Do Influencers Pay Tax On Gifts?
In this article, you will learn:
Working out taxes on your income can be very challenging, especially when accounting for gifts you receive from brands for promotion as a digital influencer.
Receiving gifts such as cash payments, gift cards, free products or services, travel sponsorships, etc from brands in return for promotion on your digital media platforms is typical of the digital influencer business.
Say, you are a YouTube creator who receives a free gadget from a brand for a detailed review to be posted on your channel in return. How will you report this free gadget you receive for reviewing as an influencer? Is this gift taxable? Do influencers pay tax on gifts they receive for promotion? Do influencers pay taxes in the first place?
Well yes, any gifts or compensation having a monetary value that you receive as a YouTuber or a social media influencer is treated as taxable income in the eyes of the IRS. Therefore, any gift or compensation you receive as a digital influencer must be reported in your federal tax returns that you file with the IRS.
To understand why influencers need to pay taxes on gifts they receive for promotion, you first need to know if you as an influencer need to pay taxes on your income.
Also Read: Do YouTubers Need To Pay Tax?
Do Influencers Pay Taxes?
Many digital influencers need to be made aware that the income they earn as an influencer is taxable and must be reported to the IRS.
Digital influencers such as YouTube creators receive payments from Google in the form of royalties, ad revenue, etc. under its YouTube Partner Program (YPP) in return for the content they create for YouTube.
Since they receive these payments not as YouTube employees but as independent content creators as they work for themselves, YouTube creators are self-employed entities in the eyes of the IRS.
You are a self-employed individual according to the IRS if you:
- carry a trade or business as a sole proprietor or as an independent contractor
- are part of a partnership that carries a trade or business
- are a gig worker, an independent contractor, or a part-time business who works for himself
And as self-employed individuals, the monetizing YouTube creators are required to pay two types of taxes:
a. Federal Income Tax
This is the tax that is charged by the IRS on your annual earnings as an individual, corporation, trust, partnership, or any other legal entity.
Federal income tax is levied on all types of income including earnings from business, salaries, wages, commissions, investment income, tips, bonuses, and unearned income such as dividends, interest, royalties, sale of assets at a profit, etc.
Additionally, it is a progressive tax, meaning that the rates of federal income tax increase with the increase in your (or taxpayer’s) taxable income.
The IRS provides the marginal federal income tax rates every year on its website, which are applicable based on the income range or tax bracket your taxable income falls into. You must calculate your taxable income and see the federal income tax brackets to know the federal income tax rate applicable to you.
Further, the IRS requires you to report and pay the federal income tax via various tax forms. Form 1040 is one of the principal forms used to file tax returns and make federal tax payments to the IRS.
b. Self-Employment Tax
If you are a self-employed individual or entity in the eyes of the IRS, you are required to pay self-employment tax along with federal income tax on your earnings.
Self-employment(SE) tax is the self-employed individual’s contribution towards Social Security and Medicare taxes, much like wage earners whose Social Security and Medicare Taxes are withheld by their employers from every wage earner’s earnings.
Since self-employed individuals work for themselves and not an outside entity, they must contribute towards their coverage under the Social Security System by paying SE tax. SE tax is charged at the rate of 15.3% by the IRS, which is bifurcated as follows:
- 12.4% for Social Security Tax (6.2% as employer’s share and 6.2% as employee’s share)
- 2.9% for Medicare Tax (1.45% as employer’s share and 1.45% as employee’s share)
Since there is no employer responsible for withholding Social Security and Medicare taxes from employee earnings, the self-employed independent contractor or gig worker is responsible for contributing both the employer’s and employee’s share of Social Security and Medicare taxes. However, the self-employed individual can claim the employer’s SE tax share as a deduction at the time of filing a return with the IRS.
Do Influencers Pay Tax On Gifts?
Yes, digital influencers receiving gifts such as free products for review, sponsored travel, cash payments, etc are required to report such gifts in their tax returns as these are treated as taxable income by the IRS. That is, the value of these gifts will be included while calculating taxable income on which federal income tax and self-employment tax rates will be applied to know the amount of tax payable by self-employed digital influencers.
But As A Digital Influencer, How Should I Report Gifts In My Tax Return?
Let’s say you are a US-based monetizing YouTube content creator who is part of the YouTube Partner Program. Accordingly, you receive both royalty payments and AdSense income from Google as part of YPP.
Since you are an independent content creator, you receive payments from Google as an independent creator and not as an employee of Google, for which Google will use various 1099 forms to report such payments to the IRS.
As per the IRS, any individual or entity making payments during the calendar as part of its trade or business is required to report such payments by filing information returns to the IRS.
As Google pays you for content creation, it is liable to report such payments to the IRS using various 1099 forms, the copy of which it will send you in your Google AdSense. You as a YouTuber can download the 1099 form you receive from Google and use the payment information contained in this form for filing your tax returns as an independent digital content creator.
Thus, Google is responsible for reporting payments it makes to you as a YouTuber with the IRS via 1099 forms. You can simply check with your Google 1099 form to know the amount of earnings to calculate your taxable income at the time of your annual tax return filing with the IRS.
Which 1099 Forms Can I Receive As A Digital Influencer?
If you are a monetizing YouTube creator, you can receive any of the following YouTube 1099 forms, depending on the type of payments Google makes to you.
1099-MISC is used to report miscellaneous income like royalties, rent paid, or payments made to an attorney. Before 2022, form 1099-MISC was used to report payments made to independent contractors. But post 2020, 1099-NEC is used to report payments made to independent workers for services they offer to an individual or entity.
You are an independent worker if you earn income via content creation on your YouTube channel. Accordingly, you will receive a 1099-NEC form from Google. 1099-NEC or 1099 Non-Employee Compensation form, as the name suggests, is the tax form that is used by an individual or an entity to report payments it makes to independent contractors, gig workers, etc as a part of its trade or business during a calendar year.
Since Google pays you as an independent content creator, it will report all such payments in the form 1099-NEC and file the information return with the IRS. It will also send you a copy of your 1099-NEC, which you can download from the ‘Payments’ section of your Google AdSense account.
To help you understand how the value of your gifts is considered taxable income, let’s look at the definition of Non-Employee Compensation.
What is Non-Employee Compensation?
Non-employee Compensation (NEC) is the amount that is paid by an individual or entity as part of its business or trade to people who are not its employees. The amount paid could include:
- Professional service fee or referral fee
- Travel reimbursement
- Travel fringe benefits to nonemployees
- Payments to nonemployee entertainers for their services
- Expenses incurred for the use of entertainment facility by nonemployees, etc.
Since gifts such as travel sponsorships, cash payments, gift cards, and free products are given by brands in exchange for your services to promote them on your platform as a digital influencer, the value of these gifts forms part of your taxable income.
Also, an individual or an entity making payments during a calendar year to people who provide services as nonemployees to such an individual or entity will report these payments as NEC only if the following conditions are met. The individual or entity made payments:
- to someone who is not its employee
- as part of its trade or business during a calendar year
- to an individual, partnership, corporation, or estate
- of at least $600 to someone during the calendar year
How To Determine the Value of Gifts For Taxable Income?
Let’s first understand the definition of gift to determine how to establish the value of gifts received from brands by digital influencers to be included in the influencers’ taxable income.
A gift is the giving of money or property or the use of income from property without expecting something of equal value in return. For instance, a brand may give a free product for review to a digital influencer. Thus, the digital influencer would receive the product for free, that is without paying the monetary value of the product to the brand.
So, how will the influencer report such a gift?
The digital influencer must first determine the Fair Market Value of the non-cash gifts such as free products, services, gift cards, etc, and consider the same as part of his taxable income.
Where influencers receive gifts such as cash payments, sponsorships, endorsements, or travel trips, the value of such gifts can be included in the taxable income of the influencer.
But in the case of non-cash gifts, FMV must be taken and treated as part of the taxable income of the influencer.
What is Fair Market Value?
Fair Market Value (FMV) is the value of the property that exchanges hands between the willing buyer and the willing seller when none out of the two are forced to buy or to sell and both know all the appropriate facts.
If you are a YouTuber who accepts payment cards from people paying you for channel membership, Super Chats, Super Sticker, etc, Google will send you form 1099-K. Form 1099-K reports payments you receive during the calendar year from a Payment Settlement Entity (PSE), Google in the case of a monetizing YouTuber, in the settlement of payment card transactions.