INTERNAL REVENUE RULING

IRS RULING 68-624

“... Withholding applies only to remuneration for services performed by an employee for his employer. Where employers make payments for services performed and also for other items, such as rental of equipment, royalties, dividends, and other payments that are not for services performed, withholding should be based only on the wage portion of the payments.”

IRS RULING 5021

“... the amounts added will not be deemed remuneration for services and will NOT be subject to FICA, FUTA or Federal Income Tax withholding if they are, in fact, for the user of equipment and are not compensatory in nature.”

IRS RULING 53-111

“... Amounts paid by a paper manufacturing company to its woodsmen employees for the use of chain saws owned and operated by such employees in cutting pulpwood for the company, less their operating expenses, DO NOT constitute self-employment income under section 481 of the Internal Revenue Code.”

REG. 31.3401.02

“The allocation of the amount paid to an individual where the payment is in consideration of both personal services and the use of equipment must be governed by the facts in each case…

A proper allocation may be arrived at by reference to the prevailing wage scale in a particular locality operating the same class of equipment or fair rental value of similar equipment.”

SECTION 29-481

“Advise is requested weather the amounts paid by a paper manufacturing company to its woodsmen employees for the use of chain saws owned and operated by such employees in cutting pulpwood for the company… Eighty percent of the amount paid is considered taxable wages for the purposes of section 1400, 1600, and 1621 of the Internal Revenue Code with respect to the Federal Employment Taxes and the withholding of income tax at the source on wages and twenty percent is considered payment for the use of the chain saws owned by the woodsmen.”

SECTION 1394 – AMERICAN CONTRACTORS STANDARD 703 2-12-91

“Often an employer will hire an employee who will, for one reason or another, provide his own tools and/or equipment, or even his own additional help. When this occurs, the gross pay of the employee generally will reflect an amount that represents the use of the equipment as well as an amount representing compensation for the employee’s personal services. The question to be considered is weather the amounts not representing compensation for personal services subject to federal employment taxes… Generally, where additional allowances are involved, the amounts added will not be deemed remuneration for services and will NOT be subject to FICA, FUTA or Federal Income Tax withholding if they are, in fact, for the use of tools and/or equipment and not compensatory in nature.”

DISTRICT DIRECTOR REPLY: MS:101PDW 7-29-92

We have requested an opinion on the correct treatment, for Federal employment tax purposes, of tool rental payments made to workers who are treated as employees… This is a common practice in the trucking industry and the timber industry. Rent payments would not be subject to employment taxes. The worker would report these payments on Form 1040, schedule E, along with the related deductions. Rental income is NOT subject to self-employment taxes.

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