Balance Pro Staff
April 3, 2023
When you hear the phrase “video game streaming,” Twitch probably comes to mind. This popular Amazon-owned platform is not only the go-to destination for watching other people’s gaming sessions but also hosts a variety of creator-made content, including karaoke, live chess competitions, and even complex LEGO builds. Some people have even built a lucrative career out of streaming on Twitch. If you’re one of them, it’s time to talk about everyone’s favorite topic – taxes.
If you earn over $400 in profit in a given year, which is calculated after deducting expenses, you should assume that you owe taxes as an independent contractor, including those who earn money from streaming. It's important to note that even if you earned less than $400, you can still take out expenses if you're streaming as a business. We will cover this in detail later on.
Any donations received on Twitch, even if you are not making any other income on the platform, are considered taxable income. This applies to both individuals and organizations who receive donations. It's important to keep track of all donations received and report them accurately on your tax return to avoid any potential issues with the IRS.
Running charity streams using Twitch’s Charity tool is a great way to give back to the community while also avoiding taxes on the funds raised. Any money raised through the tool is sent directly to the chosen charity, which means it won’t be included in your taxable income. This is different from personal donations that you keep, which are considered part of your income and are therefore taxable. So, if you’re looking to support a cause through your Twitch channel, using Twitch’s Charity tool is a smart choice.
If you decide to donate to a tax-exempt charity during another user’s charity stream, your donation may qualify as a tax-deductible charitable contribution. However, there is an additional requirement to be eligible for this deduction: you cannot take the standard deduction. Charitable contributions count as a personal itemized deduction, rather than a business deduction, so you would need to itemize your deductions if you want to claim it.
It's important to keep in mind that any virtual goods or tips that you receive on Twitch, such as Bits, are subject to taxes. This is because all forms of income, including tips, are taxable. When you receive a payout from Twitch, it includes not only revenue from subscriptions or merchandise, but also the virtual goods or tips you've received, which are like the icing on top of the cake. In other words, the entire payout is taxable, including the Bits you've received.
If you're a Twitch streamer, you must take into account two taxes when it comes to taxes: income tax (both federal and state) and self-employment tax. These taxes are crucial to understanding how much you owe in taxes and can help you avoid any potential legal issues. It's essential to be aware of both taxes and take steps to file and pay them correctly. Failure to do so can lead to fines, penalties, and other financial problems. With a little bit of knowledge and some planning, you can ensure that your Twitch taxes are handled appropriately.
Regardless of your employment status, income tax is a necessary tax for all workers. If you're employed under a W-2 status, your income tax will be automatically taken out of your paycheck. However, if you're self-employed or work as a freelancer, you'll need to keep track of your income tax and make payments on your own.
As an independent contractor, you will be responsible for paying both income tax and self-employment tax. Self-employment tax is a contribution to Social Security and Medicare, and it's calculated as a percentage of your net earnings
Self-employment tax, also known as FICA (Federal Insurance Contributions Act) tax, is a tax that funds Social Security and Medicare. All workers, including W-2 employees, are required to pay FICA taxes. However, freelancers have to pay twice as much as traditional employees. This is because W-2 workers split the 15.3% tax rate with their employer, but freelancers have to pay both halves since they don't have an employer to share the cost with.
When it comes to filing your Twitch taxes, it can be a bit complicated determining whether you're considered a hobby streamer or a business streamer. Hobby streamers stream primarily for fun and not for profit, and they must pay income tax but not self-employment tax and can't deduct business expenses. In contrast, business streamers must pay both income tax and self-employment tax, but they can deduct business expenses.
To determine which category you fall into, ask yourself a few questions. Are you streaming with the goal of making money? Have you invested in your channel by buying supplies, taking courses, or upgrading your internet? If so, you're likely a business streamer. The IRS has a full list of criteria for determining business status if you're curious. However, if you stream purely for enjoyment and don't invest much in your channel or rely on Twitch for income, you might be a hobby streamer.
Absolutely! It's important to assess your streaming activity and determine whether you should categorize yourself as a hobby streamer or a business streamer. It's up to you to decide how you want to categorize your channel, and you can always change your classification in the future if your circumstances change.
As a business streamer, you may be eligible to claim deductions for your business expenses to reduce the amount of income that is subject to taxes. For example, if you earned $9,000 from your Twitch channel in 2022 but spent $700 on a new keyboard and a backdrop, you would only pay taxes on $8,300. This means that deducting your business expenses could potentially lower your tax bill and increase your tax refund.
You do not need to have an LLC to deduct business expenses. As an independent contractor, you can deduct your business expenses on your personal tax return using a Schedule C form, even if you don't have a separate business entity like an LLC. The key is to make sure you keep accurate records of all your expenses and have documentation to support your deductions in case of an audit.
Some common business expenses for Twitch streamers may include:
If you purchase a game specifically for streaming or creating content, then that cost can be considered a business expense and can be written off. However, it's important to keep in mind that games purchased and used for personal leisure cannot be written off. In cases where a game is used for both personal and business purposes, it's recommended to purchase a separate copy solely for business use in order to be able to write it off.
Yes, Twitch streamers can write off PC rigs or gaming laptops used for streaming, but only the business-use portion is tax-deductible. This means you’ll need to calculate the percentage of time your computer is used for streaming and deduct that portion of the expenses.
For example, if you use your gaming laptop 50% of the time for streaming and 50% of the time for personal use, you can only deduct 50% of the cost of the laptop as a business expense. Keep detailed records of the time spent using your computer for business and personal use to support your deduction in case of an audit.
Do you have to depreciate your gaming computer?
While it is not a certainty, it is possible that you may need to depreciate your computer when it comes to tax deductions. This means that you will be able to write off the cost of your computer over the course of five years, based on the IRS guidelines. This depreciation accounts for the fact that your computer loses some of its value every year.
However, there are some cases where you can deduct the entire cost of your computer used for business purposes in a single year. One such instance is through the de minimis safe harbor election, which allows you to deduct up to $2,500 in computer costs during the first year of use. This option is particularly beneficial for smaller purchases, as it simplifies the process of tracking and deducting expenses.
Yes, in most cases, Twitch streamers who are self-employed and anticipate owing $1,000 or more in taxes for the year are required to pay estimated quarterly taxes. This includes both income tax and self-employment tax. The deadlines for quarterly tax payments are April 15th, June 15th, September 15th, and January 15th of the following year. It's important to stay on top of these deadlines to avoid penalties and interest charges.
Filing your Twitch taxes as a streamer can be daunting, but it doesn't have to be. You'll need to familiarize yourself with two major forms: 1099 and Schedule C. Here's a step-by-step guide on how to handle them.
First, let's talk about Form 1099. If you're a business streamer, you may receive a 1099-MISC form from Twitch if you earned more than $600 on the platform in a year. This form reports your earnings to the IRS and is an essential component of filing your taxes.
Make sure to double-check that the information on the 1099-MISC is accurate. If there are any errors, reach out to Twitch support to have it corrected. Keep in mind that even if you don't receive a 1099-MISC form, you're still responsible for reporting your income to the IRS.
Next, let's dive into Schedule C.
This form is used to report income or loss from a business. As a streamer, you'll use Schedule C to report your Twitch income and any business expenses you're deducting.
Start by gathering all of your income and expense records for the year. This includes revenue from subscriptions, ads, and donations, as well as any business expenses like equipment, software, or internet costs.
Once you have all of your records in order, it's time to fill out Schedule C. Make sure to include all of your income and expenses in the appropriate categories. If you're unsure of how to categorize a particular item, seek the advice of a tax professional.
After you've filled out Schedule C, you'll use it to calculate your net profit or loss from your Twitch business. This number will then be transferred to your personal tax return (Form 1040) to determine how much income tax you owe.
Finally, don't forget about self-employment tax. This tax helps fund Social Security and Medicare and is required for all self-employed individuals. Use Schedule SE to calculate your self-employment tax and include it in your total tax bill.
By following these steps and staying organized throughout the year, you can successfully file your Twitch taxes with ease.
This post is for informational uses only and is not legal, business, or tax advice. Please consult with an attorney, business advisor, or accountant with concepts and ideas referenced in this post. Balance Pro assumes no liability for actions taken in reliance upon the information contained in this article.
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