This is a great thread with lots of practical advice! I've been lurking here as a small business owner who made this exact mistake last year. After reading through all the responses, I ended up going with the approach Sofia Martinez suggested - filing Schedule C with the "Owner wages (non-deductible)" line item and attaching an explanatory statement. Just wanted to share that it worked smoothly - no questions from the IRS, no audit triggers, and I was able to move forward cleanly this year with proper owner draws instead of wages. The key really was the clear documentation showing I understood the mistake and was correcting it going forward. For anyone else dealing with this, don't panic - it's more common than you think and the IRS seems to understand that small business owners sometimes get confused about entity structures, especially when working with accountants who don't properly advise on elections. The transparency approach definitely beats trying to hide the issue or over-complicate the fix. Thanks to everyone who contributed advice here - this community is incredibly helpful for navigating these tricky tax situations!

As someone who handles a lot of small business tax issues, I'd like to add another perspective on this situation. While the "non-deductible owner wages" approach that Sofia Martinez outlined is definitely the cleanest, there's one more consideration that hasn't been fully addressed - the timing of when this mistake was discovered. If you're still within the current tax year and haven't filed yet, you have more flexibility to clean things up. But if this spans multiple years or returns have already been filed, you need to be extra careful about consistency across all affected periods. Also worth noting - make sure to check if your state has any additional requirements or complications with this type of correction. Some states are more strict about payroll tax corrections than the federal IRS, and you don't want to solve the federal issue only to create a state problem. One practical tip: if the client has been making quarterly estimated tax payments based on the incorrect W-2 setup, you'll need to recalculate what they actually owe for the year since self-employment tax calculations are different from regular income tax withholding. This could affect their final payment or refund significantly. Has anyone dealt with the state-level complications of this type of correction? I'd be curious to hear experiences from different states.

Quick question for anyone who knows - does the dependent care FSA have the same $610 rollover option that the healthcare FSA has for 2023? I'm in a similar situation with about $300 left unspent.

This is such a frustrating situation and unfortunately very common! I went through something similar last year. The key thing to understand is that FSAs can only reimburse up to what was actually contributed through payroll deductions, not what you originally elected. It sounds like there was a discrepancy between your $4,100 election and what was actually withheld from your paychecks. This can happen due to payroll errors, timing issues, or contribution limits on individual paychecks. Here's what I'd recommend: 1. Get your final paystub from last year and check the YTD dependent care FSA amount 2. Contact your company's benefits coordinator (not just the FSA administrator) with documentation of the payroll discrepancy 3. If the money truly can't be recovered through the FSA, make sure to claim those unreimbursed $500 in childcare expenses on your tax return using Form 2441 for the dependent care credit While the tax credit isn't as valuable as the pre-tax FSA benefit, it's better than losing the money entirely. Don't give up - sometimes HR can work with the FSA provider to resolve legitimate payroll errors, especially if you have good documentation.

What box on the 1099-MISC is the settlement amount in? This makes a HUGE difference! If it's in Box 3 (Other Income), then it's just regular income - taxable but NOT subject to self-employment tax. If it's in Box 7 (Nonemployee Compensation), that's normally for independent contractor work, which is why TurboTax is treating it as self-employment income subject to additional 15.3% self-employment tax. For tax years 2020 and later, Box 7 income should actually be reported on Form 1099-NEC instead of 1099-MISC, but some companies haven't updated their practices.

I went through almost the exact same situation last year with a class action settlement from a data breach case. Got the 1099-MISC and TurboTax immediately started calculating self-employment tax which had me panicking. The key thing that saved me was realizing that settlement payments are NOT self-employment income, even if they're reported in Box 7 of the 1099-MISC. When you're entering it in TurboTax, you need to specifically tell the software that this is NOT business income. Here's what worked for me: When TurboTax asks "Is this payment for work you did as an independent contractor?" select NO. Then when it asks what type of payment it was, look for "Legal settlement" or "Other income not related to business." This prevents TurboTax from applying the 15.3% self-employment tax. The settlement amount is still taxable as regular income (unless it was for physical injuries), but you won't owe the additional self-employment taxes. This distinction saved me about $1,300 in taxes I didn't actually owe. Double-check which box your amount is in on the 1099-MISC - that will help you navigate the TurboTax screens more effectively.

I've been using FreeTaxUSA for my quarterly payments for about 2 years now and wanted to share my experience. The software does a great job calculating your estimated payments, but like others mentioned, you need to handle the actual payment process separately. I started with Direct Pay but switched to EFTPS after missing a payment deadline (cost me about $65 in penalties). The EFTPS registration process is a bit old-school - you do have to wait for them to mail you a PIN - but once you're set up, it's incredibly convenient to schedule all four payments at once. One tip that might help: when FreeTaxUSA calculates your quarterly amounts, print out that summary page and keep it with your tax records. I reference it throughout the year when I'm tracking my business income to make sure I'm still on track. Also, don't forget that if your income changes significantly during the year, you might need to adjust your remaining quarterly payments. EFTPS makes it easy to modify future scheduled payments if needed.

I went through this exact same situation last year when I started freelancing! Here's what worked for me: I ended up going with EFTPS after initially trying Direct Pay. Yes, the registration process feels antiquated (waiting for a PIN in the mail in 2025!), but once you're set up, it's so much better for quarterly payments. You can schedule all four payments at once and then basically forget about it. One thing that really helped me was setting up a separate savings account just for quarterly taxes. Every time I get paid, I immediately transfer 25-30% to that account. That way when the quarterly payments come out, I'm not scrambling to find the money. Also, FreeTaxUSA's quarterly calculation is pretty accurate, but I'd recommend being slightly conservative and rounding up your payments by $50-100 per quarter. Better to get a small refund than owe penalties. The IRS underpayment penalties aren't huge, but they're annoying enough that you want to avoid them. If you're really worried about getting it right the first year, consider making your first quarter payment a bit higher than calculated - you can always adjust the remaining quarters down if needed.

I'm facing the exact same situation and this thread has been incredibly helpful! Just received a K-1 from a publicly traded partnership showing all zeros after a brief investment period, and I was really anxious about whether I needed to amend my already-filed return. What's been most reassuring is seeing the consistent experiences from multiple people who actually went through this without any issues. The explanation about these zero K-1s being administrative compliance requirements rather than actual tax events really clarifies things. It makes sense that the IRS matching system focuses on catching unreported income, not missing forms that show no taxable activity. I was initially inclined to amend just to be absolutely certain, but after reading about the potential complications that could introduce versus the minimal risk when there's genuinely nothing to report, I'm convinced the consensus approach is correct. I'll be keeping my K-1 with my tax records but not amending my return. This community discussion has been so much more valuable than trying to interpret IRS guidance alone - real experiences from people who've been through the exact situation provide the kind of practical insight you just can't get elsewhere. Thanks to everyone for sharing!

I just want to thank everyone in this thread for sharing their real-world experiences! I'm dealing with this exact same situation - received a K-1 from a publicly traded partnership showing all zeros after selling my shares early in the year, and I was really stressed about whether to amend my already-filed return. Reading through all these consistent experiences has been incredibly reassuring. The explanation about these zero K-1s being administrative compliance documents rather than actual tax events makes perfect sense, especially when you consider that the IRS matching system is designed to catch unreported income, not missing forms that show no income. What really convinced me was seeing multiple people who went through this without any issues by just keeping their K-1s with their tax records. The risk-benefit analysis is clear - the potential complications from amending (introducing errors, processing delays) outweigh the minimal risk when there's genuinely nothing taxable to report. I'll be following the consensus here and keeping my K-1 with my tax documents without amending my return. This community has been so much more helpful than trying to parse through IRS publications alone - there's nothing like hearing from people who've actually been through the same situation!