Editor: Mary Van Leuven, J.D., LL.M.
With the growth of "influencer" culture has come increased sophistication in companies' use of influencers as part of an overall marketing strategy. This has now moved beyond extending an invitation and free pass to an event to more extensive and explicit contractual obligations involving required presence and responsibilities at events, minimum numbers of social media postings showcasing or mentioning a product, mandatory interviews, and other duties as part of the expanding universe of social media marketing possibilities. And in return, influencers often receive little or no cash but rather some combination of access to events involving entertainment and meals and a series of free or discounted items and services related to the product they are being asked to market. But that could establish a relationship involving the receipt of compensation for services, and so the issue arises of whether and when these "freebies" or discounts result in taxable income to the influencer and possible limitations on deductions for the related expenses.
The typical service contract with an influencer creates an independent contractor relationship — the service recipient is requesting specific services, such as presence at specified events or a minimum number of social media postings, but is not directing and controlling the influencer in his or her production. To the extent the influencer is being paid in cash for these services, this generally would be taxable compensation subject to reporting on a Form 1099-NEC, Nonemployee Compensation. But, often, an influencer is "paid" in ways other than cash and often with the expectation (at least of the influencer) that these benefits will not be taxed.
Several years ago, the IRS engaged in some back and forth on the issue of gift bags provided to presenters at awards shows, commonly referred to as "swag bags." Ultimately, the IRS posted on its website an informal FAQ finding that the products and services claimed by the presenters were taxable as income and were not gifts, because "the organizations and merchants who participate in giving the gifts bags do not do so solely out of affection, respect, or similar impulses for the recipients of the gift bags" (see IRS, Gift Bag Questions and Answers; Duberstein, 363 U.S. 278 (1960)). Notably, the FAQs found that with respect to items like gift certificates and vouchers, an individual was taxable only to the extent the individual used those items, and similarly, with respect to a "free shopping room," an individual was taxable only to the extent of the individual's selected items. This would seem to address any potential constructive receipt issues, although the FAQs are not explicit about the analysis of the issue.
This gift bag analysis would seem to apply to the items or services provided to an influencer, especially if the items or services are provided as part of a contractual obligation, in that the items or services are not provided "solely out of affection, respect, or similar impulses." And when specific services are outlined that the influencer must provide to earn the items or services, then the taxable income has been identified as compensatory in nature.
This then requires analysis of whether some or all of the items or services provided to the influencer may be excludable from income. The exclusions under Sec. 132 for working condition fringe benefits and de minimis fringe benefits may be applied to independent contractors. This is particularly relevant to travel and lodging expense reimbursements provided to an influencer, which will require substantiation of expenses similar to an accountable plan (see Regs. Sec. 1.132-5(a)(1)(v)). In addition, certain meal and entertainment expenses may be excludable from income but will be subject to the deduction limitations of Sec. 274, including the general disallowance of entertainment expenses in Sec. 274(a), with certain exceptions provided in Sec. 274(e). In contrast, the Sec. 132 exclusions for no-additional-cost services and employee discounts do not apply with respect to benefits provided to an independent contractor.
If there is no applicable exclusion, the compensation income should be reported on Form 1099-NEC and the entire process of obtaining a Form W-8, Request for Taxpayer Identification Number and Certification, and any other reporting process used by the service recipient for independent contractors will need to be applied. In addition, if some or all of the compensation takes the form of fringe benefits, consideration should be given to which party will be subject to any applicable deduction limitation.
For example, with respect to food and beverage expenses incurred by the service recipient, or incurred by the influencer and reimbursed by the service recipient, the service recipient's deduction for the related expenses may be limited by Sec. 274 if the amounts are not treated as compensation income to the influencer. Under Sec. 274(n)(2), the deduction of a food and beverage expense is limited to 50% of the deduction that would otherwise be allowable. (Section 210(a) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, Division EE of the Consolidated Appropriations Act, 2021, P.L. 116-260, added Sec. 274(n)(2)(D), which provides a temporary exception to the 50% limitation for expenses for food or beverages provided by a restaurant. Sec. 274(n)(2)(D) applies to amounts paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023. For more information, see IRS Notice 2021-25.) If the contract provides that the service recipient is taking the expense deduction, the contract should also require that the independent contractor provide sufficient receipts or other documentation necessary for the service recipient to substantiate the expenses (and that otherwise the amounts will be reported as compensation to the independent contractor).
In contrast, if the service recipient treats the cost of the food and beverages as compensation income to the influencer, then the service recipient's deduction will not be limited by Sec. 274, although in that situation, the influencer's available deduction for the expenses may be. If the tax treatment of the costs is expressly identified in the contract to provide services between a service recipient and an independent contractor, that will determine the party that generally would be subject to the deduction limitations. In the case of an arrangement between a service recipient and an independent contractor providing for reimbursements that does not expressly address the tax issue, if the influencer provides adequate documentation to the service recipient, the deduction limitation applies to the service recipient. If the influencer does not provide adequate documentation, the deduction limitation applies to the influencer.
The growth of celebrity influencers' services in marketing strategies and the formalization of these arrangements require these relationships to be reassessed from a federal tax perspective. Celebrities used to be invited to events with the hope only that they would attend and be photographed. The more modern arrangements with influencers often state explicitly what marketing services the influencer will provide to the customer and the benefits the influencer will receive in return. Under those circumstances, the influencer should be thought of as like any other independent contractor providing services to a customer. As a result, a best practice to avoid any surprises is to ensure that the federal tax consequences of the arrangement are understood by all the parties and explicitly addressed in the contract.
EditorNotes
Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C.
For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or mvanleuven@kpmg.com.
Contributors are members of or associated with KPMG LLP.
The information in these articles is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of Section 10.37(a)(2) of Treasury Department Circular 230 because the content is issued for general informational purposes only. The information is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. The articles represent the views of the author or authors only, and do not necessarily represent the views or professional advice of KPMG LLP.
