The amount of people making money playing esports like Fortnight, League of Legends, Rocket League, Smite, Halo, CS:GO or content creating via Twitch, YouTube, Azubu, etc. continues to grow at an extraordinary pace. According to a recent article on dotesports.com, the payout for the top 50 streamers from August 2019 to October 2021 was around $1 million a year to $10 million a year.
As much as gamers and content creators would like their earnings to be free from the Internal Revenue Service, their activities may constitute a tax obligation.
Gamers and content creators could receive either a W-2 (by Jan 31), if employed by a company, or a 1099-NEC (by Jan 31) as a self-employed individual. This in turn will be reported to the Internal Revenue Service and individuals are required to pay taxes on this income.
Tax Group Types
Here are further details regarding the four tax groups that gamers and content creators may have to pay on their earnings:
- Federal Income Tax: The US Tax System is progressive, starting at 10% and with the highest tax rate being 37% as of 2022 (additional details here.) The Internal Revenue system also provides relief from tax via deductions such as charitable donations, state taxes paid, mortgage interest and student loan interest. In addition, for those gamers or content creaters who may be nonresidents of the United States, there are income tax treaties between the US and select countries. Many European and Asian countries have income tax treaties with the IRS and a full list can be viewed here. The federal income tax can be paid as an employee through withholding or by making estimated tax payments throughout the year. Estimated tax payment dates are usually April 15, June 15, September 15, and January 15 of the next year (they could deviate if the 15th falls on a Saturday, Sunday or legal holiday.)
- State/Local Tax: If a content creator or pro gamer earns money in the following states, there is no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. If an athlete competes in California and earns a payout, that individual may have a tax liability to the state of California even though if don’t live in California. Similar to how the Internal Revenue Service operates, individuals will be required to pay their taxes either through their withholding or via estimated taxpayment throughout the year. For more information regarding a specific state’s tax rates, please click here.
- Medicare Tax: Medicare tax is a flat 1.45%. As an employee, this is automatically taken out of a paycheck, with the employer paying the other half of the Medicare tax of 1.45%. However, in most cases, gamers and content creators are self-employed. These individuals need to add this payment in addition to their federal tax amount as self-employment tax (1.45% as employee and 1.45% as employer, equaling a total of 2.9%). If an individual makes more than $200,000 (single) or $250,000 (married filing jointly) during a year, they’ll also need to pay an additional Medicare tax of 0.9% tax. There is no cap on this tax, so the more a person makes, the more they pay.
- When individuals earn money in the United States they are required to pay into the Medicare and Social Security System. However, there are select countries where the United States has a Social Security tax treaty, different from the income tax treaty discussed above. In these countries, individuals will not have to pay into both systems if the correct paperwork is filed. This agreement is called a totalization agreement. Click here for more information.
- Social Security Tax: Social Security Tax is also a flat rate of 6.2%. Much like Medicare tax, as an employee, this gets taken out of an individual’s paycheck. The employer also pays the other half of the social security tax of 6.2%. Most gamers and content creators are self-employed, so they’ll need to pay both the employer and employee portion, for a total of 12.4%. This amount will be added to the federal tax payment and the social security wages cap is $147,000 for 2022.
Other Financial Items of Note
If an individual has a foreign bank account(s) and the amount(s) goes above $10,000 USD at any given point in time, the individual will need to file Foreign bank account reporting form, FinCen 114. This is an annual requirement and can easily be overlooked but for more details see here. In addition, if an individual is behind on reporting their income to the IRS, the IRS offers many different remedies and paths to amnesty if they have not properly reported their tax information in prior years. By being aware of the different financial obligations owed each year, gamers and content creators can stay compliant and keep track of their tax obligations more clearly.
For more information about financial and tax concerns for esport players and content creators, contact DiAndria Green, Michael Klug or Nick Down by calling 770.396.2200.