Changes Made for Content Creators
Many publishers are changing how they characterize ad revenue payments to content creators using their platforms.
For many years, when a creator was monetized on a platform, the advertising revenue share paid to the creator was characterized as nonemployee compensation.
The platform reported the annual amount of compensation on Form 1099-MISC (Miscellaneous Information) and later used Form 1099-NEC (Nonemployee Compensation).
Nonemployee compensation is treated as ordinary income and generally subject to ordinary federal income taxes. Non-U.S. creators could generally avoid paying U.S. income taxes on these amounts because the income was considered foreign source income.
The companies have recharacterized these amounts from nonemployee compensation to royalty income.
Change From Nonemployee Compensation to Royalty Income
Under U.S. federal tax laws, royalty income is sourced to where the property is used and not where the creator is based.1
For example, assume a creator is based in Germany and uploads content to YouTube. When their videos are viewed by persons in the United States running U.S. advertisements, the advertising revenue share paid to the German creator will be U.S. source royalty income. It is no longer characterized as nonemployee compensation.
Because the earnings are now characterized as U.S. source royalty income, U.S. source earnings are now subject to federal withholding taxes as U.S. source FDAP income.
Example of a Non-U.S. Content Creator
John Smith is a citizen and resident of the Bahamas. John publishes videos on YouTube. John receives his yearly Google AdSense report, which shows total ad revenue of $10,000, with $6,000 being U.S. sourced and $4,000 being foreign source earnings.
On the $6,000 of U.S. source royalty income, Google must withhold $1,800 of taxes (i.e., 30% of $6,000), and John keeps the remaining $4,200 of U.S. source royalty income.