Dedicated Server Hosting Services
Do I need to pay tax to resold services on 1099?
I am in consulting business and sometimes I buy hosting/dedicated server and resold to clients with little or no markup fee. In year 2008 tax return, I found that these monthly services compensation were taxed as my 1099 income. How am I going able to avoid this? I don’t make money out of these monthly services I use it only as a tool to stay closer with my clients.
Example :
I spent $2000 for leasing dedicated server each month and receive payment of $2100 to cover the cost. Buy end of fiscal year I have a gain of $25,200 on paper ($2100 x 12) but real gain is only $1200 ($100 x 12). Is there a better way to pay tax gain of $1200 only?
What about tax bracket? If these monthly services keep add up am I going to end up paying higher tax bracket where the compensation won’t be enough to cover the cost? Assume leasing server space become $4000/month..
You should report the money that you receive on Schedule C. On the same Schedule C, you should deduct the amount that you spent. In your example, you would report (on Schedule C) gross receipts of $25,200, expenses or costs of $24,000, and “net” profit of $1,200, and would pay tax on that $1200.
If leasing server space become $4000/month and you continued to receive only $2100 per month, then you would lose money.
If leasing server space become $4000/month and you received more money, then you report the amount received on Schedule C, report the amount spent on Schedule C, and pay tax on the difference.