3 Watch out - I thought I was being clever by taking a small salary from my S-Corp ($40K) when I was actually making about $250K in profits. Got audited and ended up having to reclassify a bunch of my distributions as wages, pay back payroll taxes plus penalties. Cost me about $32K in total. My new CPA says there's no hard rule but they typically want to see at least 50-60% of profits as reasonable compensation depending on your industry. Also differs based on how labor vs. capital intensive your business is.

The fundamental difference is corporate governance and tax structure. Public company CEOs who take $1 salaries have their compensation packages approved by independent boards of directors and compensation committees, which provides legitimacy in the eyes of regulators. Their stock options and RSUs are still subject to ordinary income tax rates when exercised/vested, plus the company pays payroll taxes on the fair market value. Small business owners face different scrutiny because S-Corp distributions avoid self-employment taxes (15.3% savings), while CEO stock compensation doesn't provide the same tax avoidance opportunity. The IRS specifically targets owner-operators who might abuse this structure. The "reasonable compensation" test for small businesses considers: your role and responsibilities, hours worked, business profits attributable to your personal services vs. capital, and what you'd pay a non-owner to do your job. There's no magic percentage - it's truly case-by-case based on these factors. Bottom line: Big company CEOs aren't actually avoiding taxes with their structure, they're just deferring timing. Small business owners using minimal salaries are potentially avoiding payroll taxes entirely, which is why the IRS watches it more closely.

Has anyone used TurboTax to report ESPP sales? I'm trying to figure out how to adjust the cost basis correctly since my 1099-B only shows what I paid, not the adjusted basis after adding back the discount.

I went through this exact same confusion with my ESPP last year! The key thing to understand is that with a disqualifying disposition (selling within one year), the ordinary income calculation uses the Purchase FMV, not the Subscription FMV. Your ESPP Disposition Summary showing $1,142.57 in ordinary income is correct. Here's the math: 43.7921 shares × ($71.89 Purchase FMV - $45.82 actual purchase price) = $1,142.57. This means your adjusted cost basis for capital gains purposes is actually $71.89 per share (the Purchase FMV), not your original purchase price. So your capital loss would be: $2,986.44 (sale proceeds) - (43.7921 × $71.89) = approximately -$162.66. The total tax impact is roughly the same as you calculated, but it's split between ordinary income (taxed at your marginal rate) and capital loss (which can offset other gains or up to $3,000 of ordinary income). Make sure this ordinary income amount appears somewhere on your W-2 - usually in Box 1 or Box 14.

This is such a common confusion! I went through the exact same thing when I first started working. Here's what helped me understand it: Think of the tax year like a school year - it's a complete 12-month period that gets "graded" (filed) after it's over. So your 2024 tax year (Jan 1 - Dec 31, 2024) gets filed during the 2025 filing season (Jan - April 2025). For your March 2024 job situation, that income definitely goes on your 2024 tax return that you'll file in early 2025. Your employer should send you a W-2 by January 31, 2025 showing all the income and taxes withheld from that job. The key thing that clicked for me: we always file taxes for a COMPLETED year, never for the year we're currently living in. That's why when you file in April 2025, you're not including any 2025 income - that year isn't complete yet! And yes, the system is unnecessarily complicated. Most other countries make it much simpler, but we're stuck with this backwards-looking annual system.

This thread has been incredibly helpful! I've been working for the IRS for 8 years and I still see this confusion constantly. The "school year" analogy is perfect - I'm definitely going to start using that with taxpayers who call in confused. One thing I'd add that might help: when you get your W-2 or 1099 forms in January, they'll clearly show the tax year (like "2024") right on the form. That's your confirmation of which year's tax return those documents belong on. Also, for anyone worried about missing deadlines or filing for the wrong year - the IRS computer systems are pretty good at catching these mistakes. If you accidentally file income for the wrong tax year, you'll usually get a notice explaining the error rather than being penalized immediately. The system IS overly complicated, but once you get the basic timeline down (earn money in Year X, file taxes for Year X in Year X+1), it becomes much more manageable. Don't be too hard on yourselves for being confused - this trips up way more people than you'd think!

I actually messed this up when getting my EIN last year for my SaaS startup. I selected "Retail" because I thought we were "selling" software. Had to file additional paperwork to correct it to "Service." Definitely go with "Service" and save yourself the headache!

Great question! I went through this exact same decision process for my SaaS startup just six months ago. After consulting with both my CPA and doing research through IRS publications, I can confirm that "Service" is definitely the correct classification for SaaS businesses. The key distinction the IRS makes is that with SaaS, you're providing ongoing access to software functionality rather than transferring ownership of a product. Your customers are paying for the service of hosting, maintaining, and providing access to your software platform - they don't own the underlying code or infrastructure. I'd also recommend keeping detailed records of your subscription revenue model and service agreements from the start, as this documentation helps support your business classification if there are ever any questions down the road. The IRS guidance specifically mentions that businesses providing "access to software applications" fall under service categories rather than retail sales. Good luck with your EIN application - you're making the right choice going with "Service"!

One important thing nobody has mentioned - you need to be super careful about the pro-rata rule if you have ANY existing pre-tax money in ANY traditional IRA accounts (including SEP or SIMPLE IRAs). The backdoor Roth strategy really only works cleanly if you have zero pre-tax IRA money anywhere.

Great question about timing! I went through this exact scenario last year and here's what I learned: You're correct that you can report the full $7,000 on Form 8606 even if you only have a 1099-R for $4,000 at the time you file. The IRS expects you to report ALL contributions made for the tax year, regardless of when you received the supporting documents. A few key points to keep in mind: 1. Make sure to designate your March contribution as a "2024 contribution" when you make it (your broker should ask) 2. Keep detailed records of both contributions with dates and amounts 3. The 1099-R you receive for the March conversion will be for tax year 2025, so you'll report that conversion on next year's return I'd recommend making your additional contribution and conversion before mid-March to give yourself some buffer time before the 4/15 deadline. Also, double-check that you don't have any other traditional IRA balances that could complicate the pro-rata calculation. The key is being consistent and thorough with your record-keeping - the IRS cares more about accurate reporting than perfect timing of tax documents.