My accountant told me that the IRS has a first-time penalty abatement policy! If you haven't had any penalties in the past 3 tax years, you can often get the underpayment penalty waived completely. You have to specifically request this though - they don't offer it automatically. Worth a shot if this is your first time with this issue.

I went through this exact same situation last year! My income jumped from about $45k to $82k due to some freelance contracts that came in late in the year. Here's what I learned: First, don't panic - the penalty isn't as scary as it seems. For most people it ends up being a few hundred dollars, not thousands. Second, definitely look into the annualized income method that Beth mentioned. Since your big income jump happened late in the year, this could significantly reduce your penalty. The IRS basically recalculates what your quarterly payments should have been based on when you actually earned the money. Also check if you had any withholding from other sources (like a W-2 job earlier in the year, or backup withholding). The IRS treats all withholding as if it was spread evenly throughout the year, which can help reduce the underpayment for earlier quarters. One thing I wish I'd known - if your total tax liability is under $1,000 after subtracting withholding and credits, you don't owe the penalty at all. Worth double-checking your math on that. The form is intimidating but if you take it step by step, it's manageable. And paying now definitely helps stop the interest from growing, even if it doesn't eliminate the penalty completely.

4 I think an important factor nobody's mentioned is FUTURE plans for the app. If you intend to keep developing it, adding features, or creating more apps, the IRS would likely see this as an ongoing business activity rather than a hobby. One advantage of filing as self-employed now is that it establishes a pattern if your app income increases in the future. It's easier to start as self-employed and stay consistent than to switch from hobby to self-employed when profits increase.

I'm dealing with a similar situation with my freelance graphic design work that I do occasionally on weekends. Based on everything I've read here and my own research, it really seems like the profit motive test is key. The fact that you deliberately switched your app from free to paid shows clear intent to generate profit, even if the amount is small. That's probably the strongest indicator that this should be treated as self-employment rather than a hobby. I'd also consider what you plan to do going forward. Are you going to keep the app paid? Might you develop other apps? Even small actions like adjusting pricing or promoting the app could further demonstrate business intent. The expense deduction issue is huge too. Losing the ability to deduct that $125 developer fee means you're essentially paying taxes on income you didn't actually receive after expenses. That seems fundamentally unfair and not what the tax code is designed to do. I think I'm leaning toward Schedule C for my own situation after reading all these responses. Better to establish the pattern now while everything is well-documented and straightforward.

Has anyone actually had experience with both options (checking box C vs. doing the multiple jobs worksheet)? I did the worksheet last year after getting married and I think we ended up overwithholding by like $4000! Wondering if just checking the box would have been better...

Thanks for all the detailed responses everyone! This is exactly the kind of real-world experience I was hoping for. Based on what I'm reading, it sounds like the "two jobs total" box might be too blunt an instrument for our income difference. The $50k gap between my salary and my husband's seems significant enough that we'd probably end up overwithholding if we just check box C. I think my plan is to start with the IRS Tax Withholding Estimator that Leslie mentioned, and then maybe try one of the other tools people have suggested if I need more specific guidance on filling out the actual form. I definitely want to avoid both owing a bunch at tax time AND giving the government an interest-free loan! One follow-up question - should we both update our W-4s at the same time, or is it better to adjust mine first (as the higher earner) and see how that affects our withholding before touching his?

Clear your browser cache and cookies. Fixed it for me!

I had this exact same issue last week! What finally worked for me was making sure I was using the EXACT refund amount from line 35a on my 1040 form, not any estimated amount. Also double-check that you're using "Single" vs "Head of Household" - that trips people up sometimes. The system is definitely glitchy right now but hang in there!

Called MI treasury yesterday - they said theyre having website issues and to just keep trying. Classic government efficiency at its finest 🤡

Had the exact same issue last month! What finally worked for me was clearing my browser cache and cookies, then trying again with incognito/private browsing mode. Also double-check that you're using your AGI (Adjusted Gross Income) from line 11 of your MI-1040, not your total income. Michigan's system is super picky about which exact numbers you enter.