Taxing Patreon Contributions
June 8, 2018
Throughout the past few years, many tech companies have streamlined industries by cutting out middlemen. Tesla, while most known for its innovation with electric cars, allows customers to order cars directly from the company. Uber and Lyft weaken the demand for established taxi services. And now, changes at Youtube have given rise to a new competitor, Patreon, which allows fans to directly compensate video and other content creators.
For those unfamiliar with Patreon, it is driven by two types of people: creators and patrons (fans). The relationship is fairly self-explanatory: patrons contribute money to the creators. Many creators set up separate tiers for patrons who donate varying amounts of money; for instance, a creator may say a $1 a month contribution comes with access to an additional article a month, while a $5 a month contribution comes with access to a half-hour Q&A session.
Founded in 2013, Patreon has grown rapidly over the past five years. In the wake of Youtube removing ads from a large swathe of videos, many creators moved to Patreon in 2017 to generate income, leading to see a doubling in creators and patrons for Patreon.
The tax treatment of Patreon contributions is not immediately clear. The first consideration is whether Patreon contributions are charitable. According to Patreon’s FAQ section on taxes, unless creators are legally recognized as 501(c)(3) charities, patrons cannot deduct their contributions under the charitable deduction. However, for creators who are legally recognized as 501(c)(3) charities, their patrons can use the charitable deduction for their contributions.
Many creators offer special benefits for different levels of contribution. This feature of Patreon can make the “charitable donations” classification problematic. For creators who are legally recognized 501(c)(3)s, the patron’s contributions seem more like a payment in exchange for services instead of a charitable donation. In the case of a creator who is legally recognized as a 501(c)(3) and offers perks for patrons, the patrons are only allowed to deduct the amount of money they contributed minus the value of the perk they received. For instance, if a $10 a month contribution to a 501(c)(3) creator ($120 for the year) meant receiving a used book worth $4 in the mail every month ($48 for the year), the patron would only be able to deduct a total of $72 for the fiscal year under the charitable contributions deduction, similar to rules governing charitable contributions in other contexts.
Although Patreon is a United States company, creators and patrons are located all over the world: a patron from South Africa might contribute to the Patreon of a Canadian painter, or an Australian writer might receive contributions from an American patron. The international nature of the service Patreon provides means activity on Patreon often falls under multiple tax codes.
Patreon does not withhold taxes on any of the contributions it receives, and it is the responsibility of the creator to pay their income tax. Creators who live outside of the United States must comply with the U.S. tax code, since Patreon is a U.S.-based firm. Non-U.S. resident creators must withhold 30 percent of payments made from their patrons in the United States, and subsequently remit those payments to the U.S. government. However, that rule does not apply if the U.S. has an income tax treaty with the country in which the creator resides. Income tax treaties can allow for a tax rate lower than 30 percent for payments from the U.S. to foreign earners, or they can allow for such payments to be exempt entirely from U.S. taxation. The U.S. has income tax treaties with numerous countries.
For patrons in Europe, Patreon works slightly differently. Countries in the European Union tend to rely on value-added taxes (VATs), a consumption tax that imposes a tax on every point in the production process. Under this system, European patrons are taxed when they contribute to creators, and the creator is not responsible for remitting those taxes. Instead, the company remits VAT receipts to the appropriate government. For example, consider a patron in Austria, a country with a VAT of 20 percent. Under this system, if the patron chooses to make a $1 a month contribution to a creator, then Patreon will bill the patron for $1.20 a month and remit the added twenty cents to the Austrian government.
While only a small percentage of creators can make a living on Patreon, the company has grown rapidly as artists and commentators see it as at least a source of supplementary income, and it has the potential to expand even further. Given the international nature of the business model and the hard-to-parse relationship between creator and patron, Patreon pages form an interesting case study in various aspects of national and international tax codes.