With more than 165 million creators joining the creator economy since 2020, it’s no surprise that more and more people are shifting to creative work. Who wouldn’t want flexible hours, a six-figure income, and endorsements with top brands? While many opportunities come with being a content creator and influencer, keeping track of your business income and expenses is critical when filing your taxes for the year. Like everyone else, influencers and content creators must file taxes and report their taxable income every year.
As inflation rates continue to increase, the Internal Revenue Service (IRS) announced that they would provide tax inflation adjustments for the 2023 tax year. With the inflation adjustments being some of the largest adjustments in history, dozens of tax provisions have changed significantly – including adjustments that may affect influencers and content creators.
So what does this mean for you? If you’re a content creator, influencer, or freelancer and earn more than $600, then you are also considered an independent contractor or 1099 employee. This means you must file a tax form or Form 1099 with the IRS for each payee you work with.
Below, I will walk you through several provisions that social media influencers should be aware of when discussing your tax return with a tax professional or CPA to help with tax preparation and strategy.
Standard Deduction Changes and Itemized Deductions
You can either take the standard deduction or itemized deduction on your personal tax return. Typically, you’ll take whichever is higher. The standard deduction is one flat number depending on if you file your tax return as married or single – that’s $25,900 if you are married or $12,950 if you are single.
This means your itemized tax deductions must be greater than those numbers to take the itemized deduction. The significant itemized deductions are medical, state, and local taxes (property and income taxes), but that’s capped at $10,000. Then mortgage interest and charitable contributions are the big ones.
Simply put, if you do not own a home, you generally won’t itemize since tax reform. As for deductions, it’s important to distinguish itemized tax deductions vs. deductions for your write-offs. This is one area where content creators get confused, so don’t throw those out the window just yet. Those do matter, and we will use them on your business tax return or schedule C (sole proprietor).
This year standard deduction increased by 3%, and the IRS follows the Consumer Price Index (CPI) to determine rates. The CPI tracks a myriad of items that may or may not be relevant to how clients spend their income. In recent years, influencers and creators may claim significant adjustments on itemized deductions that will exceed standard income in reducing taxable income.
Itemized deductions include personal activities such as mortgage interest, property taxes, sales taxes, charitable contributions, and medical expenses. It’s safe to admit that 2022 was a tough year for many – prices shot up everywhere, and the tax provisions may not necessarily reflect it. Itemized deductions are a good way to help push down taxable income in any tax year, especially in years with high inflation adjustments.
Regardless of any tax situation, it is vital to be aware of recordkeeping requirements, including tax information. Always keep a clean book of organized revenues and expenses. Both should be supported by proper invoices, receipts, and copies of bank statements. It’s a great way to keep track of your business expenses and financials (whether you’re a sole proprietor or business owner with an LLC)! Now that the IRS has been tasked to hire 87,000 agents, there is no better time to keep records.
Personal Expenses and Exemptions
There are no personal exemptions for taxpayers due to TCJA tax laws still being in effect. This means it’s important to separate personal and business activity or discuss your expenses with a tax professional or CPA. Deciding what is considered a tax write-off or what can be prorated on business tax returns is crucial. You always want to be mindful of what is appropriate to deduct as both itemized deductions and deductions for a small business.
Overall the marginal tax rates brackets shifted up. This means more income is taxed at lower rates. More income is subject to tax at lower marginal rates. Most clients will be subject to lower taxes as a result of the new inflation-adjusted tax rates for 2023. So finally, we are getting a hand from the government. This is a result of tax brackets being higher even though most companies aren’t compensating for inflation-adjusted rates.
Medical expenses are a significant concern for influencers and content creators, there are some changes for 2023 in one particular area of Medical Savings Accountants. Tax-saving vehicles such as Health Savings Accounts (HSAs) are used to pay for “qualified medical expenses” using a “high deductible health plan”. In my experience, HSAs are the best type of tax-preferred account. HSAs have the advantage of being a triple-tax benefit account. They enjoy tax-free contributions (which are deductible), tax-free growth (interest and earnings can grow tax-free), and tax-free withdrawals for qualified health expenses. HSAs can be a useful tool to build over time for the future or immediately for a cheaper dollar-to-dollar payment of current medical expenses due to effectively paying less (tax-free contributions and tax-free withdrawals).
For 2023, there was a $200 increase from $3,650 in 2022 to $3,850 in 2023 for all individuals or taxpayers. For family coverage, the maximum contribution is $7,750 (up from $7,300 in 2022). The catch-up contributions for those over age 55 remain at $1,000.
Retirement planning is another area of significant concern for influencers and creators. For 2023, $22,500 is the amount that individuals can contribute to Sec. 401(k) plans, up from $20,500 for 2022. The limit on annual contributions to an IRA (Roth or Traditional) increased to $6,500, up from $6,000.
A Simplified Employee Pension Plan (or SEP) IRA is the best option because it is relatively easy to set up and administer with most large brokers. A SEP plan allows employers to contribute to traditional IRAs (SEP-IRAs) that are set up for employees. A business of any size, even self-employed, can establish a SEP. This means your contributions are deductible to the full extent.
You can deduct your contributions and your employees can exclude these contributions from their gross income. SEP contributions are not subject to federal income tax withholding, social security, Medicare tax, and federal unemployment (FUTA) taxes.
SEP IRAs are limited annually to $66,000 for 2023 ($61,000 for 2022) or 25% compensation. The deadline for setting up a SEP IRA is April 15 or your business' tax-filing deadline, including extensions.
Gift Taxes and Taxable Gifts
Annual gift tax exclusions increased to $17,000, allowing you to give anything up to that amount tax-free. Anything that exceeds that amount must be reported and is subject to an almost $12.92M individual limitation. However, for content creators and influencers who receive gifts instead of giving to individuals more personally, the gifts you receive may be taxable under various circumstances and facts.
Taxes will change yearly, and even small shifts like inflation can affect your bottom line. Knowing that you can increase your retirement contribution by $500 a year, will become $50,000 in 30 years for taking small, simple actions. The same goes for the HSA and having an extra $200 limit. If you have more questions or are looking for more advanced strategies, feel free to email us at email@example.com. If you'd like to schedule a consultation with us, you can do so through this link. Creators who are coming from Lumanu can enjoy 15% off their next consultation.
About Tony Hoong, The CPA Dude, Founder & CEO
Tony has years of experience working for Big Four accounting firms and advising top-tier companies. He earned his Accounting and Management Information Systems degree at the University of Minnesota’s business school; and shortly after obtained his license as a Certified Public Accountant. When Tony isn’t elbow-deep in tax returns, you can find him in the Bay Area lifting weights, bullet journaling, and keeping up with the latest tech gadgets.