Are the Donations I Receive from Online Streaming Taxable?
Did you know that if you are a US citizen and you are earning any income from streaming you might be on the responsible for paying taxes on the donations you receive? Despite their misleading name, donations are not tax free like the kinds of donations you give to a charity. They are taxable income!
Streamers are self-employed earners. That is one of the beauties of your online streaming job. There is no one to tell you what to do or when to do it. You also get to take home whatever income you generate. However, there is one downside that you do not want to overlook. As a self-employed earner, the IRS considers you both an employer and employee. You and your business are one and the same in the eyes of the IRS.
You may have noticed in the past, that when you get a check from an employer, there is some money withheld for taxes. This is not case when you are self-employed. It is your responsibility to pay the taxes out of your gross income, including Social security and Medicare tax.
Social Security and Medicare taxes are separate from income taxes so it can be quite the surprise to realize you owe 15.3% more than you thought you would. This means that as a online streamer you will have to set aside some extra money from your income.
This one should be more familiar to you if you have worked for someone else before. Your income tax is the one that everyone talks about when they are talking about paying taxes. It is what you see withheld from your paycheck and it can hurt!
The US tax system is progressive, meaning the more you earn the more you pay. That is generally a good thing! You pay your marginal rate for each bracket that you go through meaning that if you are single and earn $100k you are not paying 28% taxes on everything you earn. You would pay 10% in taxes on your first $9,275 ($927.50), 15% on income up to $37,650 ($4,256.25), 25% up to $91,150 total ($13,374.75), and 28% up to $100k ($2,477.75). You would pay $21,036.25 in total taxes or 21% 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 would 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.
This is the beneficial part of getting income from streaming. You are running a business and you can deduct the ordinary and necessary business expenses which help you generate income. Unless you went through the effort to set up a legal business structure, you are a sole proprietorship which means that you and the business are considered the same entity for tax purposes.
You only pay taxes on your net income. Your net income is your gross income (everything you earned) minus your business expenses.
So now that you have an idea of what you must pay, how do you pay them and when? If you are earning self-employment income you need to pay estimated taxes once a quarter, if you expect to owe more than $1,000 in taxes.
You have to pay estimated taxes only 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 online streaming income. Use the rough rule of thumb that if you made more than $10,000 from online streaming, you will likely be in this camp.
You really do not want to forget this because you want to make sure you have a reserve set aside come tax time. We have found that it’s helpful to set aside more than you expect to pay in taxes so that I always have a buffer.
The IRS has specific dates that they use for estimated tax payments. Your estimated tax 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 would like but quarterly is the minimum requirement.
What Do I Do Now?
You should absolutely use software or some system 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 do not have! It is unlikely but it is still something to keep in mind. It is also a good business practice to track all these kinds of things for later analysis. You would want to track income and expenses for your taxes but those are also perfect comparison points for watching your business grow and seeing if you are becoming more efficient.
Contact LNK Tax Group for a free 20-minute consultation and see how we can help make your life easier.