Just to add something that might be helpful - the reason this gets confusing is because we're mixing book accounting (GAAP) concepts with tax concepts. When calculating the deferred tax liability, you're using your effective tax rate which includes state tax. But this calculation is purely for financial reporting purposes. When you actually file your tax returns, you'll take the higher tax depreciation deduction now (which is why you have the deferred tax liability in the first place), and you'll pay less tax now. In future years when the timing difference reverses, you'll have higher taxable income and pay more tax. So bottom line - no, the deferred state tax isn't a deductible expense. It's just part of your GAAP financial reporting.

This is a great question that trips up a lot of people working on corporate returns! The key insight is that deferred tax liabilities (including the state portion) are purely financial accounting entries - they never appear as deductible expenses on your actual tax returns. When you calculate that deferred tax liability using your 24.5% effective rate, you're creating a balance sheet entry that tracks future tax obligations due to timing differences. But the IRS doesn't recognize "deferred tax expense" as a legitimate deduction because it's not an actual cash payment or legal obligation in the current year. For your specific situation with equipment depreciation differences, here's what's actually happening tax-wise: You're taking higher depreciation deductions now on your federal return (reducing current taxes), and the state portion of future taxes will be deductible on federal returns when those taxes are actually paid in future years - but only as they're paid, not as deferred amounts now. The M-3 reconciliation you mentioned is the right track - you'll report the temporary difference between book and tax depreciation there, but the deferred tax liability calculation itself stays in the financial statement world and doesn't flow through to your tax return at all.

Don't stress too much! I work in tax compliance and can tell you that state audits don't automatically trigger federal ones. The IRS has their own selection criteria and timeline. That said, if your state finds significant issues (especially underreported income), they might share that info with the feds. My advice: cooperate fully with the state audit, keep meticulous records, and if anything major comes up, consider hiring a tax pro who can represent you with both agencies. Most state audits are routine and result in minor adjustments or no changes at all.

I'm going through something similar right now and it's definitely nerve-wracking! From what I've researched and heard from others, state and federal audits operate independently. The IRS has its own selection algorithms and risk assessment criteria. While there can be information sharing between agencies, it's not automatic. Focus on handling your state audit properly - gather all your documentation, respond to their requests promptly, and be transparent. Most state audits are resolved without major issues, and even if they find something, it doesn't guarantee the IRS will take action. Try not to let the anxiety consume you - just be prepared and professional in your responses.

This has been such an enlightening discussion! As someone who just switched from having taxes prepared professionally to doing them myself this year, I was completely baffled by the difference between my marginal bracket (32%) and what I was actually paying. The "climbing stairs" and "filling buckets" analogies really clicked for me - it makes perfect sense that you only pay the higher rates on the income that reaches those levels, not on everything. I actually went and pulled up my Form 1040 after reading through these explanations, and found the Tax Computation Worksheet that shows exactly how my income was divided across the brackets. What surprised me most was learning about how the standard deduction works BEFORE the bracket calculations even start. I never realized that $27,700 (for married filing jointly) comes right off the top tax-free. So my $150,000 gross income became $122,300 taxable income, which then got run through the progressive brackets. I calculated my effective rate manually using the method Freya showed, and it came out to 18.4% - way lower than that scary 32% bracket I thought I was in! This knowledge definitely makes tax planning feel more manageable. Thank you to everyone who shared their expertise here!

Reading through this entire discussion has been incredibly helpful! I had the exact same confusion about blended vs marginal rates when I first started doing my own taxes. One thing that might help others visualize this is to think of it like a water bill with tiered pricing - you pay one rate for the first 1000 gallons, a higher rate for the next 2000 gallons, and so on. Your "marginal rate" is the highest tier you reach, but your average cost per gallon (like your effective tax rate) is much lower because most of your usage was charged at the lower tiers. For those using tax software, most programs have a "forms view" where you can see Form 1040 and the actual line-by-line calculations. In TurboTax, try clicking "Forms" at the top, then look for Form 1040 and any attached tax computation worksheets. This will show you exactly how your income was split across the brackets. The key insight that helped me was realizing that when someone says "I'm in the 24% tax bracket," they really mean "the last dollar I earned was taxed at 24%," not "all my income was taxed at 24%." That mental shift made everything click into place!

Guys - this is all overthinking it. If you're making under 100k, the amount of interest you'll earn on the withheld taxes is minimal compared to the hassle. Let's say you would get a $3000 refund and could instead earn 5% on that money throughout the year. That's only $150 before taxes. Is it really worth the stress of potentially miscalculating and owing penalties? Sometimes the peace of mind of knowing your taxes are handled is worth more than squeezing out every last dollar.

I've been doing this strategy for about 3 years now and wanted to share my experience. The key is finding the right balance - you don't want to underwithhold so much that you trigger penalties, but you also don't want to be too conservative and miss out on potential earnings. Here's what I learned: Start small your first year. I reduced my withholdings by about 15% and put that money into a high-yield savings account. I tracked everything carefully and made sure I still hit the safe harbor threshold. The second year, I got more aggressive and reduced by about 25%, investing the difference in a mix of CDs and money market accounts. The psychological aspect is huge though. You have to be disciplined enough to actually save/invest that money and not spend it. I set up automatic transfers to a separate "tax payment" account so I wouldn't be tempted to touch it. Last year I earned about $480 in interest that would have otherwise gone to the government as an interest-free loan. One tip: keep really good records of your calculations and payments. If you ever get questioned by the IRS, you want to be able to show you were following the rules intentionally, not just trying to avoid paying taxes.

This entire thread has been incredibly educational! As someone who's relatively new to handling contractor payments and tax forms, I had no idea that sole proprietors could use either their SSN or EIN on Form W-9. What really strikes me is how common this misconception seems to be - it sounds like many finance departments are operating under outdated or incorrect assumptions about IRS requirements. The fact that multiple people here have had to fight similar battles with their own accounting teams suggests this is a widespread issue. I appreciate everyone who took the time to cite specific IRS publications and regulations. Having those concrete references makes it so much easier to have productive conversations with skeptical colleagues. The point about identity theft protection is also really important - in today's environment, we should be supporting contractors who want to protect their personal information rather than forcing them to share their SSNs unnecessarily. For anyone else dealing with this issue, it seems like the key is having the right documentation ready and being persistent about educating internal teams on current IRS guidelines. Thanks to everyone who shared their experiences and solutions!

I just want to echo what everyone else has said here - your contractor is absolutely right, and your finance director needs to update their understanding of current IRS regulations. This is actually a pretty common knowledge gap I've seen in smaller companies. What might help is framing this as a compliance and risk management issue for your finance director. By refusing to accept valid EINs, your company is potentially: 1. Creating unnecessary friction with qualified contractors 2. Forcing contractors to share more sensitive personal information than required 3. Operating under outdated tax compliance practices The IRS Form W-9 instructions are crystal clear on this - sole proprietors can use either identifier. I'd recommend printing out the relevant pages from the official IRS instructions and highlighting the specific language that addresses this. Sometimes seeing it in black and white from the source makes all the difference. Also, you might point out that if the IRS audits your 1099 reporting, they won't flag properly completed W-9 forms that use EINs from sole proprietors - because it's completely legitimate. The audit risk comes from improper documentation, not from following IRS guidelines correctly. Stick to your guns on this one - the regulations are on your side!