TikTok is spreading tax myths
TikTok is spreading financial misinformation, according to a new report, including five troubling tax myths affecting self-employed workers.
According to Paul Koullick, CEO of tax software developer Keeper, the majority of the software's customers are in their 20s and early 30s and spend several hours a day on social media. A 2021 survey commissioned by Forbes Advisor found that nearly 80% of millennials and Gen Zers have gotten financial advice from social media, with 32% relying on TikTok.
"We constantly deal with misinformation coming from an account they follow, as well as more conservative fake news that the article doesn't focus on as much," said Koullick. "As a business, Keeper has to deal with the context people are coming in with and we need to understand that gray space in the tax world because we have to come up with our stance and values for our customers."
As a result, Keeper staff writer Chloe Bryan watched hundreds of TikTok videos to immerse herself in how tax information gets portrayed on social media. Relying on accountants and tax experts to validate the information to get both sides of the picture, the Keeper team also used the anonymized 2022 transactions from 28,449 self-identified freelancers who used the Keeper app.
The top tax five tax myths they discovered are explained below.
1. If you write off $500 in business expenses, you'll save $500 on your taxes
Contrary to popular belief, tax deductions never offer people a dollar-for-dollar refund; they lower the amount of money people are taxed on, instead. According to tax influencer Alexander "Duke" Moore, they work like a tax credit or a 10% discount on a total purchase, and it all depends on one's effective tax rate or tax bracket.
For example, someone who's in the 22% tax bracket only saves 20% of a $500 purchase, resulting in $100 saved. In the report, Keeper explains that TikTok's short format is sometimes to blame for the confusion between lowering one's tax bill and lowering one's taxable income when discussing specific expenses. Lorilyn Wilson, a TikTok influencer under the name @thenotspicyaccountant, says this is one of the biggest misunderstandings of the Tax Code she sees with clients and on social media.
"I usually explain it to clients this way — you're spending a dollar to save a quarter," said Wilson. "So while you might pay less in taxes, you'll still be out more cash, so you want to think carefully about what you're deducting and aren't making purchases just to reduce your tax bill."
2. People who rely on their appearance for work can write off appearance-related expenses
Moore said it's very difficult to convince the IRS to write off clothing, makeup or even cosmetic surgery that can work for everyday use. Sex workers and cosplayers are the most successful at writing off appearance-related expenses, as they often purchase intricate costumes or lingerie that can only be used within the scope of their activities.
However, Wilson said the number of videos she comes across on TikTok with people attempting to write off personal care expenses to maintain their image is "astounding." She explained that the IRS doesn't fall for people attempting to claim expenses they get personal benefits from as business expenses, because extras like makeup or cosmetic surgery are not only used for work.
"I even saw an EA posting about how he writes off his haircut since he has a YouTube channel, and had to do a response video showing that's actually not true," said Wilson. "The IRS even has an 'Entertainment Audit Technique Guide' which specifically states: No deduction is allowed for wardrobe, general make-up, or hair styles for auditions, job interviews or 'to maintain an image."
Keeper's report refers to the infamous 1994 case of exotic dancer "Chesty Love," who managed to depreciate the cost of the silicon breast implants that she purchased for her work. After demonstrating that the implants were impractical for everyday use and resulted in unfortunate consequences such as social stigma, infections or back pain, her case was approved.
3. Lifestyle influencers can write off "lifestyle expenses" like clothing hauls or home decor
Knowing what to write off when one uses personal items for their career on social media can be troublesome, but "aesthetic decor" and fashionable apparel are seldom accepted for a tax refund, because they are not absolutely necessary for one's business.
Keeper's dataset captured the spending behavior of over 28,449 anonymized freelancers in 2022 and found they spent an average of $229 on Shein, a fast fashion retailer often used by influencers in haul videos where they show the products they purchased. Altogether, these freelancers attempted to write off just 8% of their Shein transactions, which Keeper considered a reasonable percentage, considering that the site sells costumes, wigs and props.
"You'll often hear, especially on TikTok, from lifestyle influencers that you can put a little label or embroider your business's name on a piece of clothing to write it off as a business expense, but that is clearly not enough," said Koullick. "It may sound like it's enough or like you're cheating the system, but it's not."
By contrast, 68% of the same group wrote off some of their rent-related transactions, which is most likely explained by the development of remote work. Moore said that specific situations related to a home office could work for a tax write-off, such as someone who purchases home decor specifically for videos and never uses it as a personal area. However, it is still quite difficult to convince the IRS that it does not constitute a personal expense, even for soundproofing walls or recording equipment.
Wilson said she did a video response on TikTok to someone claiming that a makeup influencer can get a tax refund on the makeup they buy and review on their channel. While it may be possible to do so, Wilson said the time it would take to keep a detailed record of all the expenses may not be worth the deduction.
"One way I recommend doing this is if you are reviewing beauty products – such as a foundation – and are wearing it during the day to test use, keep a log of each day you wore it, as well as how you thought the product performed," said Wilson. "Then once that product is used up, do a second review on your channel using all the notes you made while using the product over a period of time so you can give your audience on an honest assessment on of it."
4. You need an LLC to claim write-offs
In fact, all an individual needs to claim a write-off is to prove their company is an actual business. The IRS can identify whether they keep records, depending on the income from their business, or have non-monetary motives behind their activities. But in any case, the report indicates there is no single deciding factor in write-offs, and the federal agency considers every element of the business.
Some TikTok videos misleadingly implied that creating an LLC is the only way to "legitimize" one's business, but expenses such as a work computer are still deductible if they are the sole proprietor. Additionally, an LLC may subject people earning less than $80,000 to unnecessary tax complications, especially considering that single-member LLCs are taxed identically to regular sole proprietorships.
"If you're an Uber driver, you already have a lot of liability limiting already happening inside the company, and there's not a need to set up this more complex structure and deal with all the tax implications," said Koullick. "A lot of people believe they need to spend all that time and money on certifications or payroll when it's just completely unnecessary, and I would honestly call it one of the biggest scams on 'TaxTok'."
Conversely, Moore believes that setting up an LLC doesn't truly complicate one's tax situation, but it can be confusing and he recommends doing effective due diligence before picking that route. The creation of an LLC may come with additional requirements throughout the year, such as filing an annual report with their state, but their status with the IRS won't be so different. What can be tricky is if you create an LLC in California, because it has a minimum $800 tax that you have to pay, no matter the income.
What he sees as the real trap, however, is some people's tendency to want their company as to be "incorporated."
"Many people are going to go with the .Inc because it looks professional, but it makes your tax situation significantly more complicated," explained Moore. "Don't make such an important choice from an appearance standpoint, because you're going to get taxed as a C corporation like Amazon, which is a huge business, and you better be prepared for that."
5. You can choose an expensive vehicle to go to work, because you'll be able to deduct its full cost the first year it's in use.
Moore says this myth is not completely wrong, in the sense that it directly refers to the concept of bonus depreciation, which can be found in Section 179 of the tax code. Until 2023, some workers could deduct 100% of the purchase price of their business vehicle during the first year, if they met certain requirements. The vehicle had to weigh between 6,000 and 14,000 pounds, and the taxpayer had to use it 50% or more for work. Now, workers can only deduct up to 80% of the purchase price.
However, many creators failed to specify a critical aspect of this tax provision, which is that one can only deduct the business-use percentage of any purchases. These workers could have a full refund because they worked in industries such as aviation or farming, whereas someone using a BMW for work 55% of the time can only deduct 55% of its purchase price.
"We determine your business use percentage by taking the business miles and dividing them by the total miles you drove," explained Moore. "So if you have 5,100 business miles on a total of 10,000 miles, your business use percentage is 51%, meaning that you can only write off 51% of the initial purchase price."
The report highlights another downside, which is that someone taking a Section 179 deduction on a vehicle can never use the standard mileage rate to deduct expenses related to that vehicle again. Furthermore, they won't ever be able to write off depreciation on the car, possibly resulting in fewer savings in the long term.
Additionally, CPAs examining the report noted that influencers had a greater incentive to spread misinformation on vehicle-related write-offs because they can attract more people with bigger tax deductions. The reality is that, according to Wilson, getting a big deduction the first year might not be so beneficial, considering it could result in being stuck with a loan to pay off for the next five years.
"This is my rule of thumb — if you can't afford the car outside of the tax benefits — you can't afford the car period," she added.
How can people identify misinformation?
According to Moore, influencers should at least have two years of experience when discussing intricate subjects such as tax or accounting. Only someone who has sat down through an audit or interacted with clients can appreciate the complexity of the field. To provide adequate advice and bear with the consequences of a possible mistake, he believes that having credentials such as a CPA license is a great start.
Koullick also recommended considering whether influencers have an incentive to keep one's their listeners' finances safe. While accountants take on liability on their customers' behalf, TikTokers don't take any risks giving their audience advice. As for Wilson, she added that it is often preferable to spend a couple hundred dollars on a private consultation with a tax professional than to spend hours hunting social media to find out how to get tax deductions, with no consideration of one's specific situation.
"When looking into an account, look whether they consistently post tax information and if their content is 100% tax-related," said Moore. "If that's the case, it's likely the information they put out there is authentic. But sometimes, these people are just entrepreneurs who give random tax advice and got viral, and that's a major red flag."
According to a report commissioned by cryptocurrency company Paxful in 2021, one in seven videos from TikTok finance influencers is misleading, and only one in ten influencers is transparent about their qualifications. In a digital era where information spreads faster than ever, remaining critical about the content found online seems more critical than ever, especially when it concerns personal finances.
If You Need the Right Tax Information...Talk to Us
We'll put you on the right path to solving your tax debt and help you get to the heart of any personal or business tax errors you might have made by believing any prevailing tax myths.
Contact me by one of the methods below in the blue box, or email me at Larry@TaxProblemSolver.com and we can review your specific issues and solve them. You can also click here to book a free consultation.
Would You Like to Find Out What Your
Next Best Steps Should Be?
Choose one of the 3 FREE contact methods that is easiest for you.
Schedule a Call with Us
Click the calendar button below to view our appointment calendar, and choose a day & time, and we’ll call you then.
We look forward to your free consult!
Call Us Now
Click the phone button below to either "click to call" or direct dial a number to speak with us right now.
We look forward to speaking with you!
9-Secrets You Need to Know
When the IRS is after you, you need to be informed. What you say to the IRS can be used against you.
Get My 9 Secrets email series now. I'll also add you to my newsletter.
