The influencer market is big business! Statista research shows the current market sits at a hefty $13.8 billion, which is eight times more than 2016. With money exchanging hands at such a high rate, it’s easy to overlook basic financial management strategies, such as taking tax write-offs.
Any successful influencer will tell you that money management as an influencer is critical to capitalizing on your success and bracing for the inevitable market ups and downs. Are you taking advantage of these influencer tax write-offs related to retirement contributions, pre-tax allocations, social media costs and operating expenses?
We reached out to the brightest financial minds in the game to garner some little-known tax tips and tricks for influencers. Let’s take a look at what they said below.
Make 401(k) Contributions
Let’s be honest: planning for your “golden years” isn’t exactly the most inspiring thought, especially when you’re a busy influencer. However, we ask you to pause for just a moment and consider that you’re leaving valuable tax write-offs behind by not investing at all.
Invest more to spend less? Yes! Meet the 401(k).
A 401(k) account is a type of retirement account with unique tax benefits for influencers. Not only will you start building a healthy nest egg for your retirement years, but you will also effectively reduce your tax payments.
How 401(k)s Reduce Tax Payments
The IRS designates your 401(k) contributions as pre-taxable income. This means, instead of paying taxes on your contributions now, you pay them when taking distributions in retirement. Distributions that come before the age of 59½ are subject to a tax penalty, so you’ll want to plan accordingly.
Contribution limits are the maximum amounts that you can invest annually. 401(k)s also come with contribution limits that change each year. According to the IRS website, the total contribution limit for 2022 is $61,000, not including catch-up contributions.
Example of How 401(k)s Work
Still a little fuzzy on understanding how to use a 401(k) to your benefit? Let’s look at a hypothetical but common example below:
Say you earn $250,000 and invest $25,000 into a 401(k) this year. Instead of paying taxes on your total earnings, you will only pay them on $225,000 since your contributions reduce your taxable income. Not only did this strategy help you save a ton of money for retirement, but you also effectively defer your tax bill to a time when you’re more financially flexible.
Solo Influencers Have 401(k) Options
If you don’t have employees, Matthew Cantwell of 401Go, Inc. urges influencers to invest in what’s called a solo 401(k). He says, “One benefit of a Solo 401(k) is the flexibility to choose when you want to deal with your tax obligation. All allowable contributions are tax-deductible to your business with any earnings growing tax-deferred until withdrawn.”
He further explains that influencers should also consider the Roth solo 401(k) if they don’t want to defer tax payments. “Roth Solo 401(k) employee contributions do not reduce your current taxable income, but your distributions in retirement are usually tax-free,” says Cantwell.
Always Be Pre-Taxing
A key tax issue for influencers is reducing their taxable income. Mike Jesowshek, a CPA and host of the Small Business Tax Savings Podcast, thinks they should look at the bigger picture. He says, “Look at your current spending on the personal side and find items in there that could be business-related. You can then shift them from after-tax to pre-tax spending.”
Here are the main differences between after-tax and pre-tax dollars:
- After-Tax Dollars: Money you spend after taxation
- Pre-Tax Dollars: Money spent before taxation
It’s also worth mentioning that pre-tax dollars are indicative of your company’s health. If you’re an influencer with a long-term vision, consider how financial management now will affect your ability to attract the best investors for your next project.
Depending upon your niche, you could deduct the following personal expenses if you use them in the commission of your work:
- Video games
- Haircare products
- Skincare products
- And more!
Ultimately, your goal should be to find after-tax dollars that you can allocate to pre-tax. “You lose every time you spend after-tax dollars that could have been pre-tax dollars,” Jesowshek concludes.
Track Your Social Media Costs
There’s no question that we spend hours scrolling through Instagram and TikTok feeds throughout the day. After all, it’s a popular catalyst and medium for influencers across several niches. But did you also know that you could deduct certain expenses related to your social media promotions?
If you rely on these platforms to get your message out, you should take advantage of every available tax opportunity. While your accountant can help you track these expenses, there could be others that you’re both missing.
Commonly missed social media costs include:
- Management tool subscriptions
- PPC ad spend and contractor fees
- Content creation tool subscriptions
- Commercial stock videos, music and photos
- Cost of purchasing high-end fonts
- Video and image production costs
- Audio and visual equipment
- Social media subscription costs
- Blog content writing costs
- Social media manager costs
Jenna Lofton, a CFA and the founder of StockHitter, offers a creative solution for helping offset tax costs. “Influencers often spend money to build a following by getting followers on YouTube or Instagram. For example, they may pay for lots of music so that clips don’t have an awkward silence while uploading content to their accounts. As more people follow them and their accounts are visited more frequently, companies will compensate the influencer for their social media expenses, which is called traffic and shipping fee advertising,” she says.
However, you should always seek to separate business expenses from personal ones. Social media costs can only become tax-deductible when used for legitimate business purposes. You should also avoid taking tax deductions for the time it takes you to manage your accounts.
Don’t Forget Operating Expenses
The U.S. Tax Code permits business owners to write off many expenses related to running a business. So, what do write-offs look like for influencers? The short answer is that they aren’t much different than write-offs for other businesses!
Stephanie Ng, the founder of IPassTheCPAExam.com, encourages freelancers to deduct the following incidental expenses from their taxes:
- Computer or Phone: As an influencer, you can’t deliver content to your audience without a device. You can generally write off 100 percent of the device's cost. However, in some cases, you may have to depreciate it over time.
- Furniture: While you’re hard at work creating content, where do you sit? Are you using a desk or sitting in a chair? If so, write it off. Furniture is a necessity since you can’t stand while working all of the time.
- Home Office and Utilities: If you’re usually creating content within your home, whether taking photos, videos or posting them, be sure not to miss the home office deduction. You can also expense utilities, such as your electricity or water bill, necessary to run your business. The best part is that Wi-Fi is also an allowable deduction too.
- Giveaway Prizes and Marketing Expenses: If you purchase an item as an audience giveaway, that’s a marketing expense! If you pay fees to promote your content on social media, those are business costs as well, and you should write them off.
- Outsourced Assistants: If you pay another individual to help you create or edit your content, market your promotions or even write the captions for a photo or video you’re going to post, this is another often overlooked business expense that you should be writing off as well.
While the list above isn’t comprehensive, it covers several key write-offs that you should be aware of as an influencer. Keep in mind: if you spend money to run your business, you may be able to deduct the expense when filing your taxes each year! If you’re still in doubt, Incfile offers a free tax consultation to help you understand how and where you might be able to save.