DISCLAIMER
The information below only applies to filers that are U.S. residents preparing U.S. tax returns. Nonresident aliens filing U.S. tax returns should consult a tax professional knowledgeable about international taxes. We are not tax attorneys or accountants and we are not providing legal advice. There is no attorney-client or confidential relationship that is formed by this article. While research was done to provide this information, make sure you consult a certified/licensed tax professional if you have questions about your own filings. We are simply offering information to help that consultation go a little more smoothly.
Death and Taxes
If there is one thing that just about everyone can relate to, it’s taxes. After all, if you believe Benjamin Franklin, death and taxes are the only certainties in life. For some, the thought of filing a tax return can be as scary as dying, especially if you are self-employed as a streamer and content creator. Luckily, everyone gets a few extra days this year because April 15th fell on a Friday. Still, the April 18th filing deadline is coming sooner than you think so here are a few tips to help make your tax return preparation a little easier:
Tip #1 – File your taxes!
Without a doubt, the biggest mistake you can make with regards to taxes is not filing a tax return. Aside from the very real, and very scary, potential consequences of not filing (i.e. interest, penalties, audits, collections, jail), there are some advantages to reporting your income to the Internal Revenue Service (IRS). For example, if you want to take advantage of applicable tax credits, like the Earned Income Tax Credit or the American Opportunity Tax Credit, you must file a tax return. As self-employed individuals (more on this later), you also will not receive credit towards Social Security retirement and disability benefits unless you report your earned income.
After all, the IRS already has some idea of how much money you made over the year – they received a copy of every Form 1099 that you were given by Twitch, YouTube, PayPal, etc. If you earned salary/wages outside of streaming as an employee and got a Form W-2, it doesn’t mean you’re off the hook. It is still important to disclose any and all income you received from streaming and content creation. Underreporting your income can be just as serious as not reporting income at all. You will still be penalized for any tax owed on the unreported income. That brings us to tip #2: save money so you’re able to pay your taxes!
Tip #2 – Save for your taxes!
As self-employed individuals, it is your responsibility to plan for your tax payments. If you’ve received paychecks from other jobs before, you may have noticed that a lot of money was being withheld each time for income, Social Security, and Medicare taxes. Twitch, YouTube, and PayPal may not withhold money from their payments to you for tax purposes, but that doesn’t mean you don’t owe them. In reality, the opposite is more accurate – you have to pay more taxes now that you’re working for yourself.
The percentage of income tax you pay depends on the amount of income you earned and the tax bracket you’re in. On the other hand, Social Security and Medicare taxes, also known as self-employment taxes or FICA taxes, are a fixed percentage (up to a certain limit). If you were an employee, your employer would pay half of the FICA taxes for you and take money out of your paycheck to pay the other half. As independent contractors rather than employees, you are responsible for paying the entire amount by yourself: 15.3% for 2015. Sadly, that is in addition to any income tax you may owe. To complicate things more, you are supposed to make quarterly payments based on your estimated income and self-employment tax liability because an employer is not withholding these taxes on your behalf. Again, it is important that you make these quarterly payments and that you don’t underpay – interest and penalties apply here too. For that reason, it’s a good idea to set aside money periodically for your estimated quarterly payments.
Fortunately, there are some things you can do to make the tax bite a little less painful. As business owners, your income is tied to the amount of taxable profit that your business made. Any business expense you can legally deduct will reduce the amount of taxable profit that passes through to your personal income. So, tip #3 is to minimize your taxes by taking all legitimate tax deductions possible including business expenses and personal deductions.
Tip #3 – Minimize your taxes!
At this point, you may be tempted to deduct anything and everything. After all, the more expenses you have, the less profit you earned which means the less taxes you have to pay. However, the key is to make sure your expenses and deductions are justifiable and substantiated. The recurring theme here is that the IRS doesn’t look kindly on misconduct, intentional or not, and the last thing you want is an audit. So, just what are some legitimate expenses? A good place to look is in Part II of Schedule C (Profit or Loss From Business), which must be filed with your Form 1040 tax return.
These categories will give you a good idea of the items that may be considered a legitimate business expense. For example, the cost of your airplane ticket to PAX could be included in Line 24(a) as a Travel expense, along with your hotel bill, Uber fares, etc. Did you host a meetup with subs/viewers at the convention? If you treated them, part of that bill may be expensed under the Deductible meals and entertainment category. Any new streaming equipment you purchased can be deductible (it may need to be depreciated) and, if you financed the purchase, any interest paid may be deducted too. For rent/mortgage payments and utilities, you can deduct a percentage based on how much is used exclusively for business purposes. Don’t forget about any advertising or promotional expenses you may have had like business cards and giveaways. Subscriptions and membership fees are considered legitimate expenses too as long as they help you do your job. Similarly, fees from PayPal or other payment processors are allowable expenses as part of the cost of operating your business.
As you can see, there are a lot of costs involved with streaming and creating content that could be considered legitimate business deductions. Again, remember that the key is to make sure your expenses are justifiable and substantiated so it is essential that you keep good records. Get in the habit of saving receipts and writing down notes for expenses, especially for travel and entertainment expenses. Who did you see? What did you talk about? How was it related to your business? Good note keeping is not only a great practice to help with follow-up communication and developing relationships; it also provides a record should the IRS ever question you about your expenses.
Besides the business expenses you’re allowed to take, there are personal deductions available too. “Above-the-line” deductions like interest paid on student loans, contributions to certain retirement plans or health savings accounts, and moving expenses all directly reduce your gross income just like your business expenses. Did you donate to Extra Life or St. Jude? Charitable contributions can help reduce your personal income tax as an itemized deduction and they’re just one of numerous possible deductions. Sure, taxes can be very complicated, but the process gets easier if you’re prepared. The final tip, then, is to plan for your taxes!
Tip #4 – Plan for your taxes!
As you can imagine, filing taxes might consume a lot of time and energy. So, it’s best to get started early in your tax preparation. If you’re new to streaming and it’s your first time filing as a self-employed individual, there will be a bit of learning involved. Still, you can simplify the whole ordeal if you have the right habits in place, and that applies to both first-time and frequent filers. Try recording all your expenses on a weekly or monthly basis. Find a way to keep all your receipts, records, and tax forms organized – that will save time when it comes to preparing your return once April rolls around. You don’t want to run out of time and end up filing late or not filing at all. Again, the IRS knows how much money you’ve made and you don’t want them to file a substitute return for you. If that happens, you may not get all the deductions you’re entitled to meaning you could be hit with a tax liability larger than what you really owe.
Planning for your taxes should also include finding a good CPA, tax attorney, or tax preparer. This is particularly true if you aren’t comfortable dealing with taxes on your own or just don’t have the time. Their services may not be cheap but a knowledgeable professional can be well worth the price – plus, it’s a deductible expense! You may have to explain what you do as a streamer/content creator but that is part of working in an emerging industry. Once he or she is more familiar with your job, a proficient tax preparer should be able to help you reduce the amount of taxes you need to pay while staying in the good graces of the IRS. If you’ve established yourself in this field, you may even consider forming a separate legal entity to help with tax planning. Things only get more complicated from there but you would have opportunities to reduce your tax liability even further with the help of an experienced tax professional.
Hopefully, these few, basic tips can clear even just the smallest bit of fog around tax preparation. The tax laws in America are unnecessarily complex but until a better tax code is in place, it is something everybody must deal with. Fortunately, that means you’re not alone and there are resources available to assist you as you prepare your return. Just remember to file your taxes, save for your taxes, minimize your taxes, and plan for your taxes. After all, you’ll have to do repeat the process all over again next year but if you kept these tips in mind, it should only get easier.
BIO
In addition to being an avid Twitch viewer and community member, Joel earned his Juris Doctor degree and is currently studying for the bar exam in order to become a licensed attorney. While in law school, he focused his studies on business law and tax law. Prior to law school, Joel worked in the financial services industry helping clients with insurance and investment planning. Currently, he also helps run a small business as the corporate officer where he manages the business’ accounting and legal needs. Joel hopes to be able to provide legal and financial services to streamers and content creators in the near future and is working towards that end. He can be found at twitter.com/ShengST27
Additional Resources:
Here is a small collection of helpful articles that provide some more information regarding taxes, filing them, and deductible expenses:
http://www.nolo.com/legal-encyclopedia/how-sole-proprietors-are-taxed-30292.html
http://www.investopedia.com/articles/tax/09/self-employed-avoid-tax-penalties.asp
http://www.nolo.com/legal-encyclopedia/top-tax-deductions-small-business-30176.html
