You’re happily streaming, building that view count, getting tips, maybe even trying for partner! After tons of work and months or years of low viewer count you’re finally turning the corner. You have a core group of dedicated viewers who welcome in first timers and you’re even considering starting your own Discord channel. You take a break and walk out to get your mail… weird, you don’t normally get thick envelopes from the IRS. You’re being audited! Ah crap!
Did you know you’re supposed to pay taxes on the income you make from streaming, even if it’s a side gig? If you’ve got that under control, congrats! You’re way ahead of most streamers. If not, there’s a whole world of things you need to learn but we’ll walk through them bit by bit.
I do have to start with three important notes. First, I’m not an accountant and you shouldn’t assume this article is 100% applicable to your situation. Got it? Good. Second, this is all about the United States. I’d give you advice if I could for the rest of the world but my area of expertise is the US. If you live outside the US, hopefully the whole business tax thing is less confusing! Finally, I’m writing this in 2016. It’s totally possible some of the numbers have changed if you’re reading this in another year.
This may be a bit overwhelming to take in one go so bookmark this and refer back to it when you find yourself able to handle a bit more. The good news is that when you’re just starting out you’re such small fry that there’s a tiny chance that the IRS will audit you. They have much bigger concerns. While you may make a mistake here or there as you’re getting started the sooner you start moving in the right direction the sooner you can feel better about doing it right! Beware: here be numbers and math.
The self-employment tax is the government’s way of making sure you’re still paying for Social Security and Medicare. You may have noticed that on your paychecks from an employer you had a line for FICA deductions. That’s your combined Social Security (6.2%) and Medicare (1.45%) taxes which means you the employee paid a grand total of 7.65% of your income towards those programs. Well guess what? Your employer also paid those taxes.
This is the key thing that most people don’t understand about going out on their own. You’re now responsible for both the employee and employer part of your taxes. That extra 7.65% is your self-employment tax. You pay it in addition to your income taxes so earning income from self-employment can be a little more expensive than earnings from work.
Despite this extra tax, there is a small silver lining. First, your Social Security taxes have a cap. You only pay that tax on your first $118,000 (2016) of income. That number will be $127,000 in 2017. Yeah, that’s a lot of income but it’s better than no cap.
Second, you can take a business deduction for the self-employment taxes that you pay. We’ll get in to deductions in a little bit. The gist of it is you’re able to write off some of the tax. Pro tip: a quick estimate of what income you’ll have to pay the taxes on you can just use 92.35% of your total income. That accounts for the deduction.
Third, these taxes are calculated based net profit. Luckily, that means you can take out pertinent business expenses first before calculating the tax that you owe. That’s actually a huge deal when it comes to reducing taxes and is a major advantage you have as a business owner over an employee.
Other SE Tax Resources
Finally, this is a problem that tons of people face. There are a lot of online resources that can help you with any questions you might have. I’ve linked a few below but a simple Google search will reveal thousands of good articles (please keep reading this one though!)
This is the same thing you have withheld from your paycheck. Check out the chart below for the numbers on it. You need to remember that you pay tax on your marginal rate for every additional dollar you earned. What that means is if you are single and make $50k you’d pay 10% in taxes on your first $9,275 ($927.50), 15% on income up to $37,650 ($4,256.25), and 25% up to the $50k total (3,087.25). You’d pay $8,271 in total taxes or 16.5% for your weighted income tax rate.
If you live in a state with an income tax (most of us do) you also need to add that in. Check with your state to see what rate you’d pay and then do the same calculations we did above. The only trick here is that your state taxes are a deduction for your federal taxes so you need to factor that in. So your formula for state taxes is (100% – Federal tax bracket) x State tax bracket = Effective State bracket.
Paying Estimated Taxes
So now that you have an idea of what you have to pay, how do you pay them and when? Don’t worry, there’s a whole system in place to make sure your taxes get paid. One quick note, if you paid no taxes in the prior year (maybe you were in school) and were a US citizen or resident alien for the full 12 months you don’t have to pay estimated taxes. To double check if you’d meet the criteria to not pay them you should check out the IRS site.
When do you owe estimated taxes?
First, you need to pay estimated taxes when self-employed if you’re expected to owe more than $1,000 in taxes in the year. You have to pay estimated taxes on income that doesn’t have taxes already withheld, so if you’re also working another job that is withholding taxes you only need to worry about your streaming income. Use the rough rule of thumb that if you made more than $10,000 from streaming you’ll likely be in this camp. The IRS has kindly provided form 1040-ES to help you figure out exactly what it is you owe them.
If your full time income is from streaming or other self-employment you will likely be paying estimated taxes. You really don’t want to forget this because you want to make sure you have a reserve set aside come tax time. How much would it suck to need to make a payment of $2,000 and have to scramble around to find that amount? Another 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.
I always have money left over which I then feel free to use. It’s like a nice little bonus for being prudent. As soon as I get my income in the new quarter I start up the reserve again. Just know that you owe the lesser of 90% of the total tax due for the current year or 100% of the tax you paid in the previous year.
So when do you pay your estimated taxes? The IRS has specific, quarterly dates that they use. Here’s the 2016 schedule. If you’re looking at this article from the future then you should probably follow that 1040-ES link to see the updated schedule. Regardless, your payments are going to be due in April, June, September, and January on the 15th, unless the 15th falls on a weekend or holiday. You can make more payments if you’d like but quarterly is the minimum requirement.
You pay taxes on your Adjusted Gross Income, which is where you take sum up all of the money you’ve made (gross income) and subtract out specific deductions. Some of these deductions are extremely important to you as someone running a business. You can find the full list under the “adjustments to income” section of the 1040 tax form.
First, you can deduct your business expenses! There are different rules for different types of expenses. However, this is a major benefit a business has over a regular taxpayer. Imagine if you only paid tax on what was left of your income after you paid rent, ate, paid down debt, and traveled. We’d all have a lot more money because of how much we’d save on taxes.
A really cool thing about running your stream as a business is that you can count things like your internet connection, a portion of your utilities, your home office, travel to events like TwitchCon or tournaments, and even in game items (like Hearthstone packs) as business expenses.
Take a peek at the Schedule C form for a bigger list of items you can count as expenses. Pretty much any equipment you’d buy for your streaming business would qualify to be expenses in the year of purchase under section 179.
Depreciation + Self-Employment Benefits
You also have longer term items that you can depreciate. Depreciation is when you write off a portion of an asset over its useful life. You could depreciate your office furniture and computer if you used them primarily for business. It’s also possible to expense them in the year of purchase. You calculate depreciation by taking the difference between purchase cost and expected sale value and deducting a set proportion over the useful life. If I were depreciating a computer (IRS says useful life is 5 years) that I bought for $3,000 and expect to sell for $500 I could deduct $500 annually ($3000-$500=$2,500/5 years=$500/year). Office furniture is on a 7 year schedule. Practically, you won’t use this unless you end up becoming so big that you buy a property to for your business’ exclusive use.
Second, you can deduct some other items related to being self-employed. Half of your self-employment tax is deductible. Additionally, you deduct any health insurance premiums you paid for yourself, a spouse, or dependents.
Third, take deductions for any contributions you make to a personal retirement account (SEP, SIMPLE, IRA) or a Health Savings Account. If you’re in a position to open one of these accounts and put some money in it that’s a great way to save for your future and you get a current benefit.
You also need to look at whether you should use an itemized deduction (this one’s most likely if you own a home) or the standard deduction (most likely if your expenses are low). Check out the Schedule A form to see what would make sense. You get a better standard deduction if you’re married and you get exemptions for people you support in your household. Even if you’re single with no one you’re supporting that’s still $10k that’ll get knocked off of your taxable income.
Finally, there are also some deductions you can take for being a student or having student loans. If you meet the AGI requirements you can deduct tuition and fees. Also, you can deduct the amount of interest you’ve paid on student loans.
Check out this example tax form I filled out for someone who made $50k from streaming. I hate filling out tax forms so I didn’t give them an incredibly complex life situation. It’s more to give you a sense of what it would look like.
Your TL;DR is $50,000 in income reduced by $5,000 in expenses, $7,242.50 in adjustments to income, and $10,300 in deductions and exemptions. That yields a total tax of $10,593.73 between income and self-employment taxes. If you were paying quarterly in estimated taxes would be $2,648.43. That’s not small change!
It’s more important to focus on growing your stream than to worry about your tax situation. All of what I’ve described in this article is significant. Don’t let understanding it fully get in the way of your day to day work. Professional tax people (not me) do small business tax day in and day out. There are software packages designed to help you manage it. Outsource it and focus on growing your business and reinforcing your unique selling proposition.
It’s unlikely that you’ll be audited. Even so you should spend a little attention on getting your taxes done correctly. Partially for the peace of mind and security and partially because you’ll have a better idea on how your business is running. The higher your income the more benefit you can squeeze out of your tax situation. Focus on that income piece first. Once you’ve made it and are pulling in a comfortable living income then you can look at potential tax savings.
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!