If you are making a significant profit, or pursuing something in effort of making a profit, then what you’re doing – streaming – is considered a business. Any money you make will need to be recorded and reported to be taxed. In the USA if you are working to make a profit as a business you can use expenses to decrease taxes, but for example in the UK if you make under £1,000 from a venture and use the tax-free ‘trading allowance,’ you can’t yet use expenses to decrease taxes.
In the USA, there is no hard rule on whether something is a hobby or a business. The IRS does say, however, that a business must actively be pursuing a profit. For the first few years of a business it is very common to be at a loss, but as a business you can use this loss to even reduce your personal taxes. The IRS wants you to eventually turn a profit so you can pay more taxes, and if you do profit in 3 out of the first 5 years, you are in business, no matter how small. On the other hand, if your stream is not profitable over this time period, they will consider it a hobby.
Pro Tip: If you have any questions about how to file your income from streaming moving forward, Pipeline provides access to a variety of skilled financial professionals who can help you!
When do I need to set up separate accounts for my business?
If you are making an effort to make a profit or are making income already, then your stream is a business venture and it’s an excellent idea to set up a separate account for it. Opening a business checking account is free at most banks, and even if you have not set up as a business yet, creating a separate checking account just to track and stay organized can be a good way to start optimizing for free.
In most countries, if you make profit you must pay taxes on it and you must keep track of your income and expenses to do this. In the USA, even if you don’t register as a business you will be considered a Sole Proprietor and treated as one, meaning you are required to pay taxes on any profit.
Having a separate account that you only use for the business for expenses, and a place to put revenue as it comes in, will make everything easier to track as it won’t be mixed with your personal other personal income and expenses. This will help with managing your own taxes and cash flows to monitor the venture. Sorting through hundreds of transactions that happen over an entire year with personal and business expenses mixed can be daunting to sift through, and you likely will miss some items in the process. You could theoretically manage all of these within one account, but it takes little effort to setup a new account and will save you major headaches – and more importantly, time – down the line.
When setting up an account and choosing a bank, consider the following:
- Business or personal account
- In the USA a business account often requires an EIN number similar to a social security number, but specific for your business
- Setting up as a sole proprietor, LLC, or S-corp, you can receive an EIN tax number from the government.
- Account fees and minimums
- Many banks have a free option or a way to avoid fees if minimum requirements are met for the account. Make sure to check for any minimum requirements to avoid any fees as these can add up.
- Debit or credit card options with bonuses
- As your business and the number of according transactions grow, having a card with bonuses may provide benefits that add up over time.
- Bank location and reputation
- How is the customer service, online access, mobile app, etc.? The easier it to use, the more time it will save you with any potential issues.
Keeping track of your income all within one account also makes it easy to track versus something like cash, and adds a level of transparency to your business that is required by the government.
Reporting taxes and working independently
Working as your own business means you are responsible for reporting your income and tracking and managing any expenses or financial dealings you may have over the year. Making money and hiding it from the government can lead to major issues such as fraud. It is not something that can be ignored.
Within the streaming industry, most forms of revenue come in as independent contractor payments. This could be small amounts from different sources or even one large amount from a single source. Depending on your country the minimum to be reported may vary. For example, in the US as of 2018 if you recieve $600 or more you’ll need to file your taxes a little differently; if you receive more than $600 from one source they must send you a 1099 form. That means as a streamer on Twitch, Google, Facebook, etc, they will send you a document, called a 1099 form, with how much you have been paid and what they are reporting to the government they paid you. These documents will help in combination with your own records on reporting your taxes. See our other, more in-depth blog post on 1099 forms here.
In the USA, the Schedule C is where you calculate your net profits from self-employment and report profits or losses from your business. If you’re using a website or app to report your taxes, make sure they have a place to enter this information and generate a Schedule C. You need to report losses as well, but doing so can help you save on taxes.
Unless you have specifically set your company up differently, you will most likely need to pay self-employment tax. Unlike standard employees, payments you receive working independently are not subject to tax withholdings, meaning you are required to pay these taxes yourself. If you made a profit during the year, make sure you have enough saved to pay these taxes that come alongside it.
You may also have obligations to pay estimated tax payments to the during the year, rather than just one giant lump some you pay once a year. The amount and frequency of your payments depends on how much income you earn, the tax withheld from other employment, and the method you choose to calculate.
Working with a financial professional especially as revenue increases is important to ensure you are following all important procedures and paying on time.
What can be expensed?
As a business you pay taxes on your net income, which simplified is your revenue (how much you make) minus your expenses (how much you spent to make it). If you made $10,000, but it cost you $9,000 to make it, then you would only be responsible for paying taxes on $1,000 instead of $10,000 – a huge difference. The more you can expense the better, but you also shouldn’t be spending money just to decrease tax bills.
Laws will vary by country, but in most cases to expense something, it must be an expense made only for the business, not something personal.
In the USA, to be classified as an expense it must be “ordinary” and “necessary” for the business. “Ordinary” would be something other streamers also incur expenses for, and “necessary” means expenses helpful to you in completing your work. Fox example, if you are creating a livestream, you need a computer or game console to run that stream, and/or you will need a video game or DLC in order to play and record/stream that game.
What can be counted as expenses for your business is dependant on how your business is run and will vary from streamer to streamer. You can see a full list of categories on the actual Schedule C tax doc you report it on in Part II here.
The following are some helpful examples of typical streamer expenses that may apply to you:
- Advertising (line 8): Did you run any ads, hold any giveaways, or do any paid marketing for your channel
- Contract labor (line 11): Did you hire a designer for emotes, custom overlays, logo, editor, community management, content management, etc.?
- Legal & professional services (line 17): Did you hire an attorney to review any sponsorship contracts or an accountant to help with finances or help with taxes?
- Travel and meals (line 24): Did you go to an industry convention or capture event where you had to pay for transportation, gas, accommodations, etc.?
- Business use from home (line 30): Do you use a specific room just for your business?
Other expenses are for items that didn’t fit into any of the previous items, but typically exclude things that you expect to last longer than one year. A good example of this is software such as accounting software, cloud storage, business email accounts, editing software, video games, game DLCs, channel subscriptions, and even your Pipeline membership.
Overall, what you expense will be dependant on your business structure. Seeking guidance from a financial professional is important on these matters, as there is no general rule for business expensing that will apply to everyone. But this post should give you a good idea of where to start and what to discuss with the professional, as well as good background knowledge on how the system works.