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Understanding Taxes for Self-Employed YouTubers

Kleineganz

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So we had a conversation about YouTube and Taxes and I thought I'd consolidate what I mentioned about how taxes for the self-employed work.
This is US focused because that's where I live and I am not familiar with other countries (however, if you are familiar with another countries tax laws regarding the self-employed, please add your knowledge tot his thread.)

First - if you're a YouTuber and you earn income (either through AdSense or a network) - YES you have to pay taxes on that income.

This table shows you what your marginal tax rate will be for Federal Tax in the US for the 2013 tax year: http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#Marginal_tax_rates_for_2013.

NOTE: in the US you pay Federal + FICA + State income tax (unless you're lucky enough to live in one of the few states with no income tax).

Second - Being a YouTube makes you self-employed. That's why you had to fill out and sign a W9 form (either for AdSense or your network). If you earn more than $600 in a given year, then you should be receiving what's called a 1099-Misc in the mail. This details all your income (and has been reported to the IRS and therefore you can't get around paying your taxes on it).

Third - Being a self-employed YouTuber makes you a "Sole-Proprietor," and this will allow you to subtract things you buy that are related to your YouTube business, from your income (and therefore will not have to pay income tax on that part of your earnings). This practice is known as a "tax write-off". Here is how these tax write-offs (or deductions) are defined by the IRS:

"To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary."

This is roughly how it works:

Annual gross earnings (gross is what you earned before taxes): $100,000
Annual business expenses (anything you spent that could directly benefit your YouTube channel): $20,000
Taxable income = $80,000

NOTE: You can also form an actual business (generally an LLC, or Limited Liability Company), and still be a sole-proprietor. The benefit of forming an LLC is that you are not held personally liable and if a "client" (like a network, Google, etc.) wanted to sue you, they can only go after your business assets, not your personal ones.

Fourth - If you expect to pay $1,000 or more on your taxes in a given year, you have to start paying "quarterly estimated tax" (basically you have to send in an estimate of your taxes each quarter - on April 15, June 15, September 15 and January 15). If you owed exactly $1,000, that means you'd send in $250 each quarter. Now this can be tricky since you have to estimate (guess) how much you will earn for that year and then estimate how much tax you might owe.

Finally - The final consideration is how much tax you could potentially be paying. I know most YouTubers don't earn a lot, but this may help put things into perspective for those of you who are jealous of some of the "big" YouTubers out there.

Let's say you earned $1,000,000 (one million). That easily puts you into the *top* tax bracket of 39.6% (now this is where things get complicated because in the US we have a "graduated" tax system ... if you looked at the table I shared earlier - you see anyone earning $0 - $8925 have to pay 10% federal income tax, and then it's 15% on $8,926 – $36,250, and so forth.)

I did all the calculations (and if you want to see them, let me know) but the total amount of tax you would owe on $1,000,000 is roughly $283,000 (or about a rate of 28.3%). Now this is just Federal Income Tax. There's still FICA (Federal Insurance Contributions Act tax - basically the tax that's used to fund Social Security and Medicare), and State Income Tax as well.

The rate of FICA for self-employed people is 15.3% - 12.4% for Social Security + 2.9% for Medicare (employed people don't pay as much because the employer contributes 50% of the social security portion).

Anyhow, the good news here is that the 12.4% only counts for the first $113,000 of income earned, or around $14,000. Medicare is taxed on every dollar you earn, no matter what - so for $1,000,000, that comes out to be $29,000, for a total of $43,000. Let's add that to our Federal Income Tax and we get roughly $326,000 (just a tiny bit more than 30%).

Finally, there is a new 0.9% healthcare "surcharge" (aka tax) on every dollar you earn over $200,000. So that's 0.009 x $800,000 = $7,200. Adding that to the Federal Tax brings us to a grand total of $333,200 (33.3%).

Now most of the really *big* YouTubers live in California so now we need to consider the California Income Tax. They also have a graduated system, but for $1,000,000 in income, you will pay roughly $110,000 in State Tax.

So that brings us to our final calculation:

$283,000 (Federal Income Tax) + $43,000 (FICA) + $7,200 (healthcare surcharge) $110,000 (CA State Tax) = $443,00 or 44.3% (and that will leave you with $556,800).

Disclaimer: I didn't take into account any tax write-offs for this final piece - I just wanted to show how much money anyone earning that much, while being self-employed, will pay.
 
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Lilikoi Juice

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Would it be relevant to mention this is applicable in the United States? Thank you for that information! I've been looking at that since I started monetizing but I didn't earn anything in the tax year of 2013 so I will not be filing for anything.

I was wondering how state taxes work in your state if you are self-employed?
Hawaii has something called an annual or quarterly income filing period.[DOUBLEPOST=1389928953,1389928878][/DOUBLEPOST]
to much text, i got bored at the 2nd paragraph.... :(
Did you expect tax information to be quick and simple? Haha.
 

Gabriel

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My accountant told me that I can take out business expenses and I don't own an LLC and I'm not a part of any partnerships. Do you think this might be California specific?
 
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Kleineganz

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You might want to mention this is applicable in the United States.
I did mention that it was US focused and I asked people from other countries to contribute their knowledge as well.[DOUBLEPOST=1389929133,1389929066][/DOUBLEPOST]
My accountant told me that I can take out business expenses and I don't own an LLC and I'm not a part of any partnerships. Do you think this might be California specific?
Not sure, it might be allowed for self-employed people even without an LLC, but if you get audited - the LLC provides a measure of protection you generally otherwise wouldn't have.[DOUBLEPOST=1389929190][/DOUBLEPOST]
to much text, i got bored at the 2nd paragraph.... :(
Well I guess I got my point across - there's nothing easy about it and there's a lot to know. Nothing to worry about unless you start earning a real income from YouTube though.
 

Lilikoi Juice

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My accountant told me that I can take out business expenses and I don't own an LLC and I'm not a part of any partnerships. Do you think this might be California specific?
Yes, you can. I did last year for my business I was running . As far as the state write-offs go, it depends on the state, regardless of federal or state only certain things can be deducted as business expenses when you are self-employed as self-proprietary (non-LLC). Make sure you have to have the receipt to prove everything and it needs to fit the description of whatever is allowed, as the IRS is known to be more vigilant when it comes to self-proprietary taxes.
 
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Thrashbat

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I've got an LLC :D
 
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Kleineganz

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Heads up - I made some calculation changes to the final part of my post (I miscalculated the FICA and I forgot about the new healthcare surcharge that anyone earning over $200,000 has to pay).

I was also wrong about the LLC - it is not required in order to file as a sole-proprietor in order to take advantage of tax write-offs. I corrected this in my original post as well.
 
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The Casual Gamer

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Oh dear god, that amount of tax money is just un-holy. I guess just because you're successful and wealthy doesn't mean you're above paying the government.
 

Kleineganz

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Oh dear god, that amount of tax money is just un-holy. I guess just because you're successful and wealthy doesn't mean you're above paying the government.
This is very true, and I wish more people realized that. Yes the rich have ways of reducing how much taxes they pay, but that only goes so far. They still have to pay a lot of tax, one way or another. (In other words, people shouldn't whine too much about how much Pewdiepie and Smosh earn). ;)
 
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