For those who want a quick rule of thumb, many CPAs suggest salary should be at least 1/3 of S Corp distributions for service-based businesses. So if you want to take $90k in distributions, your salary should be at least $30k. This isn't foolproof but supposedly comes from patterns in what triggers IRS scrutiny. Just passing along what my CPA told me!

The confusion around S Corp profit distribution formulas is totally understandable - there really isn't one "correct" equation because the IRS deliberately keeps "reasonable compensation" somewhat subjective. What I've found helpful is thinking of it in terms of what you'd pay to replace yourself. If your S Corp couldn't function without you, then most of the profit should probably be salary. But if you've built systems, have employees, or significant capital investments generating revenue, you can justify a higher distribution percentage. A practical approach: Start with market salary data for your role/industry (sites like PayScale, Glassdoor, or BLS.gov), then adjust based on your actual hours worked and responsibilities. Document your reasoning - if the IRS ever questions it, you want to show you made a good faith effort to be reasonable. One thing that's helped me is tracking what percentage of revenue comes directly from my personal work versus other factors (equipment, employees, systems, etc.). The higher your personal contribution, the higher your salary should be relative to distributions.

don't forget about quarterly estimated taxes for both federal AND state if your self employed!! i totally messed this up my first year and got hit with underpayment penalties from both. even if you end up owing $0 to your state at the end of the year, you might still need to make estimated payments throughout the year based on what you EXPECT to owe.

Great question! You're absolutely correct that states don't have their own version of the federal self-employment tax. With your $19,400 in income, here's what you need to know: For state income tax, it really depends on your state's specific thresholds and standard deduction amounts. Many states have standard deductions that could potentially bring your taxable income below their filing threshold, especially after you deduct legitimate business expenses from your freelance work. However, don't forget that you'll still owe federal self-employment tax on that $19,400 (minus any business deductions) regardless of whether you owe state income tax. The SE tax is about 15.3% on your net self-employment income, so that's roughly $2,740-$3,000 you'll need to plan for federally. My advice: calculate your net profit after business expenses first, then check your state's specific income tax brackets and standard deduction amounts. Even if you end up owing $0 in state income tax, you're right that you'll still need to file a state return in most cases. Also consider setting aside money for quarterly estimated tax payments next year - both federal and state if applicable - to avoid underpayment penalties!

I'm dealing with this exact same situation right now! Just got my LTR 2645 C letter yesterday and had that immediate panic response, even though we already received our refund back in February ($2,367). This entire thread has been such a lifesaver - I had no idea this was such a widespread issue! Before finding this discussion, I was convinced we had made some terrible mistake on our return or that the IRS was going to come after us for the money back. It's absolutely infuriating that the IRS can have systems sophisticated enough to process millions of returns and distribute refunds correctly, but can't manage basic coordination between their own departments. How do you successfully review, approve, and send out someone's refund, but then weeks later have a separate system sending letters saying the return needs additional review? It's like their left hand doesn't know what their right hand is doing! Reading through all the successful call experiences shared by both taxpayers and tax professionals here, I'm definitely calling first thing tomorrow morning using the direct number on the letter. It's frustrating that we have to spend our time cleaning up their system errors, but at least now I know what to expect and that the agents are very familiar with this widespread glitch. Thank you so much to everyone who took the time to share their experiences and outcomes - this community has been infinitely more helpful than anything I could find on official IRS websites. It really shows the power of community support when dealing with government system failures!

I'm going through this exact same situation right now! Just received my LTR 2645 C letter yesterday and immediately went into panic mode, even though we already got our refund back in March ($1,834). Reading through all these experiences has been incredibly reassuring - it's clear this is a massive IRS system coordination failure rather than individual taxpayer issues. It's honestly mind-boggling that they can successfully process returns and send out refunds, but then their notification system is weeks behind sending contradictory letters. Based on all the successful call experiences shared here, I'm planning to call first thing tomorrow morning using the number on the letter. It's frustrating we have to spend time fixing their system glitches, but at least now I know what to expect and that the agents are familiar with this widespread issue. Thank you to everyone who shared their experiences - this community has been way more helpful than anything on the official IRS website. It's amazing how much anxiety gets reduced when you realize you're not alone in dealing with government system failures!

I went through this exact situation last year and wanted to share what I learned! You're absolutely right that this is essentially an online garage sale situation, not a business. The $600 threshold is correct - that's why they asked for your SSN verification. You'll likely receive a 1099-K, but don't panic! The key thing to remember is that you're only taxed on actual profit, not the gross sales amount. Since you're selling personal clothing items for less than you originally paid (which is almost always the case with used clothes), you won't owe taxes on this income. When you get the 1099-K, you'll report it in TurboTax, but then you'll also enter your cost basis (what you originally paid for the items) to show there was no taxable gain. Don't include the shipping fees in your taxable calculation - those are just pass-through costs. Focus on the actual item sale prices versus what you originally paid. Even without receipts, you can make reasonable estimates of your original purchase prices. A vintage band t-shirt you sold for $25 probably cost you $15-30 originally, a jacket you sold for $40 might have cost $60-80 new, etc. The IRS accepts reasonable estimates for personal items. The most important thing is NOT to just report the full $815 and pay taxes on it - that would mean paying taxes on money that isn't actually taxable income!

I went through this exact situation last year! The $600 threshold is correct - you'll likely get a 1099-K, but don't worry about it. Since you're selling personal clothing items that you originally bought for your own use, this is treated like a garage sale for tax purposes. The key thing is that you only pay taxes on actual profit, not the full $815. Since you almost certainly paid more for these clothes originally than what you sold them for, you won't owe any taxes on this income. When you file with TurboTax and enter the 1099-K, make sure to select that these were personal items (not business inventory). Then you'll enter your cost basis - reasonable estimates of what you originally paid for each item or category of items. A vintage band t-shirt you sold for $20 probably cost you $25-40 originally, jackets you sold for $35 might have cost $60-80 new, etc. Also, don't include the shipping costs in your profit calculation - those are pass-through expenses that buyers paid to cover actual shipping, not part of your sales income. The most important thing is to NOT just report the full $815 as taxable income - that would mean paying unnecessary taxes on what is essentially a loss from selling your personal belongings!

Just to make sure we're all on the same page here - are we talking about claiming her as a qualifying relative dependent, not a qualifying child dependent? Because the rules are different for each, right? For a qualifying relative, her gross income must be less than $4,700 (for 2023), but Social Security benefits generally don't count toward this amount unless she has significant other income. Did I understand your situation correctly?

You're absolutely correct - you do NOT report her SSDI on your tax return. Her disability income remains her income, not yours. The fact that you're claiming her as a dependent doesn't change whose income it is. As long as she meets the qualifying relative tests (gross income under $4,700 excluding SSDI, and you provide more than half her support), you're compliant. Keep good records of your support expenses - housing, food, medical costs, utilities, etc. - in case you need to prove the support test later. The IRS is pretty clear on this in Publication 501, but I understand why it can be confusing at first!