The IRS and state departments of taxation have started to crackdown on unreported income from digital content creators. As the tax laws applicable to these individuals are often complex and not well understood by those operating within those areas, audits of those taxpayers often result in significant revenue generation, making it worthwhile for the federal and state governments to pursue. In this installment of Tax Talk, we take a closer look at tax considerations for digital content creators.
The Growing IRS Focus on Digital Creators
For IRS purposes, an influencer is an individual monetizing digital following through (1) platform payouts and ad revenue; (2) brand sponsorships and partners; (3) affiliate marketing commissions; (4) merchandise and digital products; (5) subscriptions and memberships; and (6) speaking and appearance fees. In an IRS audit, there are three critical areas where the IRS or state agency will audit (1) whether the influencer is engaging in a trade or business or being an influencer as a hobby; (2) whether the influencer is an employee or independent contractor; and (3) whether the influencer is conducting a combined business or conducting separate ventures.
The Importance of Recordkeeping
The bottom line is that the IRS and state tax agencies are generally skeptical about influencers’ deductions because there is a concern that influencers may be disguising personal vacation expenses as tax-deductible business expenses, or improperly deducting wardrobe costs, or deducting home office expenses that were personal in nature and turning personal meals into deductible business expenses. The IRS and state tax agencies alike will be successful in challenging these deductions unless the influencer maintains appropriate documentation and records establishing that all their deductions are business expenses and therefore deductible.
Social Media as an Audit Tool
Make no mistake that the IRS will also be scrutinizing the income reported by influencers. The IRS will be looking at the influencer’s social media profile to determine whether the lifestyle that is portrayed in the profile is properly reflected on the influencer’s tax return. Just as with the student athletes discussed in our first installment, cash is not the only thing that results in income. The influencer must report the FMV of all goods and services received in connection with its influencer business. Many influencers run into problems because they receive free products from companies or all expenses paid trips to hotels in exchange for a few posts about the product or hotel. These items are taxable and if the FMV of these items are not properly reported, the influencer may create significant tax issues for themselves.
When to Seek Professional Guidance
In conclusion, it is imperative that digital content creators consider the financial and tax implications of running their respective businesses and select the appropriate business structure to suit their needs. Mistake of law is never a defense in the course of a civil tax audit and if the IRS feels that a taxpayer has willfully failed to report income to the IRS or inflated its tax deductions, these taxpayers could find themselves facing criminal charges for tax fraud in addition to being slapped with civil liabilities.
For more information, or to seek counsel from our Taxation practice group, please reach out to request a consultation or call us at 216-696-1422.
