Are you a business owner who’s feeling overwhelmed by taxes? Don’t worry, you’re not alone! Navigating taxes can be tricky, especially with all the tax myths and misconceptions out there. In this blog post, we’ll dispel some of the most common tax myths and help you stay informed about your business taxes.
Myth #1: The Rich Don’t Pay Any Taxes in the US
The misconception that the rich never pay taxes in the US is simply not true. The IRS records show that the wealthiest taxpayers actually pay a majority of federal income taxes. In fact, the top 1% of taxpayers pay about 37% of all federal income taxes, according to the Tax Foundation. Despite having access to a variety of tax evasion tools, wealthy taxpayers are still subject to the same laws and regulations as everyone else. While they may have access to more specialized deductions and credits, they are still expected to pay their fair share of taxes according to their income level.
Myth #2: Taxes are the Same Whether You’re Employed or Self-Employed
Myth #2: Taxes are the Same Whether You’re Employed or Self-Employed. This is not true. As an employee, you will have taxes withheld from your paycheck and paid directly to the government. However, self-employed individuals must pay their taxes directly to the government and may need to make estimated payments throughout the year to avoid penalties. Additionally, self-employed individuals are responsible for paying both the employee and employer portions of Social Security and Medicare taxes, while employees only pay the employee portion. It is important to know the difference between these two types of tax obligations when filing your return and planning for the future.
Myth #3: Startup Costs Aren’t Tax Deductible
Many business owners mistakenly believe that startup costs are not tax-deductible. The truth is that many of these expenses can be deducted from your taxes, though there are important limits, exceptions, and rules to be aware of. For example, money spent on getting credentialed to work in a particular field cannot be included in startup costs and are generally not tax-deductible. It is important for business owners to familiarize themselves with the rules and regulations around these types of deductions so that they can make sure they are not overpaying the IRS or missing out on any tax deductions.
Myth #4: I Don’t Need an EIN If My Business is Registered as an LLC
It’s important to note that all Multimember LLCs require an Employer Identification Number (EIN), regardless of whether they pay taxes as a partnership or a corporation. On the other hand, if you are a single-member LLC, you may not need to file for an EIN. Generally, businesses only need to get a new EIN when their ownership or structure has changed. Additionally, you should also be aware that changing the name of your business does not necessarily require an EIN. When it comes to taxes, it is essential to do your research and always consult with a tax professional for any specific questions or concerns about your business.
Myth #5: I Can Avoid Paying Taxes by Hiring People as Contractors
It’s tempting to think that you can get away with not paying taxes by hiring people as contractors instead of employees. However, hiring someone as a contract worker does not exempt you from taxes. The IRS is on the lookout for businesses misclassifying employees as contractors. If your business is caught doing this, you could face hefty fines and penalties. Furthermore, all contractors and freelancers must pay quarterly taxes, or estimated taxes. If you don’t, you’ll owe the IRS money when it comes time to file your taxes. So, it’s important to understand the difference between employees and contractors and to ensure everyone is classified correctly.
Myth #6: I Can Pay Any Salary to Myself
Myth #6: I Can Pay Any Salary to Myself is a myth based on a myth. Firstly, a deduction simply lowers the amount of taxable income whereas a credit lowers the amount of taxes that you owe. Secondly, the Internal Revenue Service (IRS) requires business owners to pay themselves a “reasonable salary.” Depending on your business and industry, this could mean anything from the minimum wage to six figures. Ultimately, you should use data from comparable businesses in your industry to determine what’s reasonable for your business. An accountant or tax professional can help you decide what salary is best for you and your business.
Myth #7: If I Run Into Issues with the IRS, There are Fines, Interest Costs, and Late Fees
It’s important to stay on top of your taxes to avoid running into issues with the IRS. Some common mistakes that can lead to trouble with the IRS include poor bookkeeping, underpaying estimated taxes, not filing a return, or omitting income. If you do run into issues with the IRS, you can expect to face fines, interest costs, and late fees. There are also certain situations where the six-year statute of limitations may apply and you may be able to avoid penalties. To protect yourself and your business, it’s important to stay up to date with your taxes and get professional advice when needed.
Myth #8: Meals and Entertainment Are Always Tax Deductible
As business owners, it’s important to understand the tax implications of your decisions. While entertainment expenses are generally not deductible, there are exceptions, including when the expense is directly related to the business and is ordinary and necessary. The business owner must be present, and the meal can’t be “lavish or extravagant.” Properly substantiated meal and entertainment expenses are deductible, though the current deduction is limited to 50%. To ensure compliance with federal tax requirements, it’s best to keep a record of all your transactions for these expenses.
Myth #9: Accountants and Tax Preparers Know About Magic Deductions
One of the most common tax myths is that accountants and tax preparers know about “magic” deductions that can help lower your tax burden. Although they may be able to suggest some deductions you may not have been aware of, they cannot guarantee any amount of savings. Ultimately, it is up to you to make sure you are properly filing your taxes and taking advantage of all the deductions you are entitled to.
Myth #10: Blindly Following Someone Else’s Bad Tax Advice Won’t Get You in Trouble
It’s important to remember that blindly following someone else’s bad tax advice could get you into hot water. Even if a friend or family member gives you advice with the best intentions, they may not know the full scope of tax law or the potential implications of their advice. Instead, consider speaking to a professional tax preparer or accountant to ensure that your taxes are filed accurately and in compliance with the law.
Related: 12 Scams The IRS Wants You to Avoid.