As we end one tax season and begin another I wanted to debunk a lot of the misinformation or myths surrounded around taxes and tax filing. I hear every day bad information or half-truths. Although there are many rules there are also unique situations so you must always ask your CPA if this applies to you.
1. I didn’t make any money in my business so I don’t need to include it on my tax return. True or False?
False- If you operate your business as the IRS defines a business you are required to file. Your income (depending on the industry) could already be reported to the IRS and therefore reported. If you do not report your expenses against this income you will be taxed on the profit. If you have a loss, you should report also because the loss will reduce your overall income tax liability. (Hobby losses are a big issue, so you will indeed have to show that you operate as a business)
2. I started a business and only have a few expenses. I can wait and claim them next year when I will have more income to offset these expenses. True or False?
False- Expenses are considered a tax deduction the year you paid. Payment can be with cash, check or credit card. If you paid with a credit card on December 31 st this is a business expense for that year.
3. Deductions and Business Expenses are the same thing. True or False?
False-Deductions are claimed on the Schedule A and reduce your taxable income. Business expenses offset Business Income and are reported on Schedule C.
4. I can hire occasional help and pay the workers cash. True or False?
False- IRS requires you to report all income paid to workers over $600 on a 1099. Big penalties for not keeping the W-9 records and not reporting should you be audited. (not to be confused by employee requirements)
5. I can pay everyone with a 1099. True or False?
False- This is a BIG NO NO! There is a list of requirements that a contract must fulfill in order to be paid as an independent contractor. The IRS discourages this (unless they meet the rules) due to the liability and responsibility of Medicare and social security taxes. The IRS responsibility is to collect these and if there are no clear divide it makes collecting messy. Bottom-line if you pay and give 1099’s at year end make sure you know for sure you are not liable for those taxes.
These are just a few myths debunked! If you have more tax situations you are not sure what to do with,
email me at email@example.com so I can clear up the fuzziness.