Social Media is a normal and constant part of our lives. In 2019, there will be 2.77 billion social media users; that’s slightly more than one in three people on the planet!* For some social media users, with a large following and with high engagement of those followers, this means big business and potential income. Companies are using social media to market their products to an influencer’s universe of followers. In today’s blog, we’ll discuss how an influencer is taxed on income generated from marketing or selling products on social media.
Before we look at taxation, let’s look at income and how influencers on Twitter, LinkedIn, Instagram, Facebook, Pintrest, and others, actually get paid. There are several ways, but a few include:**
Sponsored posts and blogs – By far, the most common way influencers make money. A brand engages an influencer to create content featuring the brand and to share it with their followers.
Digital products – eBooks, promotional flyers, or co-creating content with brands. Influencers can sell the eBooks to their influencers or get paid by the brand for each click or download.
Selling ad and/or editorial space – A brand may rent space on the influencer’s page to promote an item via a click-through ad or an advertorial article.
Webinars and podcasts- Influencers can charge consumers to access the content, collaborate with a brand to produce the content or use the format for lead generation.
Now, let’s look at taxation. There are many things to consider: federal, state, what forms to use, etc. Below are some of the considerations.
Are influencers employees of the brands they market?
Generally, influencers are independent contractors, not employees. The IRS makes the distinction between employee and independent contractor by looking at the financial and behavioral relationship between the two parties. Since the companies do not dictate how or when influencers should complete a job, nor do they provide the equipment needed to carry out posting of their products, they usually fall under the independent contractor status. This is important because as an independent contractor, you are considered self-employed.
What tax forms will I receive?
Since an influencer is not an employee of the company for which they market products, they will not receive a W-2 for the earnings and taxes will not be withheld on their behalf. An influencer will receive a 1099-MISC if the income he or she receives is over $600. However, if a 1099-MISC was not received, the income is still reportable. If a brand gives influencers a product in exchange for a promotional post on their page, then the value of the product is considered income.
Is social media a hobby or a profit-driven business?
Social media is a hobby to most of us, but if you’re an influencer and are actively seeking to generate a profit, you can deduct expenses to offset your income on Schedule C. If social media is a hobby, Internal Revenue Code Section 183 states permits deductions only to the extent of the related income. See our previous blog about the differences between a hobby and a business.
What expenses can I deduct?
Business expenses must be both ordinary and necessary. To be ordinary, the expense must be accepted in the specific industry. Necessary expenses are helpful and appropriate for your business. These may include traveling expenses, cameras, or props for videos. As a self-employed individual, an influencer can also take an advantage of a Simplified Employee Pension Individual Retirement Account (SEP-IRA) which will help save for your retirement and reduce your taxable income.
What about state taxes?
State taxes are almost inevitable, unless you live in one of the handful of states that do not impose state income taxes. If an influencer provides a service to a company outside of their home state, they may have to file additional non-resident state tax returns depending if certain filing requirements are met. This may be challenging if an influencer is consistently traveling for business to different states.
As you can see, a lot of thought goes into those social media ads you click on. It’s big money for many and the taxing authorities at all levels know it.
If you generate a significant amount of income as a social media influencer, be aware of the tax complexities in your line of work. Working and playing on social media can be lots of fun. Finding yourself on the receiving end of an IRS notice is no fun at all.