TikTok is a money-maker but a shady CPA.
There’s a lot of business and accounting advice on social media at the moment and if you’re an influencer, you probably know what we’re talking about. In particular, there are a few viral videos playing fast and loose with half-truths relating to S corps, business expenses, and hiring your children. Whereas the basic point they’re making is at least partially right, they’re telling you the interesting part, not the detailed, keep-you-out-of-jail, playing-by-the-rules part. It makes sense, because if you’re an influencer, you know you need to get attention, and well, these videos have gained a lot of attention.
The following three examples are ones we’ve seen most prominently on TikTok. They have some truth to them, but are seriously lacking in detail. Here’s the full picture from a CPA firm who works with content creators and influencers on the daily.
Not everyone should be an S corp.
An S corp passes corporate income through to its shareholders so they can declare their earnings on their personal tax return and be assessed at individual income tax rates. It ultimately means they’re not taxed twice (once as the owner and once as a corporation). Now, we do implement this strategy with some of our clients, but only because it works in their financial favor. There are additional costs and detailed administrative responsibilities that come with being an S corp which means it is just not right for everybody.
It’s really important you know before you apply to become an S corp that:
- By having a separate entity, you will have to do a separate corporate tax return
- You have to do complete bookkeeping e.g. balance sheets, etc
- You will have to pay yourself, as the owner in the form of wages, with taxes withheld
- Not all states allow for the S-election treatment at a state level (meaning your business is taxed as a C-corp anyway), including New Hampshire, Tennessee, Texas, and also NYC and DC. And sort of Louisiana.
Filing as an S corp is only right for you if the savings this strategy generates is more than the overall cost of actually being an S corp. This strategy needs to reduce tax payments enough to justify time spent, as well as the cost of all the admin. Is it going to work for everyone? No, but it does work for some people. If you’re unsure, we know the questions to ask to work out if it’s right for you. Start by getting in touch with us here.
Can I do a little work in a holiday destination and call it a business expense?
A very popular piece of accounting “advice” is that you are allowed to fly to an exotic destination, do a small bit of work, and then write off the whole trip as a business expense. We think the best way to respond to this one is to quote Revel’s founder, Martin, directly: “There isn’t an IRS agent alive that would buy and allow that justification for this trip.” Nice and clear, don’t you think? Here’s the reason behind his statement.
- If there’s a cheaper alternative that would still allow you to complete your work, the IRS can require a business justification for the additional cost. Is it ordinary and necessary in the course of business?
- The general rule of thumb to go by is if it is not ordinary and necessary for the course of business then the IRS won’t think so either. Don’t usually work from a tree-top hotel in Madagascar? Then don’t declare it as a justifiable business expense.
In general, if something sounds way too good to be true, it is, it’s as easy as that. Now, if you’re a travel vlogger, or you make your living documenting fashion week around the world you’re going to have more wiggle room in this area. Travel expenses differ for everyone so the best thing to do is ask your CPA, “What does justifiable business travel look like for me?”
If I pay my kids, will I save on tax?
Another half-truth, yes and no. Everyone in the country earns a certain amount of income tax-free, for a child it is currently $13,850 for 2023 (under the “single” filing status). However, in order to pay it to them, you’re going to have to pay payroll taxes on those wages. And, there are additional things to consider e.g. reasonable pay for work completed, child labor laws, and the industry you’re in.
You can’t just pay them what you want.
The amount you pay must run parallel to what you would pay a standard employee for the same work. If they’re sorting your mail and packing envelopes, you must pay them the same reasonable rate you would to someone you’re not related to. If you wouldn’t pay $800 an hour to a secretary, you can’t pay your 15 year old that amount either.
Can you pay a two year old?
Not any more than what a two year old can reasonably do. If they’re not filing papers for you… what are they doing to earn that hourly wage?
You’re obligated to adhere to child labor laws.
The minimum age is 14 and restricts work to 3 hours per school day (until their 16). If they are underage or the amount you pay them is more than the typical hourly rate, you have to meet certain specific carve-outs for family businesses or you’ll be liable for prosecution. They also might not be able to work at all, if you’re in a restricted industry. You can read up on the United States’ Fair Labor Standards Act (1938) here.
The ramifications for this one can be more serious than a tax penalty. So remember, anything that goes beyond the reasonable course of business is a red flag to the IRS. Keep that as your mantra and check anything family related with your CPA.
“But I saw it on TikTok” doesn’t cut it in an audit.
There’s some good to come from these videos too. We love that there’s more conversation over all things accounting related. There’s so much power in using these tax strategies to your advantage. The very fact you’re an influencer means you have a more interesting tax return than most! But, always take anything you see on social media to your advisor. If they say “yes – let’s explore that strategy” then hey, it’s worked out! If they’re a little wild-eyed and suggest you don’t pull a move like that with the IRS, you’ve dodged a bullet. It’s win-win.
When it comes to expenses, we strongly recommend setting yourself some parameters. You can read what parameters look like in this blog.
If you’re unsure of what you can and cannot do with your business, we’re confident we do. Get in touch with us here and we’ll work it out together.