Lately, I have been fielding questions from clients regarding the purportedly forthcoming ban on TikTok, particularly from a federal income tax perspective. Whilst the legal nuances underpinning the proposed ban and the Constitutional implications are complex, I am providing a brief synopsis below which addresses some of the key considerations from a U.S. income tax perspective, particularly for those influencers making headlines by threatening to stop filing their taxes.
I. Legal Obligation to Pay Taxes
Under the federal Internal Revenue Code (IRC), all U.S. taxpayers, including TikTok influencers, are obligated to file and pay taxes on income earned, regardless of the source or the medium through which it is generated. The banning of an app like TikTok, while potentially disruptive to an influencer’s business, does not negate the taxpayer’s legal obligation to report and pay taxes on prior or current earnings derived from its use. Tax obligations are tied to income generation and residency, not the continuity of the platform where the income was earned.
II. Distinction Between Failure to File and Failure to Pay
It is crucial to distinguish between the failure to file a tax return and the failure to pay taxes owed. Failure to file a return by the deadline (generally April 15 for individual taxpayers or March 15 for certain entities) can result in a penalty of 5% of the unpaid tax per month, up to a maximum of 25%. By contrast, failure to pay taxes owed incurs a penalty of 0.5% of the unpaid tax per month, up to a maximum of 25%. Both penalties can accrue simultaneously if a taxpayer neither files nor pays. Additionally, interest accrues on any unpaid taxes from the due date of the return until the balance is paid in full. The interest rate is set quarterly by the IRS and is compounded daily. These penalties and interest can result in a substantial financial burden.
III. Quarterly Tax Payments and Reporting Requirements
Influencers operating as self-employed individuals are typically required to make quarterly estimated tax payments using Form 1040-ES. These payments cover both income tax and self-employment tax (Social Security and Medicare) liabilities. Failure to make adequate quarterly payments can result in underpayment penalties in addition to the penalties for non-payment or late payment.
IV. Statutes of Limitation and Consequences of Non-Filing
If a taxpayer files a return, the IRS generally has three years from the filing date to assess additional tax. However, in cases where no return is filed, the statute of limitations does not begin to run, effectively allowing the IRS to assess and collect tax indefinitely. Additionally, willful failure to file or pay taxes can lead to civil fraud penalties or, in extreme cases, criminal prosecution under IRC § 7201, which carries significant fines and potential imprisonment. Celebrities like Wesley Snipes, Lauryn Hill, Ja Rule, and yes, even Hunter Biden were all investigated by the IRS variously for failure to file, failure to pay, or under-reporting (or outright falsifying) income and/or abusing expense deductions.
V. Legal Avenues to Reduce or Eliminate Tax Obligations
Influencers seeking to reduce their tax obligations may consider structuring their business as an S corporation. This can provide tax savings by enabling the owner to pay themselves a reasonable salary subject to employment taxes while taking additional profits as distributions, which are not subject to Social Security and Medicare taxes. Alternatively, influencers looking to eliminate their U.S. tax obligations entirely may consider renouncing their U.S. citizenship. However, this is a complex and costly process under IRC § 877A, which imposes an exit tax on certain individuals with significant assets or income. The “exit tax” (Eduardo Saverin, one of four co-founders of Facebook, Tina Turner, and Yul Brynner all went this route, by the way) is calculated as if the individual had sold all their assets at fair market value on the day before expatriation, potentially resulting in a significant tax liability.
VI. The Consequences of Non-Payment
Refusing or simply “forgetting” to pay taxes, regardless of the rationale, exposes influencers to significant legal and financial consequences. The IRS has broad enforcement powers, including the ability to file liens against a taxpayer’s property, levy bank accounts and wages, and garnish income. Furthermore, willful non-compliance can lead to criminal charges, with penalties that include substantial fines and imprisonment.
VII. Conclusion
The banning of TikTok or any other platform, regardless of the policy rationale and Constitutional arguments for and against, does not absolve influencers of their tax obligations under federal law.
Next Steps
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