In this day and age, celebrities are all around us. Whether it’s on social media or the news cycle, celebrity gossip is everywhere.
We can’t help but be fascinated by them and how their lives compare to our own.
There have always been stories about celebrities and the state of their finances, especially as the economy fluctuates.
The spotlight scrutinizes our beloved public figures to see if they’re paying their way.
So, do celebrities pay taxes? The short answer is, yes they do, or at least they’re supposed to! However, it is much more complex than you might think.
In this article, you can discover everything you need to know about how celebrities are taxed, the obstacles they face, and what some do to avoid taxation.
How Is A Celebrity’s Income Tax Calculated?
Just like the general population, a celebrity’s income tax is calculated based on their average income.
As you can imagine, a celebrity will have extremely high tax rates on their seven-figure salaries.
However, some celebrities manage to significantly lower their tax rates, some paying no tax at all. So, how do they do this?
The majority of celebrities have high deductible expenses, such as home or office maintenance, personal assistant salaries, and travel expenses.
By deducting these expenses, celebrities lower their taxable income and therefore lower their income tax bill.
There are plenty of loopholes in the tax code that can be exploited easily if you know how to use them, which the top level financial advisors that celebrities hire do.
For example, some celebrities have created charitable foundations that give them tax breaks on the money they donate.
There is also a “pass-through” loophole that other celebrities have used to exploit exchange rates to avoid paying taxes on some of their yearly income.
Some celebrities make the majority of their money through investments, such as stocks or investments, rather than wages or fees.
Investment income is taxed at a lower rather than earned income, so celebrities can reduce their tax bill this way.
Why Do Celebrities Struggle Doing Their Taxes?
While there are some cases of celebrities committing tax evasion, some struggle to keep their finances straight, ending in them getting into trouble with the IRS.
With such a vast amount of money in their bank accounts, there are a few reasons that celebrities get into trouble with the government accidentally.
Celebrities often use highly-trained financial advisors to keep their finances and taxes in check, however, some put their faith in the wrong people.
Such huge bank accounts can lead to financial oversight by incompetent accountants. It also takes just one malicious investment broker to turn a celebrity’s finances upside down.
Without trusted advisors, a call from the IRS can be expected.
Being a celebrity means you are constantly in the spotlight and looked at under a microscope at all times. They make prime targets for scrutiny by the IRS.
They have even confirmed in recent years that they have taken a more aggressive approach to high-profile cases to crack down on large-scale tax evasion and avoidance.
They are more likely to make an example out of a big celebrity than the average person, so celebrities are under more pressure to keep their finances straight.
Erratic Pay Cycles
The nature of a celebrity’s work means that pay cycles are erratic – they could receive two big checks a year, which they then have to manage themselves.
These payments are unpredictable and don’t follow the standard salary most of us receive in monthly or weekly installments.
Celebrities do not receive steady pay and are subject to huge financial windfalls. This makes it more challenging for them to manage their funds and calculate their taxes.
Not Automatically Deducted
Unlike the average American employee, celebrities don’t have taxes automatically deducted from their paychecks.
This means they have to do this themselves or with a financial advisor, which is often the case.
This leaves room for major error if their taxes aren’t calculated correctly, forcing them to foot the bill in one large payment to avoid a visit from the IRS.
Celebrities Who Got Caught Out By The IRS
Whether it was purposeful or simply an oversight, there are some well-known celebrities that evaded tax and got a visit from the IRS.
One of the most notorious cases of celebrity tax evasion is that of celebrity chef, Martha Stewart. She had back taxes for income earned in 1991 and 1992, totaling $220,000.
She argued that she didn’t owe these taxes because she spent half the year outside of New York, but this did not hold up in court.
Nicholas Cage suffered tax troubles back in 2010. He stated that he had paid over $70 million in taxes, however, he still owed $14 million to the IRS.
Although he argued that he was up to date with his taxes, he later blamed the outstanding tax bill on incompetence and oversight by his accountants.
A victim of financial windfall, Judy Garland could not pay her tax bill due to mismanagement of her funds. The IRS eventually foreclosed on her home to settle her debt.
While celebrities are required to pay tax, not all do, or do so at a lowered rate by exploiting loopholes, claiming numerous deductibles, and investing their money.
Taxes for celebrities can be complicated, as there is much room for oversight due to the nature of how they are paid and how they are treated with more scrutiny by the IRS.
Some celebrities purposefully evade tax, however, others have tax evasion allegations because of their financial management and the difficulty that comes with overseeing a vast amount of money.