Hello, gamers and social media influencers, the tax man is coming for your earnings. Donations, tips, subscriptions, partnerships, and merchandise revenue you made last year are all taxable income.
And if it’s your minor son or daughter racking in the gains, you could be the one on the tax hook, mom and dad.
“This space is new to the IRS, but they’re aware of it and once they start to crack down, it will be easy to trace the income,” according to Juan Rodriguez, a certified public accountant and founder of Lodgz Financial PLLC. “With many content creators you can see their subscription counts, so the IRS can guesstimate subscriptions and donations, plus it’s public.”
So if you or your child monetizes social media accounts like Twitch, YouTube, Instagram, TikTok, and Twitter, here’s what to know before tax day.
Subscriptions, bits, sponsorships, and partnerships
“Subscriptions, known as subs, and bits are usually how most content creators start to get income,” Rodriguez said. “For example, Twitch has different sub tiers. The more subscribers you have, you will attract the attention of the platform to become a preferred creator.”
Sponsorships and partnerships in the form of live or prerecorded promo messaging and branded merchandise are another form of income generation.
“At 13, my son killed one of the top pros in Fortnite and he became an overnight success, gaining over 100,000 subscribers within a week,” said Chris Spikoski, the co-founder and CEO of the Coalition of Parents in Esports (COPE) and father of gamer Sceptic. “At first the money was from YouTube subscriptions, then Twitch revenue from bits and subs, and when he was 14 years old, he signed on to an e-organization and started receiving a monthly salary.”
Don’t forget donations and tips
Most content creators have an icon on their page where they can accept donations or tips.
“But this isn’t tax free and they need to track and report this income,” said Rodriguez, who educates clients on understanding the business side of gaming, including financial planning and bookkeeping to track tips and donations.
Just like restaurant workers who receive tips, tips and donations received on social media channels have to be reported as income no matter which social media platform you use.
Seek out help from a pro
Twitch has a month delay in payouts to creators, so payments received in January are actually for revenue generated in December the previous year.
“That’s where a CPA comes handy because if creators are filing taxes based on payments from the calendar year, they aren’t accurately reporting,” Rodriguez said. “Instead, they should use the 1099 tax form Twitch sends content creators for income generated from subscriptions, bits, and ads.”
Rodriguez added that taxpayers should also track their income on their own in an accounting software, such as QuickBooks or Xero, to further ensure they’re reporting all income that hit their account during the calendar year.
Another reason content creators should talk to a tax professional is because of the possibility of double income reporting. When you become monetized on Twitch and other platforms, you are invited to complete a form for 1099 tax information and where you want Twitch payouts to go — your bank or PayPal.
“I recommend clients select to receive payouts to their bank account because if you send payouts to PayPal, income from Twitch will be counted as ‘new income’ on PayPal’s 1099 tax form,” Rodriguez said.
Starting this year, PayPal tracks your income once you receive more than $600 in payments and will send you tax form 1099.
“The problem is that Twitch already reported that income on its 1099, so now you have double taxation,” Rodriguez said.
Tips for parents
For gamers and social media influencers who are minors, the responsibility to report this income falls to the parent. Rodriguez serves as a business manager and tax advisor for professional gamers, some as young as 12, 13, and 14 years old.
“Once a child makes $400 from self employment, you have to self-report income and file taxes,” said Rodriguez, noting it's net self-employment income, not gross. “Parents can still claim the minor as a dependent, but the minor still needs to file their own return.”
In Spikoski’s case, his accountant also advised them to set up a business for my son, but with Spikoski and his son’s mother as co-owners. They pay their son as an employee to help with filing taxes.
“I see it all the time during tax season,” Spikoski said, “parents are surprised how much their child made from gaming and that they need to file taxes.”
Editor's note: The article corrects the dollar threshold when PayPal issues a 1099 to $600.
Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda