Reasonable comp for social media influencers

The rise of social media has led to the emergence of a whole new employment category and revenue stream for many individuals: the social media influencer. Perhaps you have a client who derives considerable income from sharing content and promoting specific brands through Instagram, Facebook, YouTube, and other social media platforms.

For some influencers who are doing this work as a full-time job and have an S Corporation entity, reasonable compensation can have a significant impact on the amount of tax they pay from an income perspective, as well as the amount of payroll taxes they pay. And payroll taxes, in particular, can have a significant negative impact on their future Social Security payments.

Educating your clients on reasonable comp is critical

If you are new to working with social media influencers, you may be surprised at the revenue they generate. For many of them, it is important to educate them that their reasonable compensation is not the sum of their revenue. Reasonable compensation calculation is based on an accurate calculation of the market value of the services they actually perform in their business.

Let’s take the example of Lisa X, a social media influencer who sends out invoices in the amount of $100,000 for her work. This is simply what Lisa charges for her services; it is not necessarily her reasonable compensation for doing the activities that contributed to the work she did.

In order to accurately determine a social media influencer’s reasonable compensation, you need to think about the type of activities they performed to create the output for the services or products invoiced.

Calculating Lisa’s reasonable compensation

Consider this scenario when it comes to calculating reasonable compensation for Lisa:

Lisa is creating content five hours a week; that is the extent of her actual work. Yet even though she is getting paid tens of thousands of dollars a month for it, her reasonable compensation may only be a few thousand dollars a year because the actual activities performed to create the content are lower paying and do not take much time.

These activities may include:

• Writing social media posts.
• Graphic design.
• Taking photographs of themselves or products they promote.
• Attending events or trade shows.
• Creating videos.
• Bookkeeping.

For our example of Lisa X, first, you’ll need to select which reasonable compensation calculation is most applicable. Lisa performs many of the activities listed above, so we’ll choose the Cost Approach since she is effectively wearing many hats.

In a nutshell, the Cost Approach breaks the duties of the business owner into their components, such as company administration, accounting, finance, marketing, advertising, engineering, purchasing, and other areas.

The Cost Approach breaks down the time spent by the business owner into the various duties performed and quantifies the amount of time devoted to the different duties. Next, salary surveys are used to determine a comparable wage for each job duty performed by the business owner based on their proficiency, then added up to arrive at the total “cost” to replace the services of the business owner.

The Cost Approach generally works best for small businesses where the business owner provides multiple services for their business (wears many hats), just like Lisa does in our example. 

Given this definition, you’ll want to understand exactly what tasks she performs, at what proficiency, and for what amount of time each week. Then you can look up wage data for each of those tasks relative to Lisa’s location to calculate with her reasonable compensation figure.

Considerations for calculating the amount

Some important considerations in calculating reasonable compensation for Lisa include the following:

You’ll need to select how many hours, on average, Lisa works per week. Remember that a 40-hour work week is the standard for the IRS computation of reasonable compensation. Your client may work more, which won’t affect the upper threshold of their reasonable compensation calculation, but if your client works less, it will lower their reasonable compensation. This has an effect on their contributions to Social Security and retirement funding.

In Lisa’s case, she is only working 5 hours per week on average, which is what the calculation will be based on.

Next, you’ll need to calculate the value of Lisa’s standard tasks. These are standard tasks that many S Corporation owners complete for their business. You’ll need to add in how many hours per week (on average) Lisa spends on each category of activities, and, given Lisa’s proficiency level, what the average pay rate would be in her area.

In this example, you’ll see that Lisa’s income ($100,000) is much higher than the total sum of the current and reasonable market value of these types of services. The discrepancy may be so great that it could raise a red flag with the IRS.

In this situation, ensuring you have accurately calculated reasonable compensation for her social media influencer work is critical because having that auditable trail could potentially save her from a tax issue involving delinquency, which may then lead to significant fines and penalties. To handle any potential audit, you will need independent and unbiased data you can share with IRS examiners should the need arise.

A diverse client base leads to advisory services

As social media continues to grow as a profession, you may begin to see with more regularity clients similar to Lisa X. For these clients, the potential reasonable compensation inaccuracies is relatively high, and so is the need to calculate reasonable compensation accurately in order to avoid any potential fallout from non-compliance with IRS regulations and to protect your own professional liability.

Having clients such as Lisa and others leads you to adding advisory services to your practice; helping a client calculate reasonable compensation falls into your role as a tax advisor, and chances are, will lead to more advisory work.