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Another option worth considering is filing Form 8832 first to elect to be taxed as a C Corporation, then immediately filing Form 2553 for S Corp status. Sometimes this two-step approach can work outside the normal S Corp election deadline. Talk to your accountant about this strategy - it's worked for some clients at our firm.
That's interesting! I never heard of that approach. Is that completely legitimate with the IRS? And would there be any downsides to doing it this way versus the relief procedure mentioned above?
It's a legitimate strategy that works in certain situations, but it doesn't bypass all timing rules. The Form 8832 election to be treated as a C Corporation can be made at any time and can be effective up to 75 days prior to the filing date or up to 12 months after the filing date. The potential downside is that you'll need to meet the S Corporation election deadlines that apply to newly formed corporations (generally within 2 months and 15 days after the effective date of the C Corporation election). You also need to ensure you don't inadvertently create a short C Corporation tax period that could have tax consequences. Definitely consult with your tax professional before attempting this route to make sure it applies to your specific situation.
Don't forget that even if you successfully convert to an S Corp, you need to run payroll and pay yourself a "reasonable salary" before taking any distributions. Many people miss this and end up with IRS problems. My brother tried taking mostly distributions with a tiny salary and got hit with penalties for avoiding payroll taxes.
What's considered "reasonable" though? My accountant said 60% salary/40% distributions but my business partner's accountant said we could do 40% salary/60% distributions. There's no clear rule!
The IRS doesn't give a specific percentage, but they look at what you'd pay a non-owner employee to do the same work. Factors include your role in the company, hours worked, qualifications, and what similar positions pay in your area. Generally, if you're actively involved in the business, your salary should reflect market rates for your position. The key is being able to justify it as reasonable compensation - too low and you risk audit scrutiny, but you don't need to pay yourself more than market rate either. Document your reasoning and keep comparable salary data to support your decision.
Congratulations on the pregnancy! You're absolutely right that you can update your W4 in January for a baby expected in June. The IRS looks at your tax situation as of December 31st, so as long as your child is born in 2025, you'll qualify for the full child tax credit. One thing I'd suggest is using the IRS W4 calculator on their website to help you figure out the exact adjustment. It's free and walks you through all the scenarios. Just make sure to account for any unpaid parental leave you might take - that reduced income could affect your overall tax situation. Also, don't forget you'll need to get a Social Security number for your baby pretty quickly after birth to claim them on your taxes. The hospital usually provides the paperwork, but it can take a few weeks to process. Good luck with everything!
Thanks for mentioning the IRS W4 calculator! I've been trying to figure out the best approach for my situation and wasn't sure if I should trust third-party tools or stick with official resources. Quick question - does the IRS calculator handle situations where you have multiple life changes happening in the same year? I'm expecting in September but also got married last month, so I'm wondering if it can factor in both the new dependent and the change in filing status.
Yes, the IRS W4 calculator can absolutely handle multiple life changes in the same year! It's actually designed specifically for situations like yours. When you go through it, you'll enter your current filing status (married) and then it has sections where you can add dependents you expect to have during the tax year (your September baby). The calculator will factor in both changes - the marriage (which affects your tax brackets and standard deduction) and the expected child (for the child tax credit). Just make sure when you're entering information that you select "married filing jointly" as your status and add one dependent in the children section, even though the baby hasn't arrived yet. It's definitely more reliable than trying to figure out the math yourself when you have multiple changes happening. The calculator updates annually too, so it reflects the current year's tax rules and credit amounts.
This is great advice everyone has shared! I'm in a similar boat - expecting in August and trying to optimize our withholding. One thing I'd add from my research is to also consider if either parent's employer offers dependent care FSA (flexible spending account) benefits. You can typically elect this during open enrollment or after a qualifying life event like having a baby. If you're planning to use childcare after your parental leave, you can set aside up to $5,000 pre-tax annually for dependent care expenses. This won't affect your W4 directly, but it's another way to reduce your overall tax burden for the year. Also, for those mentioning unpaid leave - some states have paid family leave programs that might affect your income calculations differently than unpaid FMLA. Worth checking what your state offers since that could impact how much you want to adjust your withholding. Henry, sounds like you've got a solid plan! Just make sure to revisit your withholding after the baby arrives and you have a better sense of your actual childcare costs and any other changes to your financial situation.
This is such helpful additional information! I hadn't even thought about the dependent care FSA angle. Quick question about the state paid family leave programs - do you know if those benefits are taxable? I'm in California and know we have state disability insurance, but I'm not sure if that would be treated differently than regular wages for tax withholding purposes. If the state benefits are taxable, I assume that would mean I need to be more conservative with my W4 adjustment since I'd have additional taxable income from the state program during my leave period.
Just went thru this! That taxr.ai tool someone mentioned above is actually legit - told me exactly when my 420 would clear and it was spot on. Way better than waiting on hold with IRS for hours
about 75 days total but the AI told me that from the start based on my transcript codes
Code 420 can be frustrating but hang in there! I'd recommend calling the Practitioner Priority Service line if you have a tax pro helping you, or try calling early morning (7-8am) for shorter wait times. Also keep checking your transcript weekly - sometimes the codes update before you get any mail. The fact that you only had W2 and child tax credit makes it likely just a routine verification that should clear up relatively quickly.
Thanks for the tip about calling early morning! I've been dreading calling the IRS but 7-8am sounds way better than the horror stories I've heard about being on hold all day. Definitely going to try that this week and start checking my transcript more regularly too.
I'm still confused about this. Can I claim exempt just for December when I'm working all that overtime, then switch it back in January? Or is exempt an all-year thing?
You're misunderstanding how the exempt status works. Claiming "exempt" isn't something you do just for high-income periods. It's a declaration that you expect to have ZERO tax liability for the ENTIRE tax year. If you expect to owe any federal income tax for the year as a whole, you cannot legally claim exempt for any part of the year, even for just one pay period. The IRS looks at your tax situation annually, not month by month.
I see a lot of confusion here about withholding vs. exemptions. Let me try to clear this up from a practical standpoint. The "exempt" checkbox on your W-4 is NOT a tool for managing cash flow during busy seasons. It's a very specific declaration that you expect ZERO federal tax liability for the entire year. This typically only applies to people earning very little (below the standard deduction threshold). If you're working overtime during the holidays and expect to owe taxes for the year, here are your legitimate options: 1. Adjust your withholding allowances on your W-4 to have less tax taken out (but still some) 2. Use the IRS withholding calculator or tools like those mentioned above to find the right balance 3. Accept that you'll get a larger refund when you file, but have less take-home pay now The key is being honest about your expected annual income. If you'll owe taxes for the year, claiming exempt is tax fraud, even if it's just for December. The IRS doesn't care that you need more cash for the holidays - they care about accurate withholding based on your actual tax situation. Better to adjust your withholding legally than risk penalties and a massive tax bill later.
Daryl Bright
Listen, the IRS site is notoriously glitchy on mobile. Been that way for yrs. Most ppl don't realize their system runs on ancient tech that barely works w/ modern browsers. Quick fixes that work for most: - Try incognito/private browsing mode - Desktop comp > phone ALWAYS - Clear cookies/cache before trying - Try diff browser (Firefox tends to work better) - Log in super early AM or late PM If none of that works, just call the transcript req line (800-908-9946). Takes 5-10 days but way less hassle than fighting w/ their garbage website. Trust me, I've been down this rabbit hole many times.
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Amina Diallo
I've been dealing with this same frustrating issue! What worked for me was switching to a different network entirely - I was on my home WiFi when having problems, but when I tried using my phone's cellular data instead, it worked perfectly. Sometimes the issue isn't just the browser or device, but the network connection itself. The IRS authentication system can be really finicky about certain internet providers or network configurations. If you have access to a different WiFi network (maybe at a library, coffee shop, or friend's house), give that a try. Also, make sure your phone's date and time are set correctly - I know it sounds weird, but security certificates can fail if your device clock is off by more than a few minutes. This happened to me with a different government site last month. Hope this helps! The transcript system really shouldn't be this difficult to use in 2025.
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Omar Fawaz
β’This is really helpful! I never would have thought about the network connection being the issue. I've been trying on my home WiFi this whole time - going to try switching to cellular data right now. The date/time thing is interesting too, I had no idea security certificates could be that sensitive to clock settings. Thanks for sharing what worked for you!
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