Ten years ago, social media was not as prominent as it is today. Influencers nowadays can make money on social media on all currently available platforms. Although there is a huge opportunity to make a lot of money online, there are still tax implications that many influencers must abide by. Learn Tax Compliance Requirements Influencers Should Know in 2022. Continue reading and learn key requirements.
Of course, the amount of tax liability that each influencer has depends on how they formed their business entity and how much money they make.
If you are an influencer looking to figure out how much you owe in taxes, we made this article for you.
In this brief influencer tax guide, we will go over how influencers are taxed and the different deductions you may be able to take to reduce your tax liability.
Are Influencers Employees of the Companies They Work With?
In general, social media influencers are not employees of the companies they promote or work with. Instead, the IRS considers these influencers as independent contractors.
Since these companies do not dictate when, how, or through what means these influencers complete a job, and because they do not provide them with equipment to pull off their influencer services, each influencer is their own business entity.
How Are Influencers Taxed?
Because influencers are independent contractors, they won’t receive W-2 tax forms from the companies they promote. Instead, they will receive a 1099 MISC form which breaks down the amount of income received from the companies they partnered with. They may only receive this form if they receive more than $600 from the partnership.
The monetary value of any services, products, or merchandise provided to the influencer to promote on their social media pages is taxable. They may also show up on the 1099 form.
Are Influencers Business Owners?
As you now know, if you are an influencer on social media and you make money from your content, you will need to pay taxes on what you receive. Social media content creators and influencers are considered business owners unless what you do on social media is only a hobby. Influencers run businesses, even if it is an irregular or part-time income source.
If you bring in money as an influencer, it is imperative to keep track of what you earn since the United States tax system is a pay-as-you-go system. This means that you will have to pay taxes throughout the year.
Hobby vs. Business
As mentioned earlier, it is very important to distinguish yourself as a business owner or someone who does social media as a hobby. If you choose to declare that your social media is only a hobby, but you receive payments from endorsements or partnerships, you will lose all deductions.
You will also still need to pay taxes on your income because the IRS’s rules for hobby loss are incredibly punitive.
The first thing you will want to do as an influencer is to identify your business entity. If you have not created your business entity, the default classification is an independent contractor or a sole proprietor.
Operating your business as a sole proprietor or independent contractor is an excellent way to get started, but it is not the safest route.
Being a sole proprietor does not provide you with any liability protections, and your personal assets are on the line if someone sues you successfully.
Forming as an LLC
If you are looking for more protection and your business brings in more income, it would be best to form your business as an LLC. With an LLC, you aren’t personally liable for your company’s actions.
This means that your personal assets, such as your bank accounts, cars, and homes, have protection against creditors or any potential lawsuits.
Pass-Through Federal Taxation
An LLC is a pass-through entity, which means that the profits your business generates go directly to the business members without being taxed on the company level. Instead, the members involved in the business pay tax on the profits on their own income tax returns.
Forming as an S Corporation
An S corporation, or an S Corp for short, can also protect your assets. An S Corp also allows pass-through taxation. When you incorporate a business, you will need first to form a C corporation that meets S corporation requirements.
S corporation requirements:
- Electing S Corp status two months and fifteen days after organizing your business
- No more than 100 shareholders in the company
- Limited your owner shares to United States citizens
It is important to note that S corporations must have a board of directors, conduct shareholders’ meetings, and record important company meetings. A significant benefit of forming an S corporation is you have the opportunity to lower your liability for self-employment tax. You can make that characterizing money received from the business as dividends or salary.
Although it may not seem apparent, there are several legitimate deductions you can take as an influencer. Of course, the area you influence can play an essential part in what you can deduct.
As a small business owner, you can write off internet-related expenses such as hosting fees for your website or blog, business software fees, and domain name registration fees. You can also claim a portion of your home internet costs if you work from home.
If you work in a dedicated office away from home, you can write off your entire internet costs.
If you use any special equipment to edit or create your content, you can write them off! This includes any webcams, monitors, wireless routers, laptops, and more.
If you had to purchase any equipment to conduct your business, you might be able to write it off. If you are unsure, it is best to reach out to a reputable tax advisor to help sort your receipts and what you can use as a deduction.
Design, Advertising, and Promotion
A significant key to getting your brand the recognition it needs to reach your target audience is to invest in promotion and design services. If you paid for any assistance related to designing your brand, creating promotional giveaways, or other brand-related costs, you could use that as a tax deduction.
Other Deductible Expenses
There is a long list of things that you can write off that you may or may not know about. For example, did you know that if you hire an accountant to provide you business advice or prepare your tax return, you can write that off as a business expense? You also can write off any business meeting minutes and writing equipment.
Track Your Income and Expenses
The best way to navigate your taxes and to ensure that you don’t receive an audit is to track your expenses and income over the year correctly.
There are several different applications that you can add to your phone to track your income and your write-offs as they happen.
It is always best to keep track of any credit card, debit card, or cash transactions just in case your business does receive an audit request from the IRS.
What Is Tax Compliance?
As an influencer, you may or may not be aware of tax compliance. Tax compliance refers to ensuring that you and your business comply with international, state, and federal tax laws promptly.
While you’re busy creating exciting and fresh content for your followers, you may miss important deadlines, or you may accidentally inaccurately file your documents. Taxes can quickly become complicated depending on where you do business and live.
Certain jurisdictions have different tax liabilities and laws that you must adhere to. Taxes can also become very difficult if you move personally or your business location.
How to Stay Tax Compliant
As an influencer, you must stay tax compliant, so you don’t find yourself facing penalties or audits. Tax laws often change, which can make it hard to keep up. To stay tax compliant, you can purchase tax compliance software, or you can reach out to a reputable tax advisor to help you stay up to date.
Can I File an Extension?
Gathering all the information you need to file your return correctly can take time, especially if you have several items you wish to deduct. If you need to file an extension, you must file IRS form 7004.
You can e-file the document online at your own computer, or you can have your tax advisor file that on your behalf. This extension will provide you with at least six more months to get your documents in order.
Reduce Your Influencer Tax Liabilities
Regardless of whether you are a well-known influencer on Instagram or TikTok, it is imperative that you keep track of all your business spending and the income your business makes.
Forming your business into an LLC or an S Corp can come with many great benefits, especially if you want to protect your own personal assets.
If you are unsure how to form your business or need more information on other possible business deductions, check out our blog. We have tons of information you can review to help reduce your tax liability so you can continue to do what you love to do!