Electronic sports, or e-sports, income is taxable to gamers who make money from participating in online gaming. Professional gaming has taken off in the past few years with some even making millions! The IRS defines income broadly. Any income received from donations, tips, subscriptions, sponsorships, and advertising from gaming or streaming is considered taxable income. Also, any fringe benefits received from sponsors such as free equipment or mileage is taxed based on the fair market value of the benefit.
Gamers are responsible for submitting a 1040 tax form reporting their income earned from e-sports. The income earned will be reported from hosting websites like Twitch, YouTube, or Facebook Live on tax form 1099. If you do not receive a 1099, the IRS still requires all income to be reported. Although some gaming income is classified as donations, do not be misled. The IRS still considers it taxable income. E-sports earnings are considered self-employment income to most gamers.
Some gamers are considered employees and will receive a W-2 from the company hiring them. If you are being offered a gaming contract, be sure to understand if you are being considered an employee or independent contractor. Independent contractors are considered self-employed and are responsible for more taxes, like self-employment taxes. However, self-employed individuals, unlike employees, can deduct their expenses.
Self-employed individuals are responsible for the following taxes:
Depending on where the tournament and / or gaming takes place will determine the taxes that are due. Some of the tournaments occur in other countries or states. If a gamer has to pay foreign income taxes on their income, they should apply for a foreign income tax credit on their US tax return.
Also, if the tournament occurred in another state, the gamer may owe state or local taxes to that state in addition to the state where they reside. Although states will either give an income deduction or tax credit for income taxed in other states, it is important to complete your taxes correctly to avoid letters, penalties, and interest from the state taxation departments due to paying the taxes to the wrong state or not at all.
Depending on how much money you make from e-sports will determine how you file your taxes. If you make a small amount, you can just claim the additional income on your tax return. However, if you earn a substantial amount from gaming, you will want to keep track of your expenses just like you were running a business and make quarterly estimated payments to the IRS and your state department of revenue. (You are running a business! Who says people cannot get paid to have fun?)
Example. - Billy the Occasional Gamer. Billy streamed occasionally on the weekends when he wasn’t busy doing homework, working, and hanging out with his friends. At the end of the year, he received a 1099 reporting the $640 he had earned throughout the year. His main income was from a job he had in the mall. Billy didn’t really have any expenses for gaming. He used his personal computer, and the electricity and Internet was provided in his dorm.
Example. - Kristen the Very Busy Gamer. Kristen started streaming as a hobby, but over the years she has built up quite a large fan base that gives her regular donations and tips. Also, she has several sponsorships and makes quite a bit from advertisements during her tournaments. She received a 1099 reporting her income of $55,000 for last year.
Although Billy and Kristen both are considered self-employed by the IRS regarding their e-sports income, their tax situations are vastly different. Although they both could deduct expenses, it probably would not be worth Billy’s time, especially since he has virtually none. Billy could just report the $640 to the IRS on his 1040 and pay the required taxes on his additional income.
For Kristen, it would be wise for her to treat streaming as her business and track all her expenses during the year. Expenses that e-sports gamers can incur include costs for:
If Kristen purchased a new gaming computer for $2,000, qualified for a home office deduction of $750, paid $1,250 in editor and advertising fees, and contributed $500 of her Internet expense towards her streaming business, she could reduce her taxable income by $4,500 ($2,000 + $750 + $1,250 + $500). If Kristen tracks her expenses, it will save her hundreds of dollars.
Also, since Kristen is making substantial income from participating in e-sports, she should be making quarterly estimated payments to the IRS and state as well. The IRS requires taxpayers to make quarterly estimated payments if they expect to owe $1,000 or more when they file their tax return. The easiest way to determine whether you need to make quarterly payments or not is to prepare an estimated tax return.
If you are negotiating a gaming contract, it is important to plan for taxes and how your expenses will be covered. It can make a big difference both on how much tax you will owe, how you will need to pay it, and whether you can deduct your gaming expenses. All game streamers’ income is taxable, even if it was given as a donation.
If you want to better understand how your self-employment or gaming income will affect your taxes, schedule an appointment today with Ohio's accounting and tax preparation professionals at Gudorf Tax Group.