Great question! I went through this exact situation last year and learned the hard way that the withholding is just a prepayment, not the final amount you'll owe. Here's what happened to me: I withdrew $15,000 from my Traditional IRA and had 20% withheld ($3,000). When I filed my taxes, I ended up owing an additional $2,200 because: - The withdrawal pushed me into a higher tax bracket, so my actual tax rate on that income was 24% instead of the 20% I had withheld - I owed the full 10% early withdrawal penalty ($1,500) since I didn't qualify for any exceptions - Total taxes owed: $5,100, but I'd only prepaid $3,000 My advice: Calculate your estimated tax bracket for the year INCLUDING the IRA withdrawal, then have at least that percentage withheld for income taxes. Remember the 10% penalty is completely separate and won't be covered by withholding, so set aside that money too. It's better to overwithhold and get a refund than to owe a big chunk at tax time!

Something to also keep in mind is the timing of your withdrawal and how it affects quarterly estimated tax payments. If you're taking a large early distribution and you're self-employed or have other income that isn't subject to withholding, you might need to make estimated quarterly payments to avoid underpayment penalties. I learned this the hard way when I took an early distribution in Q3 last year. Even though I had taxes withheld from the IRA distribution, the IRS expects you to pay taxes evenly throughout the year. Since my withdrawal was large enough to significantly increase my tax liability for the year, I should have made an estimated payment for Q4 to cover the difference. The safe harbor rule mentioned earlier saved me from penalties, but it's something to consider if your withdrawal is substantial relative to your annual income. You might want to calculate whether you need to make an estimated payment for the current quarter to stay on the safe side. The IRS Form 1040ES has worksheets that can help you figure this out.

Just wanted to add that if you're worried about your bank asking questions, you can proactively contact them before making the deposit. I sold my boat last year for $32k and got a cashier's check. Called my bank beforehand, explained the situation, and they noted my account. Made the deposit super smooth and they even waived the normal hold period since I gave them a heads up.

One thing I haven't seen mentioned yet is keeping records of the equipment's depreciated value from your company's books if possible. When businesses sell off old equipment, they often have it listed at a depreciated book value that's much lower than what you might actually sell it for. If your company can provide documentation showing the equipment's book value when you purchased it, that helps establish a clear paper trail for the transaction. Also, since you mentioned the buyer is a local computer refurb company, they'll likely have their own documentation requirements for purchasing inventory. Make sure you get a proper invoice or purchase agreement from them that clearly states what equipment is being sold. This creates a clean business-to-business transaction record that banks and the IRS can easily understand if questions ever come up. The certified check approach is definitely the way to go - it's much cleaner than splitting payments, which could actually create more paperwork and potential confusion rather than less.

Has anyone used a PEO (Professional Employer Organization) to help determine reasonable compensation? My business is hitting around $600k/yr and I've heard PEOs can provide market data to support your salary decisions plus handle all the payroll compliance stuff.

This is such a timely question! I'm in a very similar situation - just converted to S Corp this year with around $680k revenue from my marketing consulting practice. After reading through all these responses and doing my own research, I ended up settling on about 45% of profits as my salary ($290k on roughly $650k profit). What really helped me was creating a detailed job analysis document that my CPA recommended. I listed out every single responsibility I have - from client acquisition and strategy development to project management and delivery. Then I researched what companies would pay for a VP of Marketing or Marketing Director with my experience level in my metro area. The documentation piece everyone mentioned is crucial. I keep quarterly reviews of my compensation decision with updated market data. One thing I learned is that the IRS doesn't have a magic percentage they're looking for - they want to see that you made a good faith effort to pay yourself what you'd pay an outsider to do your job. For anyone still figuring this out, I'd recommend starting with industry salary surveys from places like PayScale, Glassdoor, and Robert Half. Document everything and review it annually as your business grows. Better to err on the side of slightly higher compensation than risk an audit fight later!

I'm confused about something - if the employer took the money pre-tax but then only reported half of it as Cafe 125, wouldn't that mean her W-2 wages are wrong? Like they reduced her pay by the full amount but only gave her tax benefit for half?

This is a frustrating situation that unfortunately happens more often than it should. Based on what you've described, there are really two separate issues here that need to be addressed: 1. **The W-2 reporting**: If your sister-in-law's paystubs show the full double amount was deducted pre-tax, but her W-2 only shows half in the Cafe 125 box, then her taxable wages are likely incorrect. She's essentially being taxed on money she never actually received. 2. **The refund**: The employer owes her a refund for the excess premiums they incorrectly withheld. Since it's already February and they've been unresponsive since October, I'd suggest a multi-pronged approach: - Document everything: Keep copies of all paystubs, communications with HR, and the current W-2 - File her taxes based on the W-2 she received (the IRS matches returns to W-2s) - Continue pursuing the employer for both the refund AND a corrected W-2 if needed - Consider escalating within the company (beyond HR to senior management) - If they remain unresponsive, file a wage complaint with your state's Department of Labor The key thing to remember is that this isn't really a tax deduction issue - it's an employer payroll error that needs correction at the source.

I'm confused about something - do I need to set up a separate user account on my laptop for business vs personal use to prove the percentage? Or is that overkill?

One thing I haven't seen mentioned yet is that you should also keep receipts and documentation for the actual purchase of your laptop and monitor. The IRS will want to see proof of the cost basis for your deduction calculations. Also, since you're transitioning from using a work laptop to purchasing your own, make sure you can clearly show when you started using your personal equipment for business purposes. This becomes important for the depreciation timeline if you go that route instead of Section 179. I'd recommend taking photos of your setup and keeping a simple log of when you first started using it for your 1099 work. Having that paper trail makes everything much smoother if you ever get audited.