I see a lot of great math advice here but nobody's mentioned WHERE to actually set up your Solo 401k. After a ton of research, I went with Fidelity for mine because they don't charge any setup or maintenance fees and their investment options are solid. Vanguard is another good option. Avoid the ones that charge annual fees if possible - those fees eat into your returns over time!

Just wanted to chime in as someone who went through this exact confusion last year! Your math looks right - the ~20% calculation after SE tax adjustment is correct for the employer contribution portion. But like others mentioned, you're missing the huge opportunity of the employee contribution side. What really helped me understand it was thinking of it this way: as a sole proprietor, you're literally both the boss AND the worker. The "boss" you can contribute about 20% of net profit (employer contribution), and the "worker" you can defer up to $22,500 of your earnings (employee contribution) - even without a formal payroll setup. So with your $13,500 profit, you could potentially contribute your calculated $1,675 PLUS up to $13,500 more as an employee deferral (limited by your total net income). That's a massive difference in retirement savings potential! Just make sure you establish the plan by Dec 31st if you want to contribute for this tax year.

The Premium Tax Credit verification process requires manual review by an IRS examiner, which is why it takes longer than standard processing. When faxing your Form 8962 and Form 1095-A, ensure you're using the correct fax number from your notice (typically CP12C or Letter 0012C). The processing timeframe after receipt is generally 6-8 weeks, though current backlog conditions may extend this slightly. Don't worry though - this is a routine verification, not an audit.

I just went through this same verification process last month! Here's my timeline to give you a realistic expectation: I received the CP12C notice on February 5th, faxed my 8962 and 1095-A on February 8th, called to confirm receipt on February 15th (they had it), and finally received my refund on March 25th - so about 7 weeks total from when they confirmed receipt. The most stressful part was not knowing if they actually got my fax, so definitely call to confirm within a week or two. Also, make sure your 1095-A matches exactly what you put on Form 8962 - any discrepancies will cause additional delays. Good luck!

I'm confused about which line on Form 6251 these specified private activity bond interest dividends go on. My tax software seems to be putting them on line 2g, but is that right? Also, if my AMT calculation ends up being lower than my regular tax (which it usually is), do I need to worry about this at all?

Great discussion everyone! As someone who just went through this exact situation, I wanted to add that it's also worth checking if your mutual fund company provides any supplementary tax information beyond what's on the 1099-DIV. Some fund companies will send additional documentation explaining the source of the private activity bond interest and whether it comes from bonds issued before or after August 7, 1986 (which can affect certain calculations). They might also break down which states the bonds were issued in, which could be relevant for state tax purposes. I found that understanding the underlying investments helped me feel more confident about how to handle the tax reporting, especially when explaining it to my accountant. The $2,800 you mentioned is a pretty substantial amount, so it's definitely worth making sure you're handling it correctly!

Has your friend considered just using QuickBooks Self-Employed and doing the reconstruction themselves? I was in a similar mess with my Etsy business and managed to import the last 2 years of bank/credit statements and categorize everything retroactively. It took about a weekend per year of transactions, but I managed to create a reasonable accounting system that my tax preparer was able to work with. The software lets you split transactions, categorize them, and export reports that look professional enough for tax purposes. For the inventory issue specifically, I just created a spreadsheet showing reasonable COGS calculations based on my sales and industry standards. Wasn't perfect but it was acceptable.

I went through something very similar with my freelance graphic design business - had about 4 years of terrible recordkeeping with just bank statements and random receipts stuffed in a shoebox. Here's what I learned from the experience: First, definitely start with a CPA rather than a tax attorney unless there are signs of serious legal issues. CPAs are much more cost-effective for reconstruction work and most have dealt with this exact situation many times. The cash method is absolutely your friend's best option here. For businesses under $26 million in gross receipts, you can generally use cash accounting which means you deduct expenses when paid rather than trying to match them to specific sales. This eliminates a lot of the complexity around timing issues. For the inventory question - if your friend's business qualifies for cash method, they may also qualify for the small business exception that allows them to treat inventory as non-incidental materials and supplies, which means they can deduct costs when the items are used or sold rather than maintaining complex inventory accounting. The key is being proactive. I spent about $2,800 with a CPA who specialized in small business reconstruction, and it was worth every penny. They were able to create defensible books going back 3 years using just my bank statements, credit card records, and about 40% of my actual receipts. Most importantly - this is fixable! Your friend isn't doomed. The IRS would much rather see someone make a good faith effort to comply than ignore the problem entirely.

Has anyone actually had success approaching their nanny family about this after the fact? I'm in the same boat and worried about creating an awkward situation or even losing my job if I bring it up.

I'm dealing with a similar situation right now! Reading through all these responses has been really helpful. It sounds like the consensus is that you should definitely push for proper W2s since you're clearly an employee, not a contractor. From what I'm gathering, your best options are: 1. Approach the families with educational materials about household employment laws 2. If they refuse, file Form 8919 to report the wages and avoid overpaying self-employment tax 3. Consider Form SS-8 if there's a dispute about worker classification The point about losing $2,500+ by filing as self-employed really hit home - that's a huge amount! I think I'm going to try the educational approach first with my family, and if that doesn't work, I'll look into those IRS forms or maybe one of those services people mentioned to get proper guidance. Thanks everyone for sharing your experiences - it's reassuring to know I'm not alone in this situation and there are actual solutions available!