The number of content creators on social media have ballooned and advertising departments have noticed. Sending their products to creators to evaluate is one of the most cost effective ways to get your name out their to an audience that is willing to listen.
What a lot of new creators fail to address is how to handle these 'gifts' from a tax standpoint. So let's review the rules and IRS regulations that pertain to this subject. Here is an example situation to begin the discussion:
David is a full-time salesman, but in his free time is also a social media content creator. For the past few years, he has been posting his home improvement demonstration videos to social media outlets. He started this activity just for his own enjoyment, but this year one of his videos “went viral” and got the attention of a high-end brand. They sent him a free box of their expensive products and asked him to demonstrate and review the products, which he did. The company then posted his video to their sponsored social media site and sent him a commission check. David expects to continue with this side gig, as he enjoys making the videos and the extra income is certainly welcome. He hopes to be an influencer in the future. So, are the products that David receives taxable? How is the income reported and can he deduct expenses?
To start with, David must include the fair market value of the products he receives in his gross income. How it is reported will depend on whether the activity is considered a hobby or a business.
The law states that income from all sources and in all forms is taxable unless an exception exists. David’s content creator activity is like bartering. That is, he receives products in exchange for services. Although products he received was “free,” it is compensation for providing services to the company, namely his demonstration and promotion of their products. (Note that the products are taxable whether or not David receives a 1099-MISC or other information document.)
The factors used to determine whether an activity is a hobby or a business apply to David's demonstrations and reviews. As with many new activities that start off as side gigs, content creation on social media sites can be an enjoyable activity and a way to make some extra money. It appears that David’s regular job provides most of his income and that he started this activity mostly as a personal interest rather than as a business. On the other hand, he has made money from the activity and it seems as if he intends to increase his involvement with social media content creation.
He needs to understand how these factors affect his activity and the determination as to whether it is a hobby or a business. It is entirely possible that the activity is more of a hobby right now but will grow to be a business in the future.
If David treats the activity as a hobby - he reports the income, including the FMV of the products he receives, on line 8j (activity not engaged in for profit) of Schedule 1 (Form 1040). Hobby expenses are not deductible at this time.
On the other hand, if David treats the activity as a business, he reports the income on Schedule C (sole-proprietorship) and may deduct any ordinary and necessary business expenses. The net income is then also subject to self-employment tax (social security + Medicare) is the net profit is $400 or more.
Future income may include tips received from followers, ad revenue, commissions, and additional products received from brands that advertise on social media sites. This is all considered taxable income.