Taxation of influencers: Gifts with strings attached?

Being an “influencer” is big business. Influencer marketing has more than tripled since 2019, with an estimated worldwide market size of $24 billion (“Global Influencer Marketing Value 2016– 2024,” Statista (Feb. 6, 2024)). In the United States alone, brands are expected to spend $7.14 billion on influencer marketing in 2024 (“5 Creator Marketing Trends Set to Take Off In 2024,” Forbes (Feb. 21, 2024)). In 2023, an estimated three-quarters of U.S. companies with more than 100 employees used influencers for marketing purposes (“Influencer Marketing in the U.S. — Statistics & Facts,” Statista (Dec. 18, 2023)).

Despite the growth of the influencer market, the IRS has yet to issue substantial guidance regarding the unique and uncertain tax issues influencers face. The following discussion is intended to be useful to CPA tax practitioners whose clients participate in this type of activity and thereby may receive potentially taxable income.

Influencers create content and share it regularly through a variety of online channels to establish a relationship with their followers and share their expertise. They create online interest in brands and attempt to influence followers to try a particular product or service. Influencer marketing has a more authentic feel, similar to a satisfied customer recommending a brand to all of their closest friends, which increases the reach and credibility of the brand. For example, a popular fashion blogger might promote their latest favorite seasonal jacket on Instagram with a sponsored link that persuades followers to buy the product.

This article identifies categories of influencers; offers guidance for influencers and their advisers on income, deductions, and nontaxable items; and discusses other relevant tax considerations in the influencer industry.

TYPES OF INFLUENCERS

Influencer marketing is surging, and businesses are forging partnerships with online personalities to boost brand visibility. An influencer, or content creator, is regarded as possessing the ability to exert influence over the purchasing decisions of others by virtue of their authority, expertise, position, or connection with their audience. Influencers try to cultivate a dedicated following within a specific niche and actively engage with their audiences.

Influencers use a variety of online channels, including blogs, You- Tube, podcasts, and social media. For example, bloggers create and publish blogs on the internet sharing insights, opinions, experiences, or expertise in a particular area of interest. Social post influencers create posts or videos on social media such as Instagram, TikTok, X (formerly Twitter), or Facebook. These posts are often used to promote blogs, YouTube videos, or podcasts (see also “What Is an Influencer? Social Media Influencers Defined,” Influencer Marketing Hub, Feb. 14, 2024 (updated July 22, 2024)).

Influencers create content and receive compensation or perks that may need to be included in income. Some examples of activities that may result in income include:

(See "Social Media Influencers May Seem to Live Charmed Lives. But Then Comes Tax Time," USA Today, Jan. 18, 2024.)

INCOME CONSIDERATIONS

Contractual obligations of influencers

Influencers with signed promotional contracts resulting in cash compensation generally have a straightforward analysis of income. When they use a product as part of a contractually obligated review or promotion, the item itself is likely considered part of the contractual compensation, thus precluding further income recognition for it. In some cases, products or services received under a promotional contract may meet the definition of working condition fringe benefit (Sec. 132(a)(3)).

Clearly defined contract terms are essential to specify the influencerfs obligations and what the company will provide. Influencers should anticipate receiving Form 1099-NEC, Nonemployee Compensation, for compensation received; however, it is imperative to accurately report income, regardless of whether a Form 1099 is received.

Example 1: A golf course blogger signs a contract to cover a tournament, posting about players and the course. In exchange, they receive free tickets, travel expenses, and a $10,000 stipend. Based on the facts and circumstances of the transaction, the Blogger would recognize income for the fair value of the items and benefits received.

Unsolicited receipt of products promoted

While some influencers operate under a stated promotional contract with a company, others do not but may receive free products or gifts. Despite the free product’s being unsolicited, many tax advisers take the position that these products are not excludable from income as a gift when used in a promotional context because companies giving the items typically anticipate something in return, namely the influencer promoting the product on their platform.

When influencers promote unsolicited free products they receive, they could incur taxable income equal to the fair market value (FMV) of the items, under barter transaction rules.

Although the IRS has provided almost no guidance in this area, it addressed a somewhat analogous situation in FAQs, clarifying that highvalue “gift bags” given to celebrities who appear at entertainment industry awards shows are taxable. Although the gift bag is not exchanged in a business transaction, the value of the bag is considered income to the celebrity because it is given to create brand awareness and promote products. The Service’s position on celebrity gift bags suggests that influencers could have taxable income from unsolicited products sent to them for promotional purposes. (For a further discussion, see “‘Swag Bags’ Are Back: Influencers and Noncash Compensation,” The Tax Adviser, June 2022.)

Nonetheless, some accountants have suggested that, for tax purposes, products received by influencers for promotional activities should not be considered income. This approach may appeal to influencers, but it is unlikely the IRS would agree with exclusion.

Example 2: A tech expert reviews products on Instagram. They receive wireless headphones from a vendor without a formal contract and provide a review. The expert would likely be required to report income based on the FMV of the headphones received since no other compensation terms were agreed upon.

Unsolicited receipt of products not promoted

Unsolicited products an influencer receives and does not promote may be considered gifts if given with a “detached and disinterested generosity,” as defined in Duberstein, 363 U.S. 278 (1960), and, if so, are excluded from income. On the other hand, if the item is not given away with pure detached and disinterested generosity and the influencer keeps the item, then it may result in income for the FMV of the item.

The tax treatment of products unsolicited and unpromoted is an ambiguous area of the tax law because it is difficult to determine if the items received qualify as gifts. Influencers must document all unsolicited products received, determine FMV, and keep supporting documentation related to any agreements or evidence of the brand’s intent. If an influencer does not intend to use or promote an Unsolicited item received, it would be best to return the item to ensure there is no additional income to report.

To mitigate risk in this gray area of the tax law, advisers should encourage influencers with a significant following to include a statement on social media indicating they do not accept unsolicited gifts for promotion. If unsolicited gifts are received that the influencer would like to promote, influencers should establish a clearly defined contract before promoting the item on their platform.

Example 3: A fitness podcaster receives the latest running shoes from a sportswear company. The podcaster does not review or promote the shoes. To avoid income recognition, the best course of action is for the podcaster to return the shoes to the company.

Exclusions from income: De minimis exclusion and reimbursements

In influencer marketing, the de minimis fringe benefit income exclusion (Secs. 132(a)(4) and (e); Regs. Sec. 1.132-6(a)) allows for the exclusion from income of lowcost products or services that the influencer receives in collaborations with others. “Low-cost” for this purpose means “any property or service the value of which is ... so small as to make accounting for it unreasonable or administratively impracticable” (Sec. 132(e)(1)). The de minimis exclusion can apply to not only employees but also “any recipient of a fringe benefit” (Regs. Sec. 1.132-1(b)(4)). Because Sec. 132(e)(1) adds that the value must take into account the frequency with which such products or services are received from that source, if an influencer receives de minimis-valued items frequently from the same business, income recognition may occur.

Under a separate exclusion, when an influencer purchases a product for promotional purposes and subsequently receives a reimbursement for the expense through an accountable plan, the reimbursement can qualify for exclusion from income (see Regs. Secs. 1.62-2(d)–(f)). To meet the accountable plan requirements, expenses reimbursed under the plan must have a business connection and be substantiated, and any advances in excess of expenses paid must be repaid within a reasonable time. Reimbursements paid to independent contractors, as opposed to employees, can receive the same tax treatment if the expenses reimbursed under an accountable plan have a business connection to the work performed by the independent contractor and the independent contractor accounts to the client for the expense under the substantiation rules of Sec. 274(d) (Sec. 274(e)(3)(B); Temp. Regs. Sec. 1.274-5T(h)).

Example 4: A food critic hosts a hot sauce competition on their YouTube channel. Several hot sauce companies send hot sauces without a formal agreement that are used in the competition. Since the hot sauces are each of a minimal value that is impracti Cable for the companies to account for, they meet the de minimis fringe exclusion and the food critic does not report them as income.

EXPENSES OF INFLUENCERS

Influencers should — and those hoping to deduct them must — also be mindful to track their expenses. Not all expenses fit into obvious categories. Influencers using social media often invest in high-tech production lighting, equipment, and other technology. Moreover, they can incur travel expenses for promotions or video content-creation purposes.

While some lifestyle influencers might argue all of their personal purchases, trips, and spending are building their image or brand, there are limitations to what the IRS will consider an ordinary and necessary business expense under Sec. 162(a) that is deductible from income earned from influencing. The general disallowance of entertainment expenses in Sec. 274(a) may further limit the deductibility of influencer content-creation expenses.

Influencers must also use caution when considering clothing or other appearance-related costs. Many items worn or used in content creation are not deductible unless they have an exclusive business purpose.

Some common types of expenses influencers may seek to deduct, subject to substantiation and other deductibility requirements and limitations, are shown in the table, “Common Influencer Expenses,” below.

OTHER TAX ISSUES TO CONSIDER

Avoiding hobby tax classification

Influencers often develop their expertise based on their interest in a particular activity that gives them personal enjoyment. It’s crucial for them to differentiate between a hobby and a business for tax purposes. Hobbies are pursued for enjoyment without profit intenTion, while businesses are conducted with continuity and regularity with the primary purpose of making a profit.

Before the enactment of the Tax Cuts and Jobs Act (TCJA), P.L. 115- 97, tax rules permitted expense deductions for hobbies to the extent of hobby income. Net losses from hobbies could not be deducted under Sec. 183. The TCJA suspended miscellaneous itemized deductions, including hobby-related expenses, from 2018 through 2025, preventing individuals from offsetting hobby income with expenses until at least 2026, while hobby income must still be reported and recognized. This shift underscores the importance of categorizing side activities as a business rather than a hobby for optimal tax benefits.

For more information about hobby classification, see “Is It a Trade or Business? Or a Hobby or Investment?” Tax Insider, May 16, 2023.

Tax status of influencers: Employee vs. independent contractor

Influencers are chosen to market products and services based on social media presence and the ability to reach key target markets. Influencers are rarely hired to work directly at a particular company, and most are not engaged in exclusive promotion contracts. Influencers largely perform their services as independent contractors.

Advisers should encourage influencers to require their contracts to explicitly state the benefits the influencer will receive in exchange for the specific services provided. The contract should clearly state the influencer’s status as an independent contractor, although substantiating this classification with relevant facts and circumstances is essential.

An influencer is usually an independent contractor, in which case no taxes are withheld from the influencer’s payments. The influencer is responsible for calculating and paying their own income and selfemployment taxes and making esti Mated tax payments throughout the year. Independent contractors will report all income and deductible business expenses on Schedule C, Profit or Loss From Business (Sole Proprietorship), of their individual income tax return.

Companies engaging influencers must cautiously navigate the independent contractor vs. employee classification to avoid potential penalties and interest due to misclassification. For more information about recent updates and the tests to determine whether a worker is an employee or independent contractor, see "Employee or Independent Contractor? DOL Issues New Guidance," JofA, Jan. 10, 2024.

ADVISING CLIENTS WHO ARE INFLUENCERS

In the ever-evolving influencer landscape, tax advisers must be prepared to help influencer clients navigate their business and tax obligations effectively. The following topics should be discussed:

Engaging in these discussions proactively and regularly can facilitate the development of a tailored tax strategy for the influencer and avoid unwanted surprises at tax time.

About the authors

Kaitlin Newkirk, CPA, MST, M.Acc., is an assistant professor in the Williams College of Business at Xavier University in Cincinnati. Sarah Webber, CPA, J.D., LL.M., is an associate professor at the University of Dayton in Dayton, Ohio. To comment on this article or to suggest an idea for another article, contact Paul Bonner at [email protected].

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