Patreon is a website that allows people to contribute funds to support the work of artists and creators. Let’s start from the beginning.
Patreon is deliberately misspelled, likely because patron.com was already taken and whoever owned it wanted too much money for it. A patron, as in patron of the arts, is (or was) a person who supports artists or art causes. The most famous patrons of all time were the Medici family, who supported numerous artists, including Leonardo da Vinci. The idea behind the website is arguably similar.
The Patreon website allows people to support “creators” by pledging a certain payment per month. In exchange, the creator may (but is not obligated to) offer various “rewards” for said contributions. The question is are Patreon payments considered taxable income for income tax filing purposes.
Patreon Contributions Not Tax Deductible
Let’s start with the easier question. No matter how much you like artists, and no matter how much supporting them feels like charity, such contributions are typically not tax deductible contributions in the eyes of the IRS. IRS Publication 526 deals with charitable contributions and it specifically says,
“You cannot deduct contributions to individuals including… contributions to individuals who are needy or worthy.”
If the recipient of the contributions is established as a 501(c)(3) organization with a valid Tax ID number for that organization then contributions may be tax deductible. However, to be a fully deductible charity contribution, the person making the contribution cannot receive any benefit in exchange. Thus, even Patreon contributions made to charitable organizations may not be tax deductible if any of the rewards received by the contributor are of value. In that case, the value of any benefits received may not be deducted.
So, for example, if you do manage to find a qualified organization on Patreon and contribute $50 per month, but you get a t-shirt worth $10 each month, you could only deduct $40 per month as a charitable contribution.
Is Money From Patreon Taxable Income?
While the question about tax deductions is relatively simple to answer, the converse about whether or not such contributions are taxed as income is trickier to answer.
The overriding section of a tax code says,
“Except as otherwise provided… income means all income from whatever source derived.”
In other words, EVERYTHING is consider income for tax purposes unless it fits under a defined exception. Gambling winnings, drug deals, if you got money for selling your kidney, it doesn’t matter, income from pretty much any source, legal or illegal, online, offline, traditional, or new economy all counts as income.
At first blush, this makes Patreon payments taxable. It also makes Patreon’s cut, or service fee, a business expense, if you are running a small business and filing a Schedule C. The things that are exempt from being income are very limited. Almost none of them can even come close to being stretched to allow Patreon contributions to be non-taxable.
The one exception is gifts. Gifts are one of the things that is excepted from being income. So, if the contribution through Patreon is a gift, then it is not taxable. If it is ANYTHING ELSE it is taxable. (Note: there is such a thing as a gift tax. However, gift tax is paid by the person giving the gift, not the recipient, but only if it exceeds the annual gift tax limit: $14,000 for 2015.)
Here is the really important part though, GIFTS are tax-free, DONATIONS are not.
Are contributions from Patreon considered gifts?
This is the sticky part. When users of Patreon offer various benefits in exchange for contributions, it becomes easier to claim that the contributions are not gifts, rather they are payment for something. However, the value of many of those gifts is negligible and if someone wanted to argue that as such the contributions are still really just gifts, then there would mean no taxes. But, even then just the fact that the recipient does SOMETHING at all in exchange means that they are not gifts. Gifts are never”for” something. At best, you could claim that the contribution above the part of what was received is a gift.
Patreon by its very nature is about an artist or a creator DOING SOMETHING which is supported by others. That is income, even if the contributor doesn’t specifically “get” anything, the fact that you produced the podcast in exchange for those contributions means it’s taxable income, no matter how worthy or noble.
Remember, the exception for income purposes here is GIFTS not DONATIONS. You, an individual, cannot receive tax-free donations, you can only receive gifts. The distinction matters. Grandma giving you $200 because it’s your birthday is a gift (you did nothing, she expects nothing.) A $20 monthly contribution for your online comic is not a gift (you did something, contributors expect the comic will be made.)
Note: Although this is not spelled out anywhere, the IRS is more likely to believe something is a gift when it comes from someone you have an association with. One total stranger handing you money as a gift if believable, but 50 total strangers handing over cash and expecting nothing in return? That’s a tougher sell.
There are a lot of theories out there about whether or not you can count them as gits. If you are just curious, then, hypothetically, yes contributions could, possibly, maybe, be considered gifts.
However, for practical purposes, this all comes down to what gets reported to the IRS. If Patreon sends you a 1099-K or other tax reporting form for filing your taxes, that means they reported the transactions to the IRS. The IRS will assume that these payments are income, and sooner or later, the computers will flag that you are not reporting all your income. If they have the manpower, and it is deemed worth enough, you’ll get an audit letter. It is at this point that you can make your argument that it’s a gift. This is highly unlikely to sway the IRS agent in charge of your account, which means you would have to go to Tax Court and win. This isn’t a cheap proposition, which only makes it worth it if you are getting a lot of money. Ironically, if you are getting a lot of money, it makes it more likely that they’ll come asking questions, so… your call. Even worse, drawing this much attention increases the odds that you’re whole return will get a full going over, so be double sure everything else is squeaky clean if you go down this road.
Even if Patreon does NOT report your payments, they are technically still taxable, but whether anyone ever notices is a whole other question. The IRS audits a really low percentage of taxpayers, and thanks to budget cuts, it’s about to get even lower. So, in this case, if you didn’t include your Patreon contributions because you, in good faith, consider them gifts, and no one ever says otherwise, then, you are right by default, but that’s a risk (albeit a small one) you’ll have to take.
The best bet then is to keep careful track of all your expenses because you can deduct them to help with the additional taxes on your Patreon income. If you get a small amount, chances are there are enough small business expenses to wipe out most of the additional income. This is so much easier if you set up a business. I recommend an LLC for a small side project. Consult a tax professional if you want to go the C Corp or partnership route.
If your income gets reported, then you should report it too, unless you are willing to go to tax court in which case, go ahead and take one for the team. Maybe you’ll win and no one will have to report their Patreon contributions. If your Patreon contributions do not get reported (that is, you don’t get any sort of 1099 from Patreon or their assigned) then, it’s your call. I won’t sit here and tell you not to report income, but if you really believe it is not income, then you should do what you think is correct.
The one thing you do NOT want to do is report it and then try and back it out with some sort of deduction or credit. That WILL NOT hold up. Either report it or don’t. Don’t try and get cute.
All information contained here is for educational purposes only. It is not advice on your specific tax situation. You are responsible for your income taxes. Consult with a tax professional for advice specific to you.
Tags: Federal Income Taxes, income, income tax, income taxes, IRS, taxable income, Taxes