If you're an influencer, you're in a relatively new industry with limited regulation, and you might be wondering: How do influencers pay taxes? You're not alone. Influencers definitely have a tax situation that is as unique as their industry. While it's an exciting time to be an influencer, it can also be challenging to understand the requirements around tax compliance.
However, taxation is obviously a very important part of being a self-employed entrepreneur or freelancer. Incfile spoke to some industry experts about tax compliance requirements for influencers to help you figure out what you need to know and how to prepare for tax time.
Is Social Media a Hobby or a Business?
One of the first questions you need to ask yourself is: Is this a hobby or a business? Sarah Adkisson, an attorney and Senior Tax Law Analyst at Corvee, believes this is one of the most important things to consider as you enter the influencer space because it impacts your tax compliance requirements.
The difference is that a hobby is usually done for fun, with profit or income only being a consolation or secondary consideration. Whereas, for it to be considered a business, profit must be the primary goal or motivation.
Adkisson says, “If it is a business, you can deduct those expenses. But if it is a hobby, then you still must report any income you make, but cannot deduct expenses.” Expenses are an important consideration for influencers, as you will likely have a variety of costs and purchases that you can deduct from your taxable income.
But first, you must make an official decision on whether your social media efforts constitute something you do for fun...or profit. According to one survey, 48 percent of influencers earn money from their account, at an average of almost $3,000 per month on Instagram.
One of the most confusing things about taxation compliance for influencers is working out what is taxable income. According to Dean Kaplan, CEO of Kaplan Collection Agency, “Several aspects of influencers’ work can be counted as taxable income.” This is because the way in which influencers earn money can vary. “These might include sponsored posts, ads, digital content, product reviews and brand partnerships,” Kaplan says.
This means that influencers often have multiple streams of income coming in from different projects and it’s vital to understand what is considered taxable income and what is not.
For example, Adkisson says, “If an influencer or a blogger receives products and goods in exchange for reviews or placement, they will need to report that as income.” In other words, anything that is given or paid to you in return or exchange for something is technically taxable, even if that is a physical product rather than cash.
Ensure You Keep Track of Expenses
If you’re running your social media as an influencer business, you’re able to deduct expenses from any taxable income. “If you are a blogger, content creator or influencer, you likely have expenses you can deduct and they may not look like typical business expenses,” Adkisson explains. For influencers, expenses can be as broad as electronic devices, software, website costs, travel costs, office space, copyright fees or camera equipment.
However, Tim Yoder, the tax and accounting analyst at Fit Small Business, warns, “This is a pretty gray standard that is often disputed with the IRS.” You need to be careful with what you file as “expenses.” They typically define an expense as anything that is ordinary and necessary for generating income. This can then be deducted from your gross income amount for tax purposes.
The good news is that there are ample opportunities to write off reasonable business expenses. A recent survey found that online sellers overpaid at least $246 on their taxes. Talk to your CPA about what you are able to write off on your taxes.
Receive 1099s and Pay Quarterly Estimated Tax Payments
Influencers are considered self-employed taxpayers. This means that they must report any income and expenses on Form 1040. Form 1040 is considered the master tax return form that includes information from all other forms combined, including 1099s. As a self-employed individual or freelancer, you should receive Form 1099-MISC from a person or company you worked for if the payment exceeded $600. This will help you work out your total income.
“Influencers must pay both self-employment tax and income tax. Both taxes are calculated on their individual income tax return, Form 1040,” Yoder says. This is then due to be filed each year; for example, the 2021 Form 1040 is due April 18, 2022.
However, influencers, like other individual contractors and freelancers, must pay quarterly estimated tax payments. “Influencers must pay an estimate of their annual tax liability quarterly on Form 1040-ES,” says Yoder. This is because independent contractors and freelancers do not have tax automatically dedicated from their income like employees. Form 1040-ES helps you work out the differences between previous and current year’s income and the tax you likely owe to the IRS.
At the end of the tax year, you will find out whether you overestimated or underestimated your taxes, and the balance will be worked out with the IRS. “Any taxes not paid as quarterly estimates must be paid by April 18, 2022, to avoid the Failure to Pay Penalty of 0.5 percent per month,” says Yoder. This means that as an influencer, it can be helpful to think of tax time as being every quarter.
Be Aware of Non-Resident Tax Returns for Engagements in Other States
An often-overlooked part of taxation compliance for influencers is that they may be subject to non-resident tax returns as well. It might be common for some influencers to receive income or be paid for a project that requires them to be physically present in another state, which means this could become taxable under those state laws.
Examples of multiple state engagements might be launch parties, grand openings, special events, speaking engagements or photoshoots. While the minimum income threshold varies depending on the state’s filing rules, influencers will still have to file regardless of the dollar value of the work.
“So, the more out-of-state engagements, the more tax returns, which is burdensome for an influencer,” says Thomas Williams, a tax accountant and co-founder of Deducting the Right Way. This will mean different forms for different states, which can get confusing. Williams suggests paying an accountant to help prepare your taxes to save time and any potential errors.
Bottom Line? If It's Not a Hobby, It's Your Business.
While it may seem a little daunting paying tax as an influencer, especially as it’s still a new and emerging industry, it doesn’t have to be. Tax compliance requirements are mostly straightforward, as long as you understand the differences between a hobby and a business and keep track of your income and expenses throughout the year.
Jenna Scatena is a writer and content strategist with a love for stories that have never been told before. More than a decade of working with prominent magazines and brands informs her approach to impactful storytelling. Her stories have reached more than 30 million readers, won multiple awards and been anthologized in books. Jenna's work has appeared in Conde Nast Traveler, Vogue, Marie Claire, The San Francisco, BBC and The Atlantic. She's the founder of the editorial consultancy, Lede Studio.