I messed this up last year and had to file an amended return! TurboTax showed the self-employment tax deduction but I thought it was an error and removed it. Ended up paying more taxes than I needed to. For anyone who's confused like I was: this is legitimate and automatic in tax software. Just leave it alone and let it calculate correctly. My mistake cost me a few hundred dollars plus the hassle of filing an amended return.

Just to add one more perspective as someone who's been self-employed for several years - this deduction is one of the few tax breaks that actually helps level the playing field a bit between employees and self-employed folks. When you're an employee, your employer pays their half of Social Security/Medicare taxes and gets to deduct that as a business expense. Since self-employed people ARE the employer, we get to deduct the "employer portion" (half) of our SE taxes. It might help to think of it this way: you're wearing two hats - employee and employer. The employee half pays 7.65% in payroll taxes, and the employer half pays 7.65% and gets to deduct it. The SE tax deduction lets you deduct the employer portion just like any other business would. The math can definitely look weird in tax software at first, but once you understand the logic behind it, it makes perfect sense!

Don't forget about debt basis too! The basis calculation gets more complicated if you have loans to the S corp. Also remember that the order matters: 1. Income increases basis 2. Non-deductible expenses decrease basis 3. Distributions decrease basis In your example, since income exactly equals your salary + distributions, your ending basis is correctly $0. But as others mentioned, that doesn't make the distributions capital gains - they're still return of capital because you had sufficient basis when taking them.

The K-1 (Form 1120S Schedule K-1) is where most of this gets reported. Box 16 shows distributions to shareholders, and your share of income/losses flows through via Box 1 (ordinary income). However, the K-1 doesn't directly show your basis calculation - that's something you need to track separately. You'll report the pass-through income on your personal return (Form 1040), but the distributions themselves aren't directly reported as taxable income since they're return of capital up to your basis. The tricky part is that YOU are responsible for tracking your basis year over year - the IRS doesn't do this for you. I'd recommend keeping a simple spreadsheet tracking: starting basis + income + other increases - distributions - losses = ending basis. This becomes crucial if you ever have distributions that exceed basis, because then you'd need to report the excess as capital gains on Schedule D.

Anyone know if this applies to ACTC (Additional Child Tax Credit) too? My tax software is giving me both EIC and ACTC even though my divorce decree says my ex claims our son this year.

This is exactly the kind of confusion that trips up so many divorced parents! Your tax software is actually correct - you CAN claim the Earned Income Credit even though your ex will be claiming the Child Tax Credit for your daughter. The key thing to understand is that the IRS treats these as completely different types of benefits. The EIC is what's called a "custodial benefit" - it goes to the parent the child actually lived with for more than half the year, regardless of any custody agreements about who claims the child as a dependent. Since your daughter lived with you for more than 6 months, you qualify for EIC based on your income. Your ex can still claim the Child Tax Credit because your custody agreement gives him the right to claim her as a dependent, but that doesn't affect your EIC eligibility at all. Make sure you keep good records showing your daughter lived with you for more than half the year (school records, medical records, etc.) in case the IRS ever questions it. But you're absolutely entitled to that EIC - don't leave money on the table because of bad advice!

Would it be better to adjust your W-4 with your employer so they don't withhold as much in the first place? Seems like a waste to let the government hold onto your money interest-free all year.

You're definitely in luck! With income under the standard deduction ($12,950 for single filers in 2024), you shouldn't owe any federal income tax. However, keep in mind that the $1,260 withheld likely includes both federal income tax AND FICA taxes (Social Security and Medicare at 7.65%). You'll get back the federal income tax portion but not the FICA. Quick math: on $11,800 income, FICA would be about $902, so you might get back around $358 in federal income tax refund. But definitely file to claim it! Also consider if you qualify for any refundable credits like the Earned Income Credit - these could potentially give you back MORE than what was withheld. And next year, you might want to adjust your W-4 to reduce withholding since you're under the taxable threshold.

I'm a tax preparer and wanted to add some clarification to help ease your concerns. You're absolutely right to be careful, but the good news is this situation is more straightforward than it might seem. First, yes you'll need to file a tax return since your prize exceeds the filing threshold. The prize will be reported on a 1099-MISC form that you should receive by January 31st. This gets reported as "other income" on your tax return. However, your SSDI benefits remain completely unaffected. SSDI only considers "earned income" from work activities - prizes, gifts, inheritance, investment income, etc. don't count against your benefits at all. So you can breathe easy on that front. Regarding taxes, since you normally don't have taxable income, you'll likely qualify for the standard deduction ($13,850 for 2023), which means you may owe little to no federal tax on this prize. But do set aside some money just in case, especially for potential state taxes. Don't try to gift it away to avoid taxes - you're already considered to have received the income when you won the prize, so gifting won't help your tax situation and could create gift tax complications for you. Consider consulting with a tax professional or using tax software designed for unusual situations to make sure everything is filed correctly. Congratulations on your win!

Congratulations on your win! I know this can feel overwhelming, but you're asking all the right questions. Just to reinforce what others have said - your SSDI benefits are completely safe. I've been on SSDI for several years and had to deal with some inheritance income, and Social Security confirmed that unearned income (prizes, inheritance, gifts, etc.) doesn't affect SSDI at all. Only earned income from work counts against your benefits. For taxes, yes you'll need to file since the prize exceeds the filing threshold, but as someone else mentioned, the standard deduction might cover most or all of it anyway. The key thing is to keep good records and report it properly when you file. One practical tip - when you get that 1099-MISC form, make sure the amount matches what you actually received. Sometimes there are discrepancies with the fair market value they report versus what you got. And definitely don't stress about the gifting idea - that would just complicate things unnecessarily. You're being smart by asking these questions upfront rather than waiting until tax time. This really shouldn't impact your benefits at all, so try not to worry too much about that part!