How do influencers pay taxes? 4 steps to conquer tax season as a self-employed social-media creator
- At many jobs, a portion of your income is automatically deducted from your paycheck for taxes.
- But when you work for yourself, you are responsible for deducting this amount out and for keeping track of every dollar you earn.
- Social-media influencers often work for themselves and have to pay self-employment taxes.
- Business Insider spoke to the head of tax at Betterment, a firm that offers digital investing advice, along with several influencers across Instagram and YouTube, on their tax-season tips.
- They broke down four steps for conquering tax season as a social-media creator.
- Click here for more BI Prime stories.
18-year-old tech YouTube creator Jacklyn Dallas keeps track of her finances on a spreadsheet she created to document all her sources of income.
Dallas, who runs the YouTube channel NothingButTech (125,000 subscribers), earns revenue several different ways: directly from Google-placed ads on her YouTube videos (called AdSense), promoting brands online, and selling merchandise.
The spreadsheet is a useful way for Dallas to see the total amount she's earning versus what she's spending. But that's not the only reason Dallas keeps it. Like many social-media influencers, Dallas is self-employed, which means she has to navigate a more complicated tax situation than workers who get a straightforward W2 form.
At many jobs, a portion of your income is automatically deducted from your paycheck for taxes. But influencers like Dallas are responsible for deducting this amount out and keeping track of every dollar they earn, as well as business expenses they incur, to know how much to pay the government.
Dallas doesn't want to cut it close.
"I always save more than I think I will actually need so I can pay my taxes without stress," she told Business Insider.
But other self-employed people can get caught off-guard, especially because beyond having to keep track of money to pay their federal and state taxes, people who work for themselves have to pay an additional tax.
"When you are self employed, in addition to paying your regular federal taxes, state, and local taxes, you also have to pay self employment taxes," said Eric Bronnenkant, the head of tax at Betterment, a firm that offers digital investing advice.
Business Insider spoke to Bronnenkant - as well as several influencers who create content for YouTube and Instagram- who broke down four steps for conquering tax season as a social-media creator.
Below is a breakdown of four steps for successfully navigating tax season as an influencer.
1. Do your research
When you work for yourself, you are responsible for withholding a portion of what you earn for taxes.
Figuring out how much to withhold can seem intimidating if you've never worked for yourself before.
Bronnenkant recommended reading up on the basics of self employment and he said the IRS has some resources for free online.
You have to declare all of your income to the IRS and that includes compensation for services, like if someone sent you a product in exchange for promotion in a YouTube video, he said. The IRS doesn't differentiate between cash and non-cash compensation, and while some websites recommend only reporting gifts or payment over $100, he recommended reporting all income no matter the price point.
Do your research ahead of time by looking at all of your sources of income, both cash-based and non-cash based, he said.
"Some people might receive a vacation, or handbags - there's a whole variety of different ways someone can get compensated, and the IRS looks at all of that and puts it all in the self employment bucket," he said. "There's a specific exclusion for gifts - let's say my mom gives me $100 for my birthday. She's doing that out of the generosity of her own heart. She's not expecting anything in return, so that's why I wouldn't report that as income."
2. Keep track of both your income and expenses
Keeping track of your income and expenses is important, especially when you work for yourself.
Know your income streams, like payment for promoting a brand, checks from YouTube, or revenue from selling a consumer product.
As you track your monthly income, you should also be keeping track of your expenses - and especially your business expenses, like what marketing tools you are paying for and equipment, Bronnenkant said.
"For some people, a simple Excel spreadsheet could be sufficient to keep track of one tab for all of your income, one tab for all of your expenses, one tab for your estimated tax payments," he said. "It doesn't even require special software to do it depending on your situation."
There are also some software programs that can help with keeping track of expenses, like Quickbooks, H&R Block, or TurboTax.
Audree Kate Lopez, a fashion stylist, consultant, and social-media influencer (29,000 Instagram followers), told Business Insider that she uses Quickbooks to document her invoices, income, and expenses.
"All of my bank accounts are linked to it as well to help with expenses," Lopez said. "In addition to Quickbooks, I have separate spreadsheets to track my business expenses - to make sure everything balances in my accounts and Quickbooks - and vendor payouts. I find it helpful to have the spreadsheets as an additional resource to make sure everything is correct in the software each month."
3. Create a system and know how much you should be saving
Self-employed people generally have to pay taxes in quarterly estimated payments based on income in that quarter, minus expenses, Bronnenkant said. Sending quarterly estimated payments will help you avoid an underpayment penalty.
Every time YouTube creator Morgan Yates (313,000 subscribers) gets paid, she moves a percentage of that revenue straight into a separate bank account, so that it's immediately out of sight, she told Business Insider.
Her dad is an accountant and he helps with her taxes, she said. Since she doesn't have an employer selecting a retirement program to opt into, she instead set up her own account through the investment company Vanguard in about five minutes online, she said.
YouTube creator and podcaster Katy Bellotte (471,000 YouTube subscribers) noted in a previous interview with Business Insider that she pays her taxes quarterly and saves 40% of every sponsorship paycheck she receives for taxes.
4. Know what you can deduct
The IRS doesn't specify what you can deduct, Bronnenkant said, but that's because the rules were designed to be flexible depending on your situation.
Knowing what you can deduct (like marketing tools or equipment) can help you save money, and further expand your business.
"In general, they say: You are able to deduct your ordinary and necessary expenses in running your business," he said. "These rules came out long before Google AdWords existed, but that doesn't mean you can't deduct the cost of promotion and other marketing expenses."
Jade Darmawangsa, an 18-year-old YouTube creator and entrepreneur who runs a YouTube channel with 300,000 subscribers, uses the Dropbox app to scan all of her business documents and receipts, as a way to keep track of her expenses and what she will be deducting for her business. Then she transfers those files to her certified public accountant instantly to avoid any issues if the IRS were to audit her account, she said.
Bronnenkant said an influencer may also want to seek professional help by planning an appointment with a local tax expert.
For more on the business of influencers, according to YouTube stars, check out these Business Insider Prime posts:
A 22-year-old beauty YouTuber explains the main ways she makes money, from a merchandise line to a makeup palette with Tarte Cosmetics: Adelaine Morin runs a popular beauty and fashion channel on YouTube. She took us inside her influencer business and merchandise line with FanJoy.
CRASH COURSE: A YouTube influencer explains how creators get paid, her advice for making more money, and how much she earns: Natalie Barbu breaks down how she earns money as a YouTube creator and her strategy for maximizing her earnings on the platform.
A recent college grad living in New York says she makes a 6-figure income as a YouTube influencer. She broke down how she does it: YouTube creator and entrepreneur Ruby Asabor shared how switching up her YouTube content has helped her earn more money.
The metrics that brands use to measure the success of an influencer-marketing campaign are changing, as 'likes' and 'followers' fall out of favor: We spoke with two influencer-marketing experts about which metrics they expected brands to pay attention to in 2020.