Congratulations - you made money as a content creator!
Whether it is just your first tip or you started receiving subscription income as a Twitch Affiliate, you now need to file your first income tax return.
Unless you've done something fancy like set up an LLC, you will simply have a new form attached to the tried and true 1040 called the Schedule C. If you've filed 1040-EZ in the past, that time is now over: You've progressed to the full 1040.
The reason I wanted this to be my first blog post is because your first tax return is perhaps the most important. The decisions you make on your first return carry forward to future years. You are making elections simply by filing the return that will continue as long as you operate the business, or make an elective change.
So, let's go through the Schedule C elections at the top.
A Principal business or profession, including product or service
Online Entertainment Services
Online Entertainment is a basic description of what content creators do. Services tells the IRS that they shouldn't bother looking for inventory and other related items.
B Enter code from instructions
The IRS has computers that track trends in businesses and then runs analysis to find outliers. If the IRS computers detect your business is too far outside the norm, that's when the computer generates and sends you a letter to verify income and/or expenses. The code list is a look once and forget it kind of thing.
From my research, content creators are most like entertainers and have similar income. Therefore, I recommend the following code number:
711510 - Independent Artists, Writers, and Performers
This code isn't exactly what you do, but you are a performer, so it's the closest match. This way the IRS won't be questioning entertainment-related expenses since you are in the entertainment industry.
Side note: If you have another side business, like an etsy store, create a separate Schedule C with a different Business Activity Code so the two don't get crossed.
C Business Name
Let's keep it simple: You want to use your channel name here.
D Employer ID number (EIN)
In light of the the Equifax breach, I encourage everyone to get an EIN. Yes it stands for Employer ID number, but you can use it in place of your Social Security Number when another business needs it for identification. You can easily get one online yourself at https://www.irs.gov/businesses/small-businesses-self-employed/employer-id-numbers
Remember - only trust a .gov address, in this case irs.gov. If you are on a .com address, someone may be trying to charge you for something that's free.
F Accounting method: (1) Cash (2) Accrual (3) Other (specify)
One of the biggest decisions you can make on your fist return is the Accounting Method. What does that mean?
Cash method of accounting is easiest to understand: When the cash hits the bank account or cash is in hand, it is recorded as income or expense.
Accrual method is a bit more complex. When someone completes all obligations under an agreement or contract and an amount is owed - to or from, the income or expense is recorded. In other words, if it is due to or due from, it is an expense even if it has not been received or paid.
Now, let's put this to real-life scenarios that apply to Twitch. Let's look at the Affiliate payout agreement. https://help.twitch.tv/customer/portal/articles/2879859-affiliate-payout-faq
"Our standard payout period is Net 60. Monthly payouts will be distributed 60 days from the end of the month. For example, revenue earned during the month of June that exceeds the minimum threshold of $100 USD would be paid out on or before August 30th."
Let's apply that to November and December payments that cross the December 31 year-end. November 2017 earnings would be paid January 31, 2018, and December 2017 earnings would be paid February 28, 2018.
Under Cash method, the income is owed when it hits the bank, in 2018.
Under the Accrual method, the income is owed to you, and is income in 2017, even though you haven't received it yet.
Conclusion: There is a tax benefit from picking the cash method of accounting.
G Did you "materially participate' in the operation of the business?
Material Participation means you actively contributed to the business. Since you are the product and the one creating the content, the answer is yes.
There are 7 factors that constitute material participation. Meeting just one of the tests means you materially participate. The easiest test for content creators is number 2: "Your participation in the activity for the tax year was substantially all of the participation in the activity of all individuals (including individuals who did not own any interest in the activity) for the tax year."
H If you started or acquired this business during (the current year), check here
Check the box - Only for the first return.
I Did you make any payments in (the current year) that would require you to file Form(s) 1099?
In general, "No" will be the answer. You should make 1099-MISC form by January 31 of each year that you paid anyone over $600 for services. This rule does not apply to payments to corporations.
Now that we have gone through the general first-year setup, you should have something like this:
Tune in next week for an overview of income and deductions.
Justifiable187 (the gamer)
GGtheCPA.com (the business)
DISCLAIMER: All advice is general business advice, and not meant to be written tax advice under IRS regulations.