Ambassadors and influencers are vital for driving organic growth for brands through content creation. A well-executed ambassador program increases brand awareness, web traffic, and conversions. However, different types of influencers require different types of compensation based on specific campaigns, engagement, and follower base.
With that being said, it is important to maintain a clear paper trail when cash is flowing in and out of your business. Influencer compensations like product exchanges, contractor payments, and perks are all subject to tax law.
We want to make sure everything is clear come tax season and put you in the best position to understand what type of taxes need to be filed based on the various compensation models your brand might want to use.
Gifting vs Payment
But first, it is critical to understand if compensation methods fall under a gift or a payment for tax purposes. Tax responsibility falls on the giver’s end of the gift. The IRS considers a gift to be a direct or indirect transfer in which the giver does not expect an equal amount of consideration in return.
Basically, if you receive a gift like money or another asset and there is no exchange of goods or services in return, then it qualifies as a gift.
As a business, gifts up to $25 may qualify for a tax deduction. If a gift exceeds $25, only $25 can be deducted from that gift. Incidental costs incurred as a result of gifting are excluded from the $25 limit. An exception for the $25 limit is for gifts worth less than $4 that have the name of the organization permanently imprinted on them, and are identical to other items that the organization widely distributes. A few examples include:
When gifting, it is important to understand where your gift falls under the tax law. We’ll go ahead and explain common compensation models and the requirements your brand has when filing for taxes.
This model is extremely cost-effective for your brand and essentially rewards influencers for promoting your brand and increasing outreach. Usually, influencers who are true fans of your brand accept this payment method because they are true believers in your brand and its values. This type of influencer makes for strong advocates of the brand.
Product exchanges are considered bartered services. It is required by the IRS to keep a record of any income generated from barter transactions. This means that your business needs to complete a 1099-B form and have the influencers you exchange with complete a 1099-B form as well.
Independent contractors include any influencer that you are making cash payments in exchange for a service to your brand. Some examples of contractor payment methods include commission and pay-per-post.
Paying commission is a solid way to lower costs while inspiring your influencers to deliver conversions. Experienced influencers know how to maintain brand authenticity while being able to drive conversions. It is important to choose wisely who you put on your compensation model.
Pay per post
Pay Per Post payments are an arrangement for an influencer to receive a flat rate fee in exchange for a branded post. Payments sizes vary from influencer to influencer so it is important to keep sight of some key influencer metrics when determining payment.
Engagement rates and followers are 2 of the most important metrics because they allow you to have an idea of how far your message will reach and what the potential ROI could be.
When filing taxes, both commission and pay-per-post methods fall under the umbrella of independent contractors. That means that whenever you pay an influencer in cash you will need the influencer to complete a W-9 form so that you can file a 1099 form. One exception to this rule is if you have paid an influencer less than $600 in that given year.
Brands running gifting programs for ambassadors through SocialLadder do not need to issue a 1099 form unless they gift an individual ambassador products valued at $600 or more.
Influencer perks are tax-deductible write offs you give to influencers that cost your business money. Examples of influencer perks include:
- Personalized merchandise
- Prizes for giveaways
- Products used for reviews
If these perks cost you money, you may be able to claim some of those perks as operating expenses. It is important to confirm if some of these perks qualify so make sure to be in contact with an accountant or attorney before finalizing your taxes for the year.
Ambassador and influencer programs will continue to grow as they have become a great way to communicate your product to your target audience. Fortunately, there are different methods that your brand can use to compensate influencers for their promotion.
In addition, as you can see from this post, there are tax benefits depending on the method you choose. With this information in mind, you will be able to decide which fits your brand, budget, and goals the most.
If you need help managing and optimizing your brand’s ambassador/influencer program, be sure to check out SocialLadder.
NOTE: The information in this article is not legal advice. Brands should speak with their accounting/legal team and/or review the IRS website for more information about tax rules and regulations for influencers and ambassadors as it relates to the brand’s specific use cases.