So you’ve read our basics on taxes for streamers article but came away scratching your head. That’s great, you say, but how does it apply to my business? Some of those things seem way too complex for the $100 I’m earning each month! Alternatively, you know that your tax headaches far outstrip the ideas we discussed and you’re really looking to optimize.
Choose your own adventure! The next three sections have a bit more detail based on where you fall in your streaming life. The first section is if you’re just starting out, the second is if you’re transitioning to full time, and the final one is if you’re killing it and running a full time business.
Just Starting Out
You are probably safe to assume that you won’t have to pay any taxes on your earnings. It takes a while to ramp up in this industry so anything you do earn could be reduced to $0, for tax purposes, by your business expenses. Breathe a sigh of relief and don’t worry yet about taxes. Keep your eye on it for sure, but unless you’re earning several thousand dollars you’re probably in the clear.
Even though you shouldn’t have to worry much about taxes you should absolutely use software to track your expenses, just in case you get audited. The last thing you want is to have written off some income because of your business expenses and then have the IRS ask you for proof you don’t have! It’s unlikely but it’s still something to keep in mind. Plus, it’s a good business practice to track all these kinds of things for later analysis. You’d want to track income and expenses for your taxes but those are perfect comparison points for watching your business grow and seeing if you’re becoming more efficient.
To start out you can use something like Excel as a simple documentation tool. If you’re feeling really fancy you can use something like FreshBooks or Xero to keep track of it all and do a lot of the math for you. They have an initial free trial but after that you’d have to pay (but it’s a business expense!). This really boils down to your time. Is it worth your time to do it by hand, struggle through, and learn it front to back or is it better to pay someone a bit to handle it for you? That’s a totally personal choice but either way you should be making the choice to track your income and expenses.
If you are starting to make more income from streaming you can also increase your withholding from your main job to offset potential taxes. You’d have to look at whether or not it made sense but if you do decide to go for it all you need to do is fill out a W-4.
Transitioning to Full Time
If you’re transitioning to full time odds are you’re earning enough from streaming to worry about taxes. Much like those just starting out, you’ll probably get to reduce your taxes significantly with your business expenses. I would actually recommend reading the just starting out section for some good tips. There are a few additional things you can do though.
Since you’re likely to have a lower annual income when starting out you could reduce your withholdings from your paychecks until you leave your job. That will put a little more cash in your pocket but shouldn’t come back to bite you later. The way it would bite you later is if you earned more than expected from streaming and then had a higher tax bill. But let’s be honest, is earning more than expected something to be sad about? Absolutely not!
You should also set up a bank account specifically for holding estimated taxes. Having something separated really makes it easier when the time does come to pay taxes. If you can set this up in an automated way your life will be much easier because you’ll be less tempted to touch the money. To rehash a pro tip from the general taxes article, a rough rule of thumb that I use is I set aside 30% of what I make from self-employment and then when it’s time to calculate my estimated taxes I pull from that reserve. If you do this you won’t find yourself short come tax time and you’ll likely give yourself a nice little pile of cash that you can use on the business or for something to help you de-stress.
Knocking it out of the Park as a Full-Time Business
If you’re earning a good income off of streaming and you’re running it as a business, there’s a good deal you can do to help with taxes. Let’s take a look at paying contractors, paying employees, tax differences by business structure, and retirement accounts. Getting sick of tax forms yet? There’s more to come, sorry.
You have to document what you pay contractors on a 1099 if you pay them over $600 in a year and you have to get them to sign a W-9 before paying them. You do need to make sure they don’t fall under the IRS definition of an employee, and I’d recommend reviewing this article. There are a couple of benefits to hiring independent contractors. First, you don’t have to worry about withholding income from their paychecks. They’re responsible for their own taxes. Second, you don’t need to pay their Social Security or Medicare taxes! This relates back up to the self-employment section of this post, since they’re self-employed they have to cover this as well.
Paying employees comes with more hassles from the tax side, though of course there are other considerations when it comes to hiring a contractor vs an employee. You’re responsible for withholding what the employee elects on their W-4 and you’re responsible for half of the Social Security and Medicare taxes (7.65%). There’s also a 0.9% extra Medicare withholding if you’re paying them more than $200k (single) or $250k (married). If you’re running in to that issue, let me know if you’re hiring! Additionally, you’re responsible for the Federal Unemployment Tax Act taxes which is 6% of the employee’s wages up to $7,000 in income. You may also need to pay state unemployment taxes, so you should check with your state where you are registered. You need to deposit these taxes either monthly or twice a month so it’s possible to fall behind very quickly if you’re not tracking it.
While there are some hassles with paying people to work for you I certainly wouldn’t avoid making a necessary hire (or finding a contractor) just because you’re scared of the tax implications. Any compensation you pay out is a business expense and comes out of your gross income prior to you paying taxes. That’s a big deal. If you’re someone who really prefers skimping on expenses it might help to think of the fact that you’re getting a discount on the services you’re paying for because of that tax break. As with any deduction the value is marginal tax rate * expense. So paying someone $5,000 if you’re in 25% bracket actually only costs you $3,750.
Retirement accounts provide another source of potential tax savings. If you’re earning decent income and keeping your expenses low you certainly should be looking towards the future and saving. Luckily, the tax code encourages that. There are many types of accounts and each one has its own appropriate use, but that’s material for another article. What you need to know is that for your taxes any contribution the business makes to an employee (including you!) is deductible as an expense. You’re limited to deducting the lesser of 25% of income (up to $265,000 in 2016) or the amount actually contributed. There are some specific rules around what someone who is self-employed can contribute to a plan but just think of the possibility. You can put money in your pocket and write that off as a business expense completely legally!
The final tax consideration for your business is the structure. You’re going to have to decide whether you want to file your taxes as a sole proprietorship, a partnership, or an S-corporation. There are other options but unless you’re a large organization planning on going public they’re irrelevant to you. Each has advantage beyond tax considerations, but we’re only going to discuss the tax ones here. All of these entities are taxed on a “pass through” basis which means that for tax purposes you’re essentially taxed on your own tax form. This is unlike a C-corporation where there is a corporate tax and then you the shareholder also pays taxes once you get a distribution.
For a sole proprietorship and a partnership any earnings are taxed to you as self-employment income. That means it’s subject to all of those self-employment taxes we discussed earlier. With a partnership you can, if it’s in the agreement, allocate any gains losses to one partner over the other but the losses are of limited benefit unless you have other income for the losses to reduce. An S-corporation provides an interesting way to legally avoid some self-employment taxes. If the owner is working for the business they have to pay themselves “reasonable compensation” which is a legally gray term. Look at what others providing similar services get paid and pay about that amount.
Since this is a newer industry it can be harder to find those comparison points, which can work both for and against you. That reasonable compensation is subject to self-employment taxes but any additional profits are considered a distribution to a shareholder and therefore not subject to self-employment tax. That’s a 7.65% effective savings! If you profited $50,000 and only half of that was salary you save almost $2,000 in taxes. As you likely can guess, this kind of business structure comes with more tax filing complications and some extra costs so it’s really only worth it if you’re making enough revenue to have that distribution create a significant tax savings. If you’re only making $20,000 don’t go through the hassle!
If you are running a successful business you ABSOLUTELY should either hire someone as a part time accountant or pay for accounting software. You’re busy with other parts of your business and odds are this isn’t your area of expertise so you should delegate it. Something that could take you many stressful hours could instead be done for a reasonable cost in a lot less time. When the business is successful you really should care about protecting your current business as much as you should about growing it in the future. Again, I recommend something like Xero or Freshbooks if you’re looking for a software solution. They aren’t set it and forget it but they do make life a lot easier.
It’s really important to know where you are in your streaming journey before you start worrying a ton about taxes. If you’re just starting out, there’s a bit that you can do to be really on the nose but overall you’re unlikely to need to worry. If you’re transitioning to full time you need to set up systems to handle taxes in the way that least interferes with growing your business. As long as you’re not making the transition at the start of the year you’ll probably not have many tax worries until year 2. If you’re knocking it out of the park as a full time business you’re finally getting to the point where spending some time and effort, or hiring an expert, can really yield major benefits. Don’t skimp in this area because you might be making a mistake that costs you more than it would cost to hire someone to do it for you!
As always, please leave us comments and questions. Want to get better at running your stream like a business? Sign up for our newsletter so you don’t miss a post!