How are Social Media Influencers Taxed? | Influencer Tax
How are social media influencers taxed? First, if you are an influencer, it’s very likely that your employment relationship between you and whatever sponsoring company you’re working with, or endorsing is via an independent contractor relationship. And as an independent contractor, you’ll receive a 1099 at the end of the year, and no taxes are withheld from any kind of compensation that you would receive from the company that you’re working with. As an employee, you would receive a W2, and taxes would be withheld from whatever the regularly scheduled payroll period is. And then, at the end of the year, when you file your taxes, it’s very likely that you won’t have to pay much to whatever state or federal government that you’re working in.
Influencer Taxes and Deductible Income
Now, as an independent contractor, as I said before, no taxes are withheld throughout the year. So, at the end of the year or quarterly, depending upon how you want to do it, you’re going to have to pay self-employment tax, once again, to the state or federal government. A few things I would suggest: one, you need to absolutely meet with an accountant prior to doing any kind of work as an independent contractor influencer. You should create an LLC, get an EIN from the IRS, and get a bank account for that business, run all compensation and expenses through that. That way you can take business expense deductions at the end of the year. I mean, if you’re an influencer, you need to think of yourself as a business. And so, all the things that go into being an influencer, depending upon what type of industry you’re in, you can use for the most part as tax deductions at the end of the year like travel, product, depending upon what you are.
I mean, if you’re in fitness, it could be weightlifting equipment. Collaborations with other sponsors, getting there, expenses paid, all that kind of stuff can be used as deductions at the end of the year. However, as I said before, you need to hook up with a good accountant to figure out how to structure the LLC that you’re going to create and then know for certain what types of deductions you can take at the end of the year. Now, what is the distinction between being an employee and an independent contractor? Well, the IRS lists a 20-factor test that kind of goes through what makes someone an independent contractor versus an employee. Other topics of interest include:
Just a few of them have the control over the influencer, meaning, kind of a full-time working relationship. Do they tell you where to go? How long to work, exactly what to do, and do they offer benefits? So, health, vision, dental, disability, life, insurance, retirement, all those types of things. It’s very unlikely if you’re working as an influencer, that you’re going to have an employment relationship between you and the sponsor. Now, maybe if it’s a very strong relationship and you’re working for them daily. Once again, it kind of depends upon the state that you’re in. But most employment relationships between the sponsor and the influencer are going to be through an independent contractor relationship.
Social Media Influencer Tax Deductions | Influencers Taxes
What are some of the tax deductions that an influencer can take as an independent contractor? As an influencer, it’s very likely that your employment relationship with all the sponsors is going to be that of a 1099 independent contractor. And what that means is, at the end of the year, you’ll be provided with 1099 from the sponsors, and then no taxes will be withheld from your compensation throughout the year. So, you are going to be responsible for the self-employment tax at the end of the year. Now, a smart influencer is first going to talk with an accountant, and then that accountant is going to have you set up an LLC in whatever state that you’re living in.
Influencer Tax Deductible Self Employed Expenses
You’re going to create a bank account with that LLC, and then you’ll have a tax ID number. And by doing that, you can then deduct many of the expenses and things that go into being an influencer. For instance, you could do travel expenses, home office deduction, advertising and marketing, legal fees, travel, whatever industry you’re in, fitness, fishing, or whatever, things like that. A product that you buy to be an influencer in that arena, you can likely deduct that as well. There are dozens of things that you can deduct as an influencer. Now, I’m not a tax attorney or an accountant, I’m just a contract attorney. As I said, I would suggest absolutely reaching out to an accountant that you feel comfortable with, and they can walk you through exactly the things that you can and can’t deduct and then things that you can track throughout the year as well.
Self Employed Expenses and 1099 Social Media Influencers
Does an influencer receive a 1099? So, what is a 1099? If you are classified as an independent contractor, which you likely are if you’re a social media influencer, you’ll receive a 1099, which is a form at the end of the year. And then the compensation received by the influencer from any of the sponsoring companies will have no taxes withheld. At the end of the year or quarterly, which would be preferable, the influencer would need to pay to the government whatever self-employment tax would go with whatever you had been compensated. In a normal kind of professional environment, you would have either employees or independent contractors. An employee would receive a W2 and then their compensation would have taxes taken out of it during the regularly scheduled payroll.
As an influencer, you’re not acting as an employee. You’re acting as an independent contractor. You’re just doing a specific amount of work for a sponsoring company for a specific amount of time. You don’t see most influencer agreements go beyond a year. Most of the time, at most they’ll be 12 months, and then they’ll be renewable by the agreement of both parties. Sometimes it’ll just be an event, so you would just have to show up for a day or for a few hours. And obviously, in that scenario, it’s a very short-term relationship, and being an independent contractor would be the only way to properly classify the influencer. What I would suggest is if you’re an influencer and you haven’t done this before, and you’re uncertain how to handle the tax implications of this, you need to reach out to an accountant preferably close to you.
Tax Implications
I guess it doesn’t really matter nowadays, but someone who has some familiarity with social media influencers and kind of taking tax deductions and that type of thing. What they’ll likely do is they’ll tell you that you need to create an LLC. You need to get a tax ID number from the IRS, which is called an EIN, and then you’ll also need to create a bank account under that LLC. And then you’ll put all compensation and expenses, then run through that bank account so you can easily track the expenses. And then at the end of the year, you can deduct a lot of the things that you need to be an effective influencer. It could be travel costs, lodging, meals, or any type of cost associated with meetings, depending on what type of influence you are.
It could be clothing or different products. There are just a ton of things that you can deduct. And so, ultimately you may come out ahead if you were just kind of classified as an average employee. There are certain tax benefits to being an influencer. It’s a different type of job, as you probably know. And I think the professional environment is kind of evolving as far as how they see influencers and then kind of what the potential tax deductions for them can be. So, does an influencer receive a 1099? Very likely yes. Absolutely, they would. If you have any questions about your independent contractor agreement or influencer agreement, we certainly can help with that.
Is a Social Media Influencer an Employee? | Influencers as Employees
Is an influencer considered an employee? In short, no. An influencer is going to have two types of employment relationships. You will have a contract with your agency, manager, or marketing firm. That’s one contract; you will also have an agreement with the sponsors. And so, I mean, sponsoring companies is a usual way of saying it. Your relationship with these sponsoring companies is that of an independent contractor. A regular employee would receive a W2 at the end of the year. Then they would have income taxes taken out of whatever compensation they would receive. They would get benefits such as health, vision, dental, disability, life, and retirement, all of the benefits of being employed.
However, an influencer is considered an independent contractor. It would receive a 1099 at the end of the year, and no taxes would be taken out or withheld during the entire year. The influencer will be responsible for paying those self-employment taxes at the end of the year. Now, I find this is the dad in me that many influencers don’t understand the income tax implications of being a 1099 independent contractor. And then they get to the end of the year, and they have an enormous tax bill, and they think, oh, well, I’ve spent a lot of that money, and I’m not sure what to do. So, you just need to make sure. I would suggest reaching out to an accountant wherever you live, establishing a relationship with them, and trying to find the best ways to maximize your income tax deductions.
What Happens If You are Working as an Independent Contractor
Now, most of the time, what would happen is an influencer would create an LLC. They’re their own business. They’d get a tax ID number and an EIN from the federal government, and they’d make a bank account. Then they’d run all their compensation and expenses through this account. And that way, they’d be able to deduct several things that go into being an influencer, like travel. Any costs that go with it, depending upon what type of influence you are, equipment, clothes, all that kind of stuff, can potentially be deducted. Still, it needs to be set up correctly.
Now, is there any time when you would be an employee? The answer to that is most likely no. As I said before, if you have an employment relationship with somebody, you are an actual employee. You’re probably working a nine-to-five full-time job/work. Whereas most of the time, as an influencer, you’re just kind of coming in, endorsing a product coming out, or maybe you have a year-long relationship where you’re required to do. If you’re on YouTube, perhaps you’re required to do a 90-second spot once a month for a company. Still, it’s not an ongoing employment relationship. It’s a straight-up independent contractor relationship between the sponsoring company and the influencer. Well, hopefully, that was helpful, and that’s kind of whether influencers are employed. The answer is no. They’re very likely not.
Breaking a Management Contract in the Digital World
Can you break an influencer management contract? One thing that I find kind of gets confused is when someone considers breaking a contract, breaching it, or simply terminating a contract. Let’s go over the difference between the two. Suppose you’ve signed a management contract with an agency or a manager. In that case, a clause in that contract states how the influencer can terminate the agreement, meaning, end it. And for the most part, there are four ways that you can terminate a contract. If it’s for a fixed period and it doesn’t renew, let’s just say it’s a year, either party wants to renew, the contract ends, it’s terminated, and that’s it.
You could terminate it by mutual agreement. At any point, even if there are clauses in the contract that state a certain amount of notice that must be given, you can just say, you know what, it’s not working out. Let’s just move on. If both parties agree, then you can move on. The third way is for cause termination, meaning one party has breached the contract. Let’s just say you’re an influencer, your management company continues to pay you slowly, or they’re not paying you the correct amount. You’d send them written notice they’re in breach of a contract. Then usually, they’d have time to fix that breach.
Why An Influencer Management Contract Attorney is Always Necessary | The Need for Lawyers in Influencer Contracts
The dream of becoming a social media influencer is increasingly common, with a reported 86% of young Americans saying that they want to try their hand at being an influencer. A full 12% say that they already consider themselves an influencer, and 20% say they know someone who is an influencer. With figures like this, it is hardly any wonder that there are lawyers on standby who can help people looking to become social media influencers.
The Pressing Need for Legal Review of Influencer Contracts
There is a pressing and immediate need for the legal review of influencer contracts because of the proliferation of contracts offered to aspiring influencers like yourself. To illustrate this point, take a look at some of the following figures related to the growth of this specific industry over the last few years:
- The total industry value of influencer marketing is set to grow to $16.4 billion by 2022
- 75% of brands say that they indeed put aside at least some money towards brand influencers
- Brands are increasingly paying their influencers in cash. There is about a 50/50 split between influencers who are paid with products and those paid with cash
- The total value of all eCommerce sales influenced by social media is estimated to hit around $958 billion this year (2022)
Influencers see the money they can make in this line of work and are ready to get started. They know that there is a high ceiling as far as what they can potentially earn, and they want to make those dreams a reality. Influencers are looking for their unique niche to develop to build an audience and attract the kind of business sponsorships that will help them earn the kind of living they really want.
Influencers and Attorneys Need to Carefully Review the Contract
Influencer agreements should be reviewed very carefully by the performers and the attorneys they hire to review those contracts. There are a number of elements to be on the lookout for, including:
- Form of Payment – How will you be paid for the content that you produce? Many influencers can command cash payments at this time, but some are still paid in free products (or some combination of the two). You want to get to the point where you can receive cash for your hard work, and the best way to do so is to make sure it is in your contract. It may take some time before you can get this kind of treatment, but you should keep working at it until you can secure those cash payments.
- Length of Contract – It is ideal to have an influencer management contract attorney ensure that the contract has a specific length of time attached to it. That is to say that everyone involved in the process should know how long the talent is expected to endorse the product via their social media page. They can break this down into a certain number of posts you need to create or various other timeline options.
- Topics to Cover in the Endorsement – Most brands create a script for their influencers to use when promoting the product. Obviously, the brand wants the influencer to come off as authentic in their endorsement of the product, so the script does not need to be adhered to precisely, but you, as the influencer, should try to hit on key points that the brand wants covering.
These are a few elements that one cannot overlook when creating a social media influencer agreement. A failure to add these specific elements into the contract could cause the contract to become null and void in some respects, and no one wants to see that.
It’s Best to Work With a Brand and Knows How It Will End
All good things must come to an end at some point, and that includes the agreement you have with your sponsors. They will eventually need to move on to other things, and you will likely want to try working with other brands at some point. Thus, you need to have a firm commitment to what the end of your agreement will look like.
Agreements drawn up with a specific end date in mind are generally better overall. It allows everyone who signs the agreement to know the extent to which parties will perform the service. This is critical as it gets everyone on the same page.
Another reason to focus on this is to have a firm exit strategy. It would help if you had the flexibility to move on to another company for endorsements as necessary in the future. Ending your deal with one brand and moving to another is the best way to contribute wholeheartedly to each project you get involved with.
Review All Contract Documents With an Attorney
You don’t have to reinvent the wheel whenever you intend to sign a contract with a brand. With the help of your influencer management contract attorney, you can easily review every contract that comes your way. Instead of starting entirely from scratch each time, you and your attorney can look for some of the most critical elements of each contract. And ensure that they contain the ones you are looking at now.
Ultimately, you will save a considerable amount of time by hiring an attorney who can review the most critical elements of any contract you are signing. The lawyer is trained in contracts for social media influencers, and you will always know that you are signing something that will hold up in court. Frankly, this is what many people are after when they start to look at the process of signing social media influencer contracts.
If you want peace of mind knowing you have a contract that will serve your interests, please get in touch with us for more information about how to get started.
Is There a Non-Compete in an Influencer Management Contract? | Influencer Non Compete Agreements
Do exclusive management contracts have non-competes? In most contracts for social media influencers, there can be what’s called restrictive covenants, and these are things that an influencer cannot do after the contract ends. Let’s just take a physician, for example. They could have a non-competition clause that would then say they can’t work as a doctor within 10 miles of their office for one year. Well, obviously as an influencer, that doesn’t make any sense as you are all over the place. And you’re not in one specific location.
Social Media Influencer Tax Deductions | Influencers Taxes
What are some of the tax deductions that an influencer can take as an independent contractor? As an influencer, your employment relationship with all the sponsors will likely be that of a 1099 independent contractor. And that means, at the end of the year, you’ll be provided with 1099 from the sponsors. And then, no income taxes will be withheld from your compensation throughout the year. So, you will be responsible for the self-employment tax at the end of the year. Now, an intelligent influencer is first going to talk with an accountant, and then that accountant will have you set up an LLC in whatever state you’re living in.
Taxes That Are Deductible by Social Media Influencers
I guess it doesn’t matter nowadays, but someone familiar with social media influencers is taking tax deductions. What they’ll likely do is they’ll tell you that you need to create an LLC. You need to get a tax ID number from the IRS, called an EIN, and then you’ll also need to create a bank account under that LLC. And then, you’ll put all compensation and expenses through that bank account, so you can easily track the expenses. And then, at the end of the year, you can deduct many of the things you need to be an effective influencer. It could be travel costs, lodging, meals, or any type of cost associated with meetings, depending on what type of influence you are.
It could be clothing or different products. There are just a ton of things that you can deduct. And so, you may come out ahead if you were just classified as an average employee. There are certain income tax benefits to being an influencer using social media. It’s a different type of job, as you probably know. And I think the professional environment is evolving regarding how they see influencers and what the potential income tax deductions for them can be. So, does an influencer receive a 1099? Very likely, yes. They would. If you have any questions about your independent contractor agreement or influencer agreement, we certainly can help with that.
Prohibiting Contract With Old Sponsors
What management companies do is an agency, an individual agent, an individual manager, or anyone with an exclusive contract with the influencer to go out and find deals and negotiate with them.
There will be a clause that states the influencer cannot contract with any sponsor they did business with while with the management company for a period. And I’ll give an example. Let’s say a skin company reaches out to the influencer and states that we’d like to have a relationship. Then they go through your management company, and they negotiate the deal. Then the management company comes back to you and says, are you interested? You say, great. You have worked with them for two years. Let’s say, at some point, you don’t want to use the same management company anymore, and you decide to terminate the agreement, so the deal ends. Well, there’s going to be a clause that states you won’t be able to work with that skin company for, usually, one year.
Paying Back Old Commission Percentage Fee
Or suppose you decide to continue to work with that company. In that case, you’ll still have to pay your old management company whatever the commission percentage was during the term of the agreement. Most of the time, that commission percentage will be 20% or around 20%. So, even after you terminate the contract, and even after that management company is no longer managing you. You still have to pay that commission fee to them if you decide to stay with the same brands, as I said before, usually a year after the contract is terminated.
What Can You Negotiate?
Now, what can you negotiate? Two things: one, you can negotiate how long that restrictive period lasts. As I said, if it’s one year, maybe knock it down to six months or three months or whatever, or over time, you can try to reduce that commission percentage.
For instance, let’s say for the first three months, it’s 20, for the second three months, it’s 15, and 10 and 5, some way of decreasing the amount of money you have to pay to your old management company. Now, the management company does this because they don’t want to set up a bunch of deals for an influencer and then have the influencer bolt. And then, they take the brands they got from the management company, and the management company receives no compensation for that. I mean, that’s honestly not fair.
How Long After the Contract Ends the Influencer Has to Pay Back
But how long after the contract ends the influencer must pay back the management company? Well, that needs to be fair as well. And is one year fair? I don’t know. It’s debatable. Another thing you could think about is the language may say any company that you’ve worked with while with the management company.
So, maybe you’ve worked with them for five years and terminated the agreement. You haven’t worked with the brand for four years, and then the brand comes back to you and says, hey, do you want to create a relationship again? Unless you limit the language in that contract, you may have to pay the management company for an entire year for a brand you haven’t worked with in a very long time.
Lookback Period
What you want to do is have what’s called a look-back period. And so, if the contract states you’re going to have to pay for a year for any brand that we’ve brought to you, you want to limit it to a period. Usually, it would say in the last 12 months. At least, that’s what I would do. That way, if you worked for a brand four years ago, they can’t come back to you and say, I know you haven’t worked for them for a very long time, but we made the introduction.
You worked with them while you had a relationship with the management company, so you still owe us 20%. If you can limit that to a year, all those brands you worked with in the past could come back, and then you wouldn’t have to pay the management fee to your old manager, which is annoying for most influencers.
What is the Purpose of an Influencer Management Contract? | Influencer Agreement
What is the purpose of an influencer management contract? The purpose of any contract is so both parties can understand their duties and responsibilities when interacting with each other. A social media influencer management contract is a contract between an agency, a manager, a marketing company, or someone that’s going to oversee the career of the influencer, bring them sponsorship opportunities, negotiate the price associated with that opportunity and then facilitate the contracts between the influencer and those sponsors. Now, the management contract will be between the influencer and the manager. All the terms of the relationship in the influencer management contract must lay out. The most important terms in any contract, the same as an influencer management contract, are the term, meaning how long the contract lasts.
Influencer Agreements with a New Manager
For the most part, influencer management contracts start at least somewhere between three to five years. That doesn’t mean if the influencer is unhappy with the manager, they cannot leave for the following reason. There will also be a section called termination. And then, that section will go over how either party can terminate the contract. Almost every contract will have what’s called without-cause termination. This means either party can terminate the contract at any time, for any reason, with a certain amount of notice to the other party.
If you are signing an influencer contract with an agency or a manager, you want to have without-cause termination in there. It would be improbable it wouldn’t be in there, but if it was absent from the contract, you could be in a horrible relationship with the manager and cannot terminate it if they’re not in breach of contract. And essentially, you’re stuck with many you don’t want to be with for years. So, you have to make sure that without-cause termination is in the influencer contract.
There will also be a section about compensation. So how much will the manager or agency get paid by the influencer? For the most part, it’s based upon a percentage of the commission. Whatever the sponsorship deal is with the influencer, the agent/manager will get a portion of that. 20% is the industry standard. Certainly, it could be less or more, but around 20% of whatever you make as an influencer will likely go to your agency or manager. Now, indeed, influencers can negotiate that. But that’s a standard amount.
What Usually Happens When an Agreement Ends
What also needs to be in there is what happens after the contract ends. Every manager agency will put a clause into an influencer agreement that states that even if the relationship terminates, they will still receive a percentage of any of the deals they brought to the influencers for a set period. Usually, that’s one year.
Let’s say your management company got you a deal with the skincare line, then the influencer terminates the contract with the manager. Still, the skincare company wants to continue the relationship with the influencer. The influencer will still have to pay 20% to their old manager for a year. Managers do this because what they don’t want to do is bring a deal to an influencer. The influencer terminates the agreement, takes the deal, and does not have to pay any commission to their past manager.
This is an equitable term in the contract. Now, indeed, influencers can negotiate parts of this. Maybe shortening the time, they have to pay any commission to their old agent, or perhaps narrowing the commission percentage over time, which means, that maybe every quarter, if it starts at 20, then 15 in the second quarter then 10 in the third and five in the last.
And then the responsibilities of the parties are going to be laid out as well. What will influencers have to do? How fast will they have to respond? And in which way will they have to communicate? Will they have to post content about their management company, or is it just the sponsors? Who pays for travel? If there’s just a one-off, what will the percentage of that be for the agent?
Why Influencer Contracts are Crucial
I mean, there are a ton of things that influencers must consider in advance. The worst thing that can happen for a digital creator or influencer is to get into a bad contract with a manager, get taken advantage of, and maybe even have their career stifled in some way by not being able to pursue the best opportunities.
The last thing to think about is many influencers are surprised that most of these management contracts are exclusive. Meaning, even if a friend, another influencer, or another agent brings a deal to an influencer, they have to take that deal back to their manager if they’re in an exclusive management contract.
The manager will then negotiate it and still get 20%. Even if someone brings you deals independent of your manager, it’s very likely the manager will still get 20% of whatever deal. Is that fair or not? Well, that’s just part of having a manager. So, that’s the purpose of a management contract. It just lays out all of the responsibilities for both parties.
Social Media Influencer Independent Contractor
Once, they laughed off social media influencers as “made up” and “unrealistic.” Still, many social media influencers of today are laughing all the way to the bank. The idea of potentially earning the same as a full year’s salary from their influencer activities alone. It is possible for someone with as few as ten thousand social media followers :
According to Vox, a micro-influencer, defined as someone with 10,000 to 50,000 followers, can earn anywhere between $40,000 and $100,000 per year.
On the other hand, influencers with millions of followers can earn tens of thousands of dollars per post. Top influencers can make hundreds of thousands of dollars to millions per year.
Figures like that have drawn people’s attention from all walks of life. To check out what it’s like to be a social media influencer and if it’s something they should consider. It has created many opportunities for influencers and marketers. To team up to create marketing campaigns that benefit the influencer and the marketers alike. Before doing so, it is important to understand what it means to be a social media influencer independent contractor. And why you may need an influencer management contract attorney. Thus, we want to review some of the common stipulations in the contracts of social media influencers.
Does a Social Media Influencer Qualify as an Employee or Independent Contractor?
Many people run into issues when working as social media influencers, whether they should be considered employees or independent contractors (IC). Most social media influencers would and should be under the classification of independent contractors. It is because they can use the flexibility of their status as an IC to do promotional pitches for several different companies via their social media activities.
Many companies want influencers to pitch their products to them via social media. However, those companies also generally want to spread their marketing budget across several influencers. Therefore, they will not necessarily hire influencers as full-time employees. Besides that, the influencers generally want to be left out of that and would prefer to field offers from various companies across the spectrum. Thus, most social media influencers will voluntarily qualify themselves as independent contractors in their work. It is an arrangement that seems to work best for them and the companies they work for.
Agreement to Release Data
Another thing that social media influencers frequently need to agree to is the release of certain performance data. That is to say that they may need to agree to the terms of their contract. Terms allow the marketing team they have signed on with to see key performance indicators (KPIs) related to their performance on social media.
The types of data that marketers may want to look into include:
- The number of followers that a particular account has
- The amount of time the average follower spends engaging with a particular creator’s account
- The demographics of the groups that are most likely to engage with a particular influencer
These, and many other types of data, are of value to marketers. They review this data and determine how much more or less they would like to spend on the services of any particular influencer. They can only really make these decisions if they have the data in front of them. That is why many contracts include information about gaining access to this information.
Influencer Management Contract Questions?
Contract Review, Termination Issues, and more!
