When it comes to filing taxes, you might not know as much as you think you do.
Yet, being in the know about filing taxes can help you avoid costly mistakes come tax season. Knowledge can also save you money, time, and hair-pulling moments.
So what is the truth and what is a myth? Here are a handful of the top myths about taxes, debunked:
Myth #1: Bonuses are taxed at a higher rate.
Truth: While you might think this is the case, bonuses aren’t taxed at a higher rate. It just looks like that because of how withholding works.
This myth is understandable, explains Logan Allec, CPA and founder of Money Done Right.
Allec explains: Bonuses — and in some instances, overtime — is considered supplemental income by the IRS. This means they’re withheld at a flat 22% rate for federal income tax purposes.
“This may come as a shock if your other wages are withheld at a lower rate,” says Allec.
Myth #2: Overtime is taxed at a higher rate.
Truth: This is a falsehood. According to Riley Adams, a licensed CPA and founder of Young and the Invested, overtime is not taxed at a higher rate—unless earning this extra income pushes you into a higher marginal tax bracket.
“In this instance, you’ll pay a higher rate of taxes only on this added income, but only when it pushes your income into a higher bracket,” says Adams.
“Otherwise, it’s simply you earning 50% (assuming a time and a half overtime rate) more on your usual hourly rate.”
Myth #3: You can get back more in taxes than you paid.
Truth: This could actually be true. In some cases, it’s possible to get more back in taxes than you actually paid in, explains Allec.
For example, this could happen with those who haven’t earned a ton of money — either in the form of a job or disability if you’re under 65. And, with the Earned Income Tax Credit (EITC), refundable tax credits can theoretically provide you more back in taxes than you paid, adds Adams. Let’s look at this scenario: Say in 2019 you were single, the head of the household, or widowed. If you have one child and your income was $15,570 or under, you qualify to tap in to the EITC. And let’s say the tax credit you qualify for — which is $3,526 in 2019 — is more than you owe in taxes. In this particular case, your tax refund could be more than what you end up owing Uncle Sam.
Myth #4: Everyone needs to file a tax return.
Truth: Well, this is a half-truth.Per the IRS, most people with income under a certain amount don’t have to file a tax return, explains Adams. For instance, if you’re single under 65, you don’t need to file if your gross income is less than $12,200. If you’re married and filing jointly, you don’t need to file a tax return if your combined gross income is $24,400.
“In fact, if your gross income is less than the standard deduction for your filing status, you don’t need to file a return,” says Adams.
Yet, it’s a good idea to file anyway as you may still qualify for a refund, explains Katherine Pomerantz, a bookkeeper and founder of The Bookkeeping Artist.
That’s because you might qualify for an immediate tax refund — even if you paid no taxes through tax credits like the “additional child tax credit” and the “earned income tax credit”.
“Business owners and side hustlers have further incentive to file in lean years. That’s because business losses can result in future tax deductions in the years you make money,” says Pomerantz.
Myth: Independent contractors, side hustlers, freelancers, and self-employed individuals don’t need to pay taxes.
Truth: This is far from true. If you’re side hustling to earn some extra cash, you’ll need to pay taxes each year, points out Adams.
“In fact, these entrepreneurs will need to pay all the usual taxes a W-2 employee would plus the employer’s portion of payroll taxes (i.e., Social Security and Medicare),” says Adams.
If you’re a freelancer, check out this guide we created with details on how to file taxes as a freelancer.
Myth #5: Side hustlers and business owners can write-off all gifts, meals, and entertainment.
Truth: This is another half-truth. Businesses and side hustlers can deduct expenses that are ordinary and necessary for their industry. That being said, none of the aforementioned examples — gifts, meals, and entertainment — are 100% tax deductible, explains Pomerantz.
For instance, gift deductions are limited to $25 per person per year.
“There are other tricky limitations here, such as the rule that giving a gift to a customer’s family member counts as a gift to that customer,” says Pomerantz.
“So if you bought a customer and his spouse tickets to a baseball game, then only $25 would be deductible. Not $25 per ticket in this case as the familial connection excludes the second person.”
What’s more, if you attend that baseball game with your customer, then this is no longer a gift. It now falls under “entertainment.” And, entertaining clients via tickets or events are no longer tax deductions as of 2019.
Business meals with clients, however, are still 50% deductible. Speaking of meals, office snacks and meals are also only 50% deductible.
And, “this only counts if you’re stocking the office with food for employees,” says Pomerantz.
“If you are the business owner or side hustler and don’t have any employees, you can’t deduct snacks and meals you buy for yourself.”
Myth#6: Freelancers and gig economy workers can deduct anything for taxes.
Truth: You’ve got to prove the expense was actually used for your business. This means you must keep a record of who the expense was for, where and when it took place, and why this was important for your business, explains Pomerantz.
For instance, if you bought a bunch of rubber duckies from Amazon, you might be able to write it off if they were used as props for a YouTube series to help promote your side hustle or business. However, you’ll need to make a note that it is technically office supplies, and keep a copy of your receipt.
Myth #7: If I e-file my return, I have to pay my tax bill right away.
Truth: E-filing doesn’t mean you have to pay your tax bill right away.
“E-filing your tax return is just that — electronically filing your tax return with the IRS,” says Allec.
“You can choose to make a payment at the same time, or you may pay at a later date.”
If you don’t think you will be able to make a timely tax payment timely, consider setting up a payment plan with the IRS.
Myth #8: A tax extension gives you additional time to file your tax return.
Truth: While an extension gives you more time to file your tax return, a tax extension doesn’t grant you more time to pay your taxes, explains Cathy Derus, a CPA and founder of Brightwater Accounting.
“So if you need additional time to complete your tax return, and you think you will owe taxes, it’s better to pay something when requesting an extension to minimize any underpayment penalties and interest,” says Derus.
Myth #9: Tax “write-offs” are free money.
Truth: Some people have the misconception that tax write-offs are a dollar-for-dollar reduction in their tax liability, explains Allec.
“In reality, tax “write-offs” are just deductions. The actual cash value they give you is the amount of the write-off multiplied by your combined federal and state marginal tax rate,” says Allec.
“Many people who don’t understand these rules think claiming business deductions is a great way to ‘write off’ their day-to-day expenses, but spending money simply because it’s a ‘tax deduction’ rarely results in a net gain,” adds Pomerantz.
“First, you must keep proper documentation. Second, not every expense is 100% deductible,” she says.
Are you ready to file your taxes?
Hopefully, debunking these common tax myths will help you steer clear of making mistakes when filing your taxes. And remember: When in doubt, consult with a tax advisor or accountant.
This page is for informational purposes only. Chime does not provide financial, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice. You should consult your own financial, legal and accounting advisors before engaging in any transaction.