What kind of penalty did they charge? Was it a percentage or just a flat fee? I have a similar situation but the W-2 is for only like $300.

They charged him a 20% accuracy-related penalty on the unpaid tax amount, plus interest that had accrued from the original filing deadline. The dollar amount wasn't huge because the income was small, but it was the principle and hassle that was the real cost. Even for $300, they'll still catch it through their matching program. The underreporter notice (CP2000) takes time to generate and send out, but it's an automated system that will eventually find even small discrepancies. Better to just include everything upfront than deal with the paperwork and potential flags on your account later.

Actually, if including the W-2 would result in a LARGER refund for you, the IRS won't penalize you - they just won't give you the additional refund unless you amend your return. The penalties are designed for when you underreport tax owed, not when you shortchange yourself. That said, they'll still send you a notice about the discrepancy. And if you repeatedly have mismatches on your returns, it could trigger more scrutiny in future years even if those mismatches were in the IRS's favor.

Wait, really? I had no idea about this QBI deduction! Does it have income limits or phase-outs I should know about? And do I need to form an LLC or something to qualify for it?

Yes, there are income thresholds where phase-outs begin. For 2025, the phase-out begins at $191,950 for single filers and $383,900 for married filing jointly. Since your income is $105k, you should be well below these limits and eligible for the full 20% deduction. You don't need an LLC to claim this deduction - you can claim it as a sole proprietor reporting income on Schedule C. The QBI deduction is calculated on your net profit after business expenses, not on your gross 1099 income. This is another reason to make sure you're tracking all legitimate business expenses properly.

S-Corps can definitely be a tax-saving strategy for higher-income contractors, but they come with additional costs and complexity. With an S-Corp, you'd pay yourself a "reasonable salary" which is subject to FICA taxes (Social Security and Medicare), but you can take the rest of your business profits as distributions that aren't subject to self-employment tax. This can save you about 15.3% on the distribution portion. However, you'll have additional expenses: incorporation fees, annual state fees, separate tax return preparation, payroll processing, etc. Generally, the breakeven point where an S-Corp makes sense is around $80-100k of net profit, so at $105k you might benefit, but you should run the numbers carefully.

I did file the proper W-4 form both times - once to claim exempt and then again to go back to my normal withholding status. I've asked HR to show me the forms on file and they said they would "look into it." I'm starting to think there might be an actual glitch in their system based on what everyone is saying here. No one I've talked to seems to think this kind of massive withholding catch-up is normal or legal. Going to push harder for that breakdown of withholding and maybe try contacting the IRS directly.

That's not how tax brackets work though. Even if OP temporarily jumped into a higher bracket, only the amount OVER the threshold gets taxed at the higher rate. The system shouldn't suddenly withhold 85% of their entire check.

You're right about how brackets work, but payroll systems sometimes make this exact mistake. They see one high paycheck and calculate withholding as if every check will be that high for the rest of the year, which can result in over-withholding. Combined with switching from exempt status, it could explain the issue.

But how do they verify this? It seems like I could just put any date and they wouldn't know the difference?

They verify it through your income records. If you claim you started on January 1 but your first rideshare payment was in March, that would raise flags. The IRS can request records from Uber/Lyft showing when you first started driving. Attempting to claim earlier dates to maximize deductions is a common audit trigger. Always document everything - take screenshots of your first day on the app if possible. The potential tax savings aren't worth the risk of penalties and interest if you're caught providing incorrect information.

I used TurboTax Self-Employed last year and it does explain this pretty well. They have a specific section for rideshare drivers and they ask when you first started using your car for business. The help text clarifies it's not your purchase date but when you began business use.

5 Do you think it matters if we stay at nicer hotels vs budget places? Sometimes the cheaper hotels are in sketchy areas and I don't want my guys to feel unsafe, but my CPA said luxury accommodations might raise red flags.

10 The IRS doesn't have a specific guideline on hotel quality, but they do look for "lavish or extravagant" expenses. Mid-range business hotels (Hampton Inn, Holiday Inn Express, etc.) are never an issue. You can absolutely prioritize safety without raising red flags. What would potentially cause problems is if you're putting your crew in 5-star luxury resorts when there are perfectly good business-class hotels available in the area. It's about what's reasonable and customary for your industry. If you're operating a mid-size construction company, stay at hotels that reflect that business level.

16 I tried TurboTax Self-Employed for my electrical contracting business and wasn't impressed. It asked basic questions but didn't give industry-specific guidance. When I entered business meals and travel, it just calculated the deduction but didn't help with documentation requirements or explain the 50% limitation on meals.