TikTok isn’t just about viral dance videos. It has become quickly a popular resource for personal finance advice — but unfortunately, not all of it is good. While there are some legitimate money experts on the app, there is a lot of financial advice floating around on TikTok that is misleading or just plain wrong.
GOBankingRates asked personal finance experts to debunk some of the worst money advice on TikTok — so if you see any of this pop up on your #fyp, keep on scrolling.
Starting an S Corporation Can Help You Avoid Paying Taxes
In a popular TikTok video, a woman claims that “if you start an S corporation and you own 100%, you can buy everything that you own under that S corporation and you don’t pay taxes on anything you purchase because it’s considered a corporate expense.” The video also claims that you can hire your children to work for you for $12,000 per year tax-free and “gift this expense back to your household.”
Why this is wrong: “The S corporation is only ‘allowed’ to buy things that are considered ordinary and necessary expenses for its own business,” said Bill Smith, managing director for CBIZ MHM‘s National Tax Office. “So, for example, if it bought a lawnmower that you use to cut your lawn, that would be treated as a taxable distribution to you. There are legions of cases that discuss using a business as a personal checkbook, and they are not limited to S corporations.”
As for the claim that you can “hire” your children to work for you for $12,000 per year tax-free, this is likely in reference to the annual gift tax exclusion — which wouldn’t even apply here.
“The S corporation does not have the annual gift tax exclusion available to individuals (which for 2021 is up to $15,000),” Smith said. “The standard deduction for 2021 is $12,550 (not sure when the video posted), so assuming that the child is legitimately working and the compensation is reasonable, there would be no income tax, although still employment taxes. The S corporation would not get to deduct the $12,000 in salary if the children did not work or the compensation was unreasonable. She seems to conflate the standard deduction and annual gift tax exclusion. There is no aspect to this that involves ‘gifting back to your family household.’ What she seems to be saying is your kids can work tax-free, but what she implies is that they don’t have to do anything to get their $12,550 in 2021. That is inaccurate.”
Anyone Can Teach Themselves How To Day Trade and Be Successful at It
A lot of TikTok personal finance content revolves around day trading and how different users have had success doing it. But this is not an investing strategy that experts recommend.
Why this is wrong: “To be consistently successful at day trading, you must have significant capital, time and emotional stamina — attributes most individuals do not possess,” said Will Rhind, founder and CEO of GraniteShares, a New York City-based ETF issuer with over $1.5 billion in assets under management. “While first-time day traders might initially have beginner’s luck, they are probably more likely to suffer losses over time. They could lose their entire investment, or even worse, go into debt if leverage was applied. It’s critical to never speculate with more money than you can afford to lose.”
Rhind recommends focusing on building long-term wealth instead of short-term gains.
“You’re probably better off putting your money in a diversified investment vehicle that eliminates the guesswork,” he said. “Exchange-traded funds, for example, offer tax-efficient, low-cost and transparent exposure to a basket of securities that trade on an exchange just like a stock. There are thousands of ETFs available that solve for a variety of investment objectives, such as capital growth, wealth preservation, income generation and inflation hedging.”
Find Out: Best Expert Money Advice for Millennials
You Can Turn $56K Into a $1M in 11 Years Thanks To Compounding Interest
In one TikTok video, a woman asks @curtisray for financial advice, stating that her husband makes $80,000 a year and she makes $56,000. Ray recommends that the couple live solely off the husband’s income while the woman puts her entire salary into a compound interest account. He “crunches the numbers” and finds that her $56,000 investment will become $1 million in 11 years — tax-free.
Why this is wrong: Andrew Meadows, senior vice president at Ubiquity Retirement + Savings, notes that living off a single income is easier said than done.
“Who, making $56,000 a year, can go a year without being paid?” he said. “Even though this example is showing a dual-income household, the point here is what you’re willing to give up. Additionally, you’ll have to wait 11 years to get that ‘million.’ It sounds easy: sacrifice one year’s worth of salary (if that’s even possible) and you become a millionaire in 11 years. While it’s true that it’s tax-free — your contributions are taxed before going in, but you’re not taxed on the interest — you’re not quite getting to a million if you’re looking at 2% interest and the account fees. I’m also not seeing the calculations on the fees; there are always fees that folks miss that can erode your savings.”
Ray’s advice may not be “wrong,” but few…
Read More: The Worst Personal Finance Advice on TikTok (and Why It’s Wrong)