Earlier this year, Hootsuite predicted that 33% of the money spent on digital advertising this year will be paid for social media engagement and partnerships.
The popular social media platforms Instagram, TikTok, and YouTube have evolved into marketing instruments for businesses. The use of social media influencers has become more important for many brands as a means of increasing product awareness.
In the past, only A-listers could get online partnerships and sponsorship deals like this.
But because e-commerce has grown so much in the past few years, micro-influencers are finding it easier to get paid jobs as brands look for content creators with a large following whose audience fits their specific market.
If given the chance, 54% of millennials and Gen Zers would become influencers, and 86% would publish sponsored material for money. As such, taxation is becoming an increasingly pressing issue as more and more of these influencers find ways to make a living off of their online content. As a YouTuber, TikToker, or Instagrammer who has monetized their social media presence, here are things you should know about filing taxes.
Why Influencers Have To Pay Taxes
Social media influencers are not employees of the firms whose products and services they promote. As such, they fall under the category of “independent contractors” when it comes to IRS regulations. Since contractors are technically their own bosses, they must pay both regular income tax and self-employment tax (SE tax).
Influencers are required to report any money they make when they file their taxes. According to Solomon Lyle, Principal Attorney at Oak View Law Group, influencers must pay the SE tax, which covers Social Security and Medicare. It's crucial to remember that even if you work in another employment where taxes are deducted on your behalf, you are still required to pay SE tax on any earnings from work you do as an independent contractor.
As an influencer, your state tax duties could be complicated. You might be required to file multiple state tax returns if you work for businesses based outside your home state.
However, Solomon clarifies social media influencers will only be required to pay federal taxes if they are based in a state like New Hampshire or Florida (for example).
What Is Considered Income?
“When someone gets paid for their services, this is considered revenue (not income),” Scott Curley, CEO at FinishLine Tax Solutions, says. “Every time a content creator creates content and receives money or revenue, they should set that money aside in a “revenue box.”
Further elaborating, Curley notes that purchases made by content creators for their businesses—such as computers, continuing education, or anything else that enables them to produce cutting-edge content—are deductible as business expenses. The income that a content provider must pay taxes on is obtained by taking their whole earnings and taking out these costs.
Curley suggests keeping track of the money you are paid for your work or billable hours and filing your taxes accordingly. Because of the system's tiers, the lower your income, the lower the percentage you must pay. He also suggests that self-employed individuals who are just starting out pay their taxes monthly or quarterly. This entails setting aside your monthly or quarterly tax obligation (depending on your income), placing the money in a reserve account, and remitting the money to the IRS.
He acknowledges that more self-control is needed to put off paying taxes until the end of the year. Since you are more inclined to put off paying taxes in favor of other, more pressing costs, this can set you up for unnecessary tax debt in the future.
Items Influencers Can Write Off on Taxes
Curley notes that a person who earns money as an influencer can deduct the costs incurred to establish their firm. The same regulations that apply to other self-employed people (such as truck drivers, Uber drivers, etc.) also apply to influencers because, in the eyes of the IRS, their job constitutes an income source. Generally, influencers can deduct expenses to build their firm from taxes.
Wealth Enhancement Group's vice president and financial counselor, Gary Watts, adds that an influencer can deduct nearly any business expense that can be shown as having some connection to the success of their enterprise. In the end, the IRS will determine if the costs were “ordinary and necessary” for the firm's operation.
As an example, Watts says, “Let's take a health and fitness influencer. It would be simple to classify gym gear, clothing, memberships, cameras, computers, etc. as “common and necessary.”
On the other hand, the IRS might raise questions about any attempt to deduct the influencer's pet's medical expenses or the cost of farm equipment. Understanding whether the activity qualifies as a hobby or a business with a profit is critical.
How to File for Taxes as a Content Creator
According to Lyle Solomon, Principal Attorney at Oak View Law Group, Taxes must be submitted for transactions with businesses outside the state of residency, and influencers must pay the self-employment tax (SE tax). Every influencer who works and earns more than $600 in compensation receives a 1099-NEC tax form. A 1040 income tax return is filed for payments under $600. Besides purchases under $100, influencers and bloggers must also pay taxes on the goods they review.
You can use software to file your taxes online. Alternatively, go to the IRS website and submit your payment, or mail the organization a check. If you are a beginner, Solomon advises getting help from a professional who can help you with any Schedule C or 1099 forms, answer all of your most challenging tax issues, and remind you to make scheduled quarterly payments.
According to Curley, depending on your business entity, there can be additional documents and even various filing deadlines. Influencers may get a W-2 or a K-1, depending on their sponsorship or collaboration deal (Partnership Income).
Filing Taxes on Gifts
Typically, Curley says that you have to file taxes on gifts, especially if these gifts are monetary. If they are not monetary, gifts ( received in exchange for work) can be assigned a monetary value. To legally accept and ensure appropriate tax obligations are covered, influencers or content creators should complete Form 709, the Gift Tax form.
Solomon says one exception is when you receive review products with a total value of under $100. The value of those things does not have to be reported on your tax return.
Things To Note About Filing Taxes as an Influencer
According to Brain Greenberg, CEO and founder of Insurist, tax requirements for social media influencers are fairly comparable to those for any other sort of business, with the following significant distinctions:
- You're probably not going to be able to write off your phone bill or internet bill as a business expense because those are personal expenses. You might be able to deduct the cost of a computer or a camera if you use it exclusively for your business purposes.
- There's no employer-matching contribution in the form of taxes. So if you're an influencer and you're making money from sponsored posts, your income will be taxed at whatever bracket you fall into based on your yearly earnings—not including any deductions or credits that may apply.
- While there are some deductions available (like health insurance), they tend to be pretty specific and only apply to certain kinds of income—like gifts under $15!
- Most importantly, don't forget about state taxes! Every state has different tax laws and requirements that may affect how much money gets taken out of your paycheck each month—so make sure you know what those are before filing!
Watts stresses that influencers must demonstrate to the Internal Revenue Service (IRS) that their profession is not a hobby. If you want to prove the legitimacy of your business, he suggests drafting a business plan, keeping proper documents, and consulting with a tax specialist and an attorney with experience in business law.
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This article was produced by and syndicated by Wealth of Geeks.
Amaka Chukwuma is a freelance content writer with a BA in linguistics. As a result of her insatiable curiosity, she writes in various B2C and B2B niches. Her favorite subject matter, however, is in the financial, health, and technological niches. She has contributed to publications like ButtonwoodTree and FinanceBuzz in the past. In addition to ghostwriting for brands like Welovenocode, Noah and Zoey, and Ohcleo, amongst others. You can connect with her on Linkedin and Twitter.