With the new filing extension set to a May 17th date, Americans have less than two months to fill out their tax returns. Many Americans dread tax filing, waiting until the last minute – out of procrastination, or perhaps, sheer confusion.
There are many tax myths that circulate this time of year. Being able to identify these myths or ‘advice’ is important to avoiding finding yourself in trouble with the IRS.
Whether you file your taxes yourself or hire a tax expert, you should have knowledge of how tax time works. Without further ado, here are some of the biggest tax myths – debunked.
1. Filing taxes is voluntary
Although it is technically considered ‘voluntary’ for each person to submit their taxes, everyone must do it. According to Bloomberg Tax, this myth is easily spread because it is confusing, and even holds some truth to it.
The article states that the U.S. tax system is characterized as voluntary, but all this means is that it’s up to the taxpayers to complete their returns, not the government’s.
Tax filing is required, although it is something each individual tax payer must do for themselves.
2. Taxes are the same – employed vs. self-employed
Some may think that all taxes are the same, whether you are employed by a corporation or are self-employed.
Some unfortunate news for all the freelancers and small business owners out there – you will owe more to the government than those who are employed.
According to financial consultant Nev Harris, those who aren’t employed by a large company must pay the full amount of social security and Medicare taxes.
Large corporations deduct taxes out of employee’s paychecks. But for the small business owners, they have to pay out all of those taxes solo.
3. You don’t have to report if you don’t receive a 1099
If you are a freelancer and you make over $600 from a client, you need to report the income when you file.
These clients will send you a 1099 form. One mistake many make is not filing all of their tax forms.
If you don’t receive the 1099 from the client, you are still responsible for reporting it to the IRS. Not being truthful about your income can cause you serious trouble.
4. Anything spent on your business can be a ‘tax write off’
Tax write offs are expenses for your business that can be deducted from your taxable income.
According to the IRS: “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.”
Therefore, it’s not always possible to write off certain expenses. It’s also important not to confuse the personal with the professional purchases.
5. Filing an extension means you can delay payment
Filing an extension gives you an extra six months to provide your return, but it doesn’t delay your requirement to pay taxes until then.
Outstanding taxes are still due by the filing date. According to My Bank Tracker, there are two different penalties if you don’t file on time:
“-The failure to file penalty is 5 percent of what you owe for every month your return is overdue, up to a max of 25 percent. The failure to pay penalty is smaller, at 0.5 percent of your balance and its capped at 25 percent too.”
Don’t fall for the tax myths
All of these tax myths can put taxpayers in a tough – and confusing – situation.
However, understanding the false information that comes along with tax season can help save time, money and anxiety.
If you are truly confused about your taxes or how to file, consult an accountant or tax professional.