Just to add some practical advice - whether or not you form an LLC, definitely keep track of ALL your business expenses for your photography work. Gear, software, travel to shoots, portion of home used exclusively for business, etc. These are deductible regardless of how you're classified. If you are properly an independent contractor (which doesn't sound like the case here), you'd report these on Schedule C. If you're an employee, some expenses might be eligible as unreimbursed employee business expenses, though the tax benefits are more limited since the 2017 tax law changes. But the classification issue is the bigger concern. If you're being treated like an employee, you should be classified as one, LLC or not.

One thing nobody's mentioned yet - if you do decide to form an LLC (for your legitimate freelance photography, separate from your employment situation), consider talking to an insurance agent about professional liability insurance. An LLC provides some protection, but having insurance is even better protection against potential lawsuits from unsatisfied clients. I learned this the hard way when a wedding client sued me after claiming I missed important moments. My LLC helped, but having insurance would have saved me thousands in legal fees even though I eventually won the case.

Did the estate planning attorney's malpractice cause you to pay extra taxes on the estate? If so, part of your settlement might be deductible as a refund of taxes previously paid. I went through something similar with a tax preparer who messed up my business returns and I was able to deduct the portion of the settlement that represented tax refunds.

I've dealt with a similar situation involving attorney malpractice in an estate matter. One thing that hasn't been mentioned yet is the potential impact on your stepped-up basis in any inherited assets. If the malpractice caused delays or errors in the estate administration that affected the valuation date for tax purposes, this could have implications for how you report the settlement. Also, keep in mind that if you received any 1099 forms related to this settlement, you'll need to report it as income initially, but you may be able to offset it with proper documentation showing it represents non-taxable recovery of inheritance. The burden will be on you to prove the tax treatment to the IRS. I'd strongly recommend getting a written opinion from a tax professional who specializes in estate and settlement taxation before filing. The interaction between estate tax rules, malpractice settlements, and income tax can be quite complex, and getting it wrong could trigger an audit or additional penalties.

Don't forget to check state and local tax implications too. Some states have different rules about entertainment deductions than federal. In our case, the state still allowed certain entertainment deductions that were eliminated at the federal level after 2018.

Great point about state tax differences! This is something that often gets overlooked when people focus only on federal rules. In addition to entertainment deduction variances, some states also have different treatment for LLC losses and passive activity rules. For example, certain states don't conform to federal passive loss limitations, which could affect how your LLC's losses flow through to the partners. Also worth checking - some localities have specific taxes on luxury entertainment that might apply to your lease arrangement. I've seen cases where cities impose additional taxes on premium sports entertainment that businesses need to factor into their overall cost analysis. Would definitely recommend having your tax professional run the numbers at federal, state, and local levels before finalizing your structure. The state savings might help offset some of the federal limitations, or vice versa.

Make sure you keep all documentation related to the settlement in case of an audit! I had a similar situation and the IRS questioned it three years later. Having the settlement agreement and evidence of the payment saved me from a huge headache. Also consider if any portion of the settlement was for attorney fees (even if you represented yourself) as there might be some deduction possibilities.

Just went through something similar last year. One thing to watch out for - if your settlement was over $600, the company is supposed to issue you either a 1099-MISC or include it on a corrected W-2, but many don't follow through properly. Don't wait for them to send the forms - you still need to report the income even without receiving the proper tax documents. I'd recommend reaching out to your former employer's payroll department to ask how they're reporting the settlement payment to the IRS. This will help you report it consistently. If they say they're not issuing any forms (which happened to me), document that conversation and report it as "Other Income" as others have mentioned. The key is being proactive since employers often drop the ball on settlement tax reporting.

Random thought - don't forget that if your travel was primarily for medical reasons, you can use your HSA for hotels (up to $50 per night, per person) and transportation costs like gas/mileage, parking, tolls, etc. Just not food. I did this last year when I had to see a specialist 300 miles away. Just make sure you document everything!

I had a similar situation last year with about $4,200 in HSA withdrawals for medical expenses and travel. I was also worried about triggering an audit, but everything went smoothly with e-filing. The key thing that gave me peace of mind was creating a detailed log of every withdrawal with dates, amounts, and what each expense was for - exactly like what Gael mentioned. I also scanned all my receipts and organized them in a folder on my computer. For the travel expenses, make sure you're tracking mileage at the IRS medical rate (which was 22 cents per mile in 2023, now 21 cents for 2024). I kept a simple log with dates, destinations, purpose of visit, and miles driven. For hotel stays, I made sure to keep receipts showing the medical purpose of the trip. Your $3,800 amount is really not that unusual - medical costs add up fast these days, especially with surgery and specialist visits. The IRS sees HSA distributions like this all the time. Just keep good records and e-file with confidence!