Did you know that if you’re a US citizen and you’re earning any income from streaming you might be on the hook for taxes? Even if it’s not your full time job. Despite their name, donations are not tax free like the kinds of donations you give to a charity. They’re income! Uncle Sam can be pretty picky when it comes to paying income taxes, so let’s go through some of the tax basics American streamers should know about.
Quick disclaimer- I’m not an accountant and not everything in this article will be 100% applicable to you.
Self Employment Taxes
Streamers are self-employed. That’s one of the beauties of the job: there’s no one to tell you what to do or when to do it. You also get to take home whatever income you generate. It’s pretty sweet. However, there is one downside that you don’t want to overlook. As a sole proprietor (a one gamer shop) the IRS considers you both an employer and employee. Side note: you don’t have to do anything to create a sole proprietorship, just the act of conducting business creates it. You and your business are one and the same in the eyes of the IRS.
You may have noticed that when you get a check from an employer, there’s some money withheld for FICA. That stands for the Federal Insurance Contributions Act and its purpose is to make sure that you’re contributing to Social Security and Medicare. Social Security costs you 6.2% of your take home while Medicare clocks in at 1.45%, for a grand total of 7.65%. Everyone pays this, though once you’re making over $127,200 you don’t pay more Social Security tax, just Medicare.
Unfortunately for you, the streamer, that’s only half of the story. What you don’t see as an employee is that your employer is also on the hook for that 7.65% of your income. So what does that mean? It means you (again, the sole proprietor) owe the employee and employer 7.65% for FICA, or 15.3%. This is a completely separate tax from your income tax, so it can be quite the surprise to realize you owe 15.3% more than you thought you would.
This means that as a streamer you’ll have to set aside some extra money from your income. If you’re using your current paycheck as a guide for the income you need make sure to add in that employer 7.65% or you’ll see yourself falling short.
This one should be more familiar to you if you’ve worked for someone else before. Your income tax is the one that everyone talks about when they’re talking about paying taxes. It’s 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’s 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’re not paying 28% taxes on everything you earn. You’d 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’d pay $21,036.25 in total taxes or 21% for your weighted income tax rate. Not as bad as you thought, huh?
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.
This is the first actually beneficial part of getting income from streaming. You’re running a business! You may not feel like you are, but the IRS insists that it’s so. Don’t argue with them, it doesn’t end well. Unless you actually went through the effort to set up a legal business structure, you’re a sole proprietorship which means that you and the business are considered the same entity for tax purposes.
Ok, so what’s the coolest thing about running a business? You only pay taxes on your net income which is waaaaaaaayyyy better than the deal that your average Joe employee gets. Your net income is your gross income (everything you earned) minus your business expenses. The IRS has a really comprehensive list of things that can count as business expenses that I would recommend reading. Basically, it counts the things that are an ordinary and necessary expense for running your business out of your income before you pay taxes. Imagine if you, the individual, only had to pay taxes on your income after subtracting out the costs of ordinary and necessary expenses for running a human! Goodbye rent, food, internet, etc. We’d all have a lot more in our pockets if we got that kind of tax treatment. Take advantage of it in your business!
So now that you have an idea of what you have to pay, how do you pay them and when? If you’re earning self-employment income you need to pay estimated taxes once a quarter, at least if you expect to owe more than $1,000 in taxes. To double check if you’d meet the criteria to not pay them you should check out the IRS site.
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 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.
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? I’ve found that it’s helpful to set aside more than I expect to pay in taxes so that I always have a buffer. If I do that I end up with a nice bonus I’ve paid myself instead of a tax bill I can’t afford.
The IRS has specific dates that they use. 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.
What Do I Do Now?
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 also 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 totally a 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.