Spotify‘s stock price plunged 11.5% on Tuesday (July 29), erasing over $16 billion from the streaming giant’s market capitalization.

One key factor in the tumble: as part of its Q2 earnings today, the company forecast lower-than-expected profits for Q3, partly due to mounting payroll taxes tied to its soaring share price.

All this despite Spotify delivering strong operational results in Q2, with premium subscribers growing to 276 million (up 8 million quarter-over-quarter) and monthly active users reaching 696 million (up 18 million quarter-over-quarter).

However, investors appear to have been spooked by Spotify’s Q3 operating income guidance of €485 million ($550m), which fell well short of analyst estimates around €560 million.

Spotify’s Q2 operating income also fell short of analyst expectations, weighing in at €406 million ($460m) – below SPOT’s own guidance for the quarter.

The profit shortfall was largely attributed to what Spotify calls “Social Charges” – payroll taxes in certain countries that are tied to the value of employee share-based compensation.

As Spotify’s stock price has more than doubled over the past 12 months, these charges have ballooned dramatically.

Spotify’s market cap at the closing bell on the NYSE today (July 29) was USD $126.9 billion, according to Google Finance, down from approximately $143 billion the prior day.

Social Charges Impact

In Q2 2025, Spotify’s ‘Social Charges’ totaled €116 million ($132m), which was €98 million larger than Spotify’s own forecast for the costs due to share price appreciation during the quarter.

It represented a significant increase from the €58 million in ‘Social Charges’ recorded in Q2 2024.

Despite achieving that strong operating income of €406 million ($460m) in Q2 – up 50% year-over-year at constant currency – Spotify posted a net loss of €86 million ($97.5m) for the quarter, compared to net income of €225 million in Q1 2025.

“Social Charges are payroll taxes associated with employee salaries and benefits in select countries where we operate. Since a portion of these taxes is tied to the intrinsic value of share-based compensation awards, movements in our stock price can lead to fluctuations in the taxes we accrue.”

Spotify

The net loss was driven by high finance costs of €447 million ($507m), combined with the ‘Social Charges’, plus income tax expenses of €134 million ($152m), which pushed the company into the red despite its operational strength.

Spotify explained to investors: “Social Charges are payroll taxes associated with employee salaries and benefits in select countries where we operate. Since a portion of these taxes is tied to the intrinsic value of share-based compensation awards, movements in our stock price can lead to fluctuations in the taxes we accrue.”

Strong Underlying Business Performance

As reported earlier, the market reaction overshadowed what was otherwise a strong quarter for Spotify’s core business metrics.

Premium subscriber growth of 8 million in Q2 beat guidance by 3 million, while monthly active user growth of 18 million exceeded guidance by 7 million.

Revenue grew 15% year-over-year on a constant currency basis to €4.193 billion ($4.75bn).

Premium revenue increased 16% year-over-year on a constant currency basis to €3.740 billion ($4.24bn), driven by subscriber growth.

Meanwhile, premium ARPU of €4.57 ($5.18) was up 3% year-over-year on a constant currency basis, despite being down 1% in reported terms due to FX headwinds.

Beware the ‘Social Charge’

The ‘Social Charge’ situation highlights an unusual challenge for successful tech companies: rising stock prices can actually hurt near-term profitability in countries with payroll tax structures tied to equity compensation values.

Spotify’s gross margin improved to 31.5% in Q2 2025, up from 29.2% in Q2 2024, demonstrating the underlying health of its business model.

However, the Social Charges issue threatens to overshadow these operational improvements.

All EUR-USD conversions made at the average quarterly rate for Q2 2025 of 1.1338 according to the European Central BankMusic Business Worldwide