Just wanted to add my experience as someone who had this same problem last year - if you're married filing jointly, make sure both you and your spouse update your W-4s. I fixed mine but my husband didn't update his, and we still ended up with a huge refund because his withholding was still too high! Also, if u have multiple jobs, there's a special multiple jobs worksheet you should fill out. The IRS withholding calculator handles this pretty well though.

This is such a common problem! I went through the exact same thing earlier this year. Here's what worked for me: 1. **Submit a new W-4 immediately** - Don't wait! Your employer has to process it for your next paycheck. Use the IRS Tax Withholding Estimator online to get the right numbers. 2. **Check your most recent pay stub carefully** - Make sure you understand what's being withheld. Sometimes there are additional deductions that look like taxes but aren't (like voluntary insurance or retirement contributions). 3. **Consider your total tax situation** - If you have other income sources, side gigs, or investment income, that might explain why more is being withheld than expected. The frustrating part is that you won't get that $3800 back until you file your return next year, but at least you can stop the bleeding for your remaining paychecks. I was able to increase my take-home by about $400 per month once I fixed my withholding. One tip: Keep detailed records of your pay stubs and the new W-4 you submit, just in case there are any issues when you file your taxes next year.

Just a real life example: I didn't properly report my cash tips for 2 years and got absolutely hammered in an audit. The IRS calculated my "expected tips" based on the restaurant's sales records and my shifts. Ended up owing over $4,300 in back taxes plus penalties. Not worth the risk! Just track everything and report properly.

As someone who's been serving for about 5 years, I'll add that it's really important to understand the difference between "reported tips" and "allocated tips" on your W-2. If your reported tips are less than 8% of your sales, your employer might add "allocated tips" to make up the difference. These allocated tips show up on your W-2 but don't have taxes withheld from them, which can create a surprise tax bill. Also, keep in mind that if you work at a large restaurant (11+ employees), they're required to report total tip income to the IRS, so there's already a paper trail of what the restaurant's servers are making collectively. This makes underreporting much riskier than people think. My advice: track everything daily, report it all to your employer monthly, and if you're worried about owing taxes at the end of the year, consider having extra money withheld from your paycheck or making quarterly estimated payments. Better safe than sorry!

I think there might be some confusion in the thread about how distributions are ordered and reported. Let me clarify the proper sequence for S Corp distributions: When an S Corp makes a distribution, it comes out in this specific order: 1. First from AAA (Accumulated Adjustments Account) - this is previously taxed income 2. Then from PTI (Previously Taxed Income) if you have any from pre-1983 3. Then from paid-in capital/capital contributions 4. Finally, anything beyond that would be taxable gain For your $25k distribution with only $1.3k in AAA: - $1.3k reduces AAA and goes in Schedule M-2 Line 7, column (b) - The remaining $23.7k reduces your capital account and goes in Schedule M-2 Line 7, column (c) "Other adjustments account" This is NOT the same as the OAA that some mentioned - that's a different account entirely. The capital account reduction represents the return of your partner's original $52k contribution. On the K-1, the full $25k gets reported on Line 16d as a distribution. Your partner won't owe any tax on this since it's just getting back money he originally put in, and it reduces his stock basis accordingly. The key thing to remember is that returning capital contributions is generally tax-free as long as it doesn't exceed the shareholder's total basis in their S Corp stock.

This is a really common confusion with S Corp distributions! The key distinction you need to understand is the difference between the corporate-level accounts (like AAA) and individual shareholder basis. Your partner's $25k withdrawal is indeed a distribution, but here's how it should be handled: **Schedule M-2 Reporting:** - Only $1.3k would be reported on Line 7 column (b) as a distribution from AAA - The remaining $23.7k represents a return of capital contribution, which reduces the capital account on your balance sheet but doesn't flow through the M-2 in the same way **No Capital Gains Issue:** Your instinct is correct - this shouldn't trigger capital gains! Since your partner contributed $52k originally, withdrawing $25k is simply getting back part of his original investment. He still has $27k of capital contribution basis remaining. **K-1 Reporting:** Yes, report the full $25k on Schedule K-1 Line 16d as a distribution. This reduces your partner's stock basis but isn't immediately taxable since it's within his basis. **Pro tip:** Keep a separate basis tracking worksheet for each shareholder showing capital contributions, allocated income/losses, and distributions. This makes it much easier to determine the tax treatment of future distributions. The ordering rules for S Corp distributions can be tricky, but returning capital contributions is generally the most straightforward situation. You're doing the right thing by getting this clarified before filing!

Just want to add something that might help other freelancers reading this thread - if you're using accounting software like QuickBooks or FreshBooks, many of them have built-in estimated tax calculators that can help automate this process. I switched to QuickBooks Self-Employed after my first messy year of freelancing, and it automatically calculates quarterly payments based on your actual income throughout the year. It even sends reminders when payments are due and can help you track deductible expenses in real-time. The key thing I learned (the hard way, like Connor) is that "tax liability" and "taxes owed" are completely different things. Even if you get a refund, you still had a tax liability that needs to be covered through estimated payments when you're self-employed. Connor, your plan looks solid! That 30% savings rate should definitely cover you, and getting into the habit now will save you so much stress down the road. The transition from W-2 to freelance is tough on the tax front, but you've got this!

One thing I haven't seen mentioned yet is that if you're really struggling to calculate the right estimated payment amounts, the IRS actually has a free online tool called the "Estimated Tax Worksheet" and there's also Form 1040ES that walks you through the calculations step by step. But honestly, after reading through all these responses, I think Connor you're getting great advice about using either tax software or professional help. The transition from W-2 to freelance is genuinely complicated, and the penalty for getting it wrong can be significant. I'd also suggest keeping really detailed records of when you make each payment and how you calculated the amounts. If you do end up with penalties, having good documentation can sometimes help if you need to request penalty relief from the IRS later on. The self-employment tax piece is huge too - that's an additional 15.3% on top of your regular income tax, so that 30% savings rate Connor mentioned is definitely wise. Better to overestimate and get a refund than to be scrambling to find money you don't have come tax time!

I think I understand where the confusion is coming from. A lot of tax software and accountants don't explicitly show you the basis calculations on your tax return, they just handle it behind the scenes. So when you look at your 1040 with Schedule E, you're seeing the profits as ordinary income, but any potential capital gains from distributions exceeding basis would show up elsewhere (likely on Schedule D). If you've never exceeded your basis with distributions, you've never seen this in action.

This thread has been incredibly helpful! I've been struggling with the same confusion about S-Corp taxation for months. One thing that really clicked for me from reading these explanations is that the IRS treats S-Corp profits and distributions as completely separate tax events. The profits flow through and get taxed as ordinary income regardless of whether you take any money out. Then distributions are a separate calculation based on your basis. I think the confusion comes from other business structures where profits and distributions are more directly connected. In a regular C-Corp, you'd have corporate tax on profits, then personal tax on dividends. In partnerships, distributions can sometimes affect the tax treatment. But S-Corps have this unique pass-through system where the profit taxation happens whether you distribute or not. For anyone else reading this thread, I'd recommend keeping a simple spreadsheet tracking your basis year by year. Start with your initial investment, add annual profits and additional contributions, subtract distributions and losses. This makes it much easier to see when distributions might exceed basis and trigger capital gains treatment. Thanks everyone for the detailed explanations - this has saved me from making some expensive mistakes on my tax return!