I (introduction) http://www.irs.gov/pub/irs-pdf/f1040se.pdf

 

I once knew a guy who liked to say his tax returns were his first offer to the IRS, and if they accepted, more fool them. Well, I, for one, am a bit more risk-averse than that, and choose not to tempt fate. Others I've known who've actually done battle with the IRS invariably claim the toll taken in stress, time, and expense was not worth the effort.

 

Best of luck to all!

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Yep!

 

 

My accountant after reviewing my taxes says I'm good. And he'll be working on it.  He plans to take all my gear rentals that I have under RENTS and run them under Schedule E. And he isn't the first accountant that I've come across to tell me this. I attended the Tax and Finance seminar the great folks at Gotham Sound threw this past Sunday. I asked the very same question to the CPA on the panel whose resume included a Masters in Taxation and 25 years of practice with many production companies as clients. She too said the same thing: Equipment rental under RENTS and RENTS reporting on schedule E to avoid SS tax deduction.

 

Like everyone else on this forum, I'm no expert, but I've now asked a good number of CPAs about this very same question. And every one of them said 'Schedule E'!

 

Crazy stuff!!! And confusing. But I am confident in my CPA's handling of my taxes. Thanks Sacarnon for wishing me luck. I still need it.

.

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This topic of course is very specific to the situation in the US, but we all usually have to deal with IRS-type agencies and when it comes down to the basics, it's all pretty similar. Laws, regulations and contracts usually open with a lengthy chapter called "Definitions".

In this case, I'd strongly suspect the term "personal property" needs to be defined.

Usually, when you run a business, such as renting gear, said gear is not personal property. It belongs to your business.

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I don't use a CPA, so take this with a grain of salt. I always use a schedule C. I'm not incorporated, but my understanding is that as a sole proprietor, all income passes through the "business" and becomes my income - this subject to self-employment tax.

From: http://www.irs.gov/instructions/i1040se/ch02.html

"Personal property. Do not use Schedule E to report income and expenses from the rental of personal property, such as equipment or vehicles. Instead, use Schedule C or C-EZ if you are in the business of renting personal property. You are in the business of renting personal property if the primary purpose for renting the property is income or profit and you are involved in the rental activity with continuity and regularity.

If your rental of personal property is not a business, see the instructions for Form 1040, lines 21 and 36, to find out how to report the income and expenses."

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José and RP:

 

If the opportunity presents itself the next time you speak to your accountants, would you mind terribly asking them what their authority is for characterizing rental income as Schedule E income? Obviously they must know some secret section of the Tax Code or something else that justifies their interpretation. If I'm wrong, I would love to know what they're reading that I'm not.

 

Thanks!

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My Tax guy doesn't do Sound Recording and I don't interpret IRS rules for him.

Before I incorporated  he told me to split out equipment rental from labor as they were treated differently.  

There is no crime in avoiding taxation, the crime is  evading taxation.

Get a pro and make sure he knows what you do.

Take your gear when you meet them, this piece of gear is this item and this piece is this item etc.

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If I were to guess...

I'm not in the business of renting equipment. I'm in the business of mixing sound, and my gear is my "tool of the trade" for which I am compensated. If I routinely rented gear to others to use for that purpose, then my business would be renting equipment/property.

Again, just guessing, and trusting my CPA.

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This topic of course is very specific to the situation in the US, but we all usually have to deal with IRS-type agencies and when it comes down to the basics, it's all pretty similar. Laws, regulations and contracts usually open with a lengthy chapter called "Definitions".

In this case, I'd strongly suspect the term "personal property" needs to be defined.

Usually, when you run a business, such as renting gear, said gear is not personal property. It belongs to your business.

This is basically what I said before deleting my comment because the IRS calls all assets not fixed to a specific location (real estate, buildings etc) "personal property".
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  • 2 months later...

I realize tax season is now behind us, for most of us, anyway. But I wanted to add a coda to this thread to correct something I said earlier about the appropriate place to report rental income, for the archives.

 

Based on what I thought was the clear meaning of the words in IRS' Tax Topics 414 (viz., "if you are in the business of renting personal property"), you should report income on Schedule C. As it turns out, there is justification for interpreting this language to in fact mean "if you are primarily in the business of renting personal property". If, on the other hand, renting personal property (i.e., your gear) is incidental to your primary business (i.e., furnishing location sound services), then reporting gear rental income on Schedule E becomes defensible, thus avoiding the dreaded Self-Employment tax.

 

This material distinction between gear rental being one's primary business versus being incidental to another primary business was pointed out to me by Nancy Adams, CPA of Adelman Katz & Mond in New York. For those who haven't watched it, Gotham Audio has a three-part seminar on Tax and Finance for Production Personnel on Vimeo. You can find Part I here. Nancy is the main presenter and very clearly lays out most, if not all, of the tax issues that a freelancer should know about. It also covers insurance and other relevant topics. It's absolutely worth the time.

 

Cheers.

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  • 6 years later...

It’s that time of year, and I have been looking into this topic on this forum and elsewhere. Just finished watching the 3 Gotham lectures with Nancy Adams linked above, which were very insightful. 
 

It seems that in 2015 you were able to report a 1099 kit fee as part of schedule E and thus have it not be subject to self employment tax. 

 

However, 1099s are now usually issued as 1099-NECs, and no longer have a box for “rentals.” All of my 1099NEC’s just have box 1–nonemployee compensation. Does this change the validity of using a schedule E for kit rental? 

 

It seems that the best way to do it, and perhaps only way in TurboTax, would be to under-report on 1099NEC and submit a separate 1099MISC as per this thread on TurboTax.


I will probably contact Nancy Adams’ firm with regards to this, since they seem knowledgeable and I don’t have any other resources. Regardless, I’m curious if anyone here has insight—or a CPA’s recommendation—on the matter. 

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The way I understand it is that rental income is taxable income, but not subject to things like social security, FICA, medical etc.

The equipment that you rent from a third party (rental house, or colleague) is at tax time sorted out by deducting the receipts/invoices from such third parties. The additional rent you add on top when billing production (which you of course (definitely) should add for your service, setup, pickup, drop-off, cleaning etc) is also taxable income.

Equipment that you own / have invested in, in order to make rental income, is also deductible in the year of purchase.

 

I am not completely sure on this, but I believe 1099-NEC is for labor / services as a non-employee, not for rental income. 

 

- Feel free to correct me, and please report back and let us know what you can find out from Nancy Adams’ firm!

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The instructions are right on the forms you received.

 

1099- Misc. Box 1 Rents

"Form 1099-MISC incorrect? If this form is incorrect or has been issued in error, contact the payer. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.
Box 1. Report rents from real estate on Schedule E (Form 1040 or 1040-SR). However, report rents on Schedule C (Form 1040 or 1040-SR) if you provided significant services to the tenant, sold real estate as a business, or rented personal property as a business. See Pub. 527. "

 

1099-NEC Box 1 NonEmployee Compensation

 

"Box 1. Shows nonemployee compensation and/or nonqualified deferred compensation (NQDC). If you are in the trade or business of catching fish, box 1 may show cash you received for the sale of fish. If the amount in this box is self-employment (SE) income, report it on Schedule C or F (Form 1040 or 1040-SR), and complete Schedule SE (Form 1040 or 1040-SR)."

 

And from IRS Instructions for Schedule E Page 5 "Personal property.Do not use Sched-ule E to report income and expenses from the rental of personal property, such as equipment or vehicles. Instead, use Schedule C if you are in the business of renting personal property. You are in the business of renting personal property if the primary purpose for renting the property is income or profit and you are involved in the rental activity with con-tinuity and regularity."

 

https://www.irs.gov/instructions/i1040se

 

Our 1099s for labor and equipment rentals have ALWAYS been required to be reported on Sch. C as Gross Receipts and never on Sch. E which is for Real Estate even before the split 1099 NEC and 1099 Rents.

 

 

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