That's really helpful info! I definitely use my car for personal stuff too. Is there a percentage that's considered "safe" by the IRS, or does it just need to be honest and accurate? And do you recommend any simple ways to track the personal vs business split?

There's no "safe" percentage - it just needs to be honest and reflect your actual usage. The IRS knows different professions have different typical business use percentages. A real estate agent might legitimately have 75-80% business use, while someone who occasionally meets clients might be 20-30%. For tracking, the simplest method is recording your odometer reading on January 1 and December 31, then keeping a log of all business miles. Subtract business miles from total annual miles to get personal miles. Some clients just take a photo of their odometer on the first and last day of the year as documentation. Phone apps like MileIQ or Everlance can also automatically track trips if you want something more automated.

Oof, that sounds rough. Did you have to pay back taxes and penalties too, or just the accounting fees to deal with it?

Is that true even if the S-corp doesn't have any physical presence in California? Just getting a K-1 from a partnership that does business there is enough to trigger the franchise tax?

Yes, unfortunately. California considers having income sourced to the state (even through a partnership) as creating nexus. So if your S corp is a partner in a partnership doing business in California, the S corp generally has to pay the $800 minimum franchise tax, even without physical presence there. It's particularly painful if your client is a small S corp that only invested a small amount in a larger partnership. Some states are more aggressive than others about this, but California is definitely one of the strictest.

We did this last year for a similar situation in NY, CT and CA - all three have PTE elections that worked well. Big benefit was getting around the $10k SALT deduction limit on the owner's 1040. But you have to be careful about timing - some states require you to make the election before the tax year ends.

Can you explain how the "gross up" works? Do you just pay them more to cover the taxes, or is there some specific calculation?

We basically increase the payment amount to account for the roughly 15.3% self-employment tax they'll owe. So if we want them to net $1,000 after SE tax, we'd pay about $1,180 instead. There's no perfect calculation because their actual tax situation depends on all their other income and deductions, but this is a rough approximation that helps prevent surprises. We record the full grossed-up amount as the guaranteed payment on their K-1.

There's a narrow exception if the LLC has elected to be taxed as an S-Corp (not a partnership) AND the payments are for services outside the member's normal owner duties. But that's clearly not the case for the original poster since they file Form 1065 as a partnership.

What's the ballpark cost for having a CPA handle an 1120S for a small business? My biggest concern with hiring someone is cost since we're pretty straightforward (just retail sales, no crazy deductions or situations).

For my business, which is similar in size to yours (about $280K in revenue), I pay around $1,200 for the 1120S preparation and filing. That includes quarterly check-ins and some basic tax planning. I know that might seem expensive compared to software that costs $150-200, but the CPA found enough legitimate deductions to more than cover her fee. The peace of mind is the biggest benefit though. No stress about making mistakes or missing deadlines. Plus, if there's ever an audit or question from the IRS, she handles all communication. For me, the cost is just another business expense that actually provides real value.

Great point! I use Drake Software for my small business and it handles all the business forms including 1120S. It's less known among casual users but very popular with tax professionals. The interface isn't as pretty as TurboTax but it gets the job done at a reasonable price.

Thanks for the Drake recommendation! I'll check that out for next year. I ended up using TaxAct Business which worked fine but was a bit more expensive than I expected. The e-file went through without issues though, and I got my acknowledgment from the IRS within a day.

Thanks for sharing your experience! Do you think it matters that my contract with the Malaysian company says "employment agreement" in the title, even though the substance of the relationship is more like self-employment? Did you have a similar issue with your German contract?

The title of the contract isn't as important as the actual terms within it. My German agreement also said "employment contract" but the IRS looks at the substance of the arrangement more than the labels. Make sure you highlight aspects of your arrangement that support self-employment: you paying your own expenses, setting your own schedule when possible, using your own equipment, and the lack of typical employee benefits. In my case, I included a memo with my tax return briefly explaining why I was filing as self-employed despite the contract title, focusing on these substantive factors. The key is being consistent and having documentation to back up your position if questioned.

I used TurboTax last year for a similar situation working in Thailand. It does handle Schedule C for self-employment and Form 1116 for Foreign Tax Credit, but honestly the questionnaire was confusing for international situations. I ended up having to manually override some things and do quite a bit of research on my own. If your situation is straightforward self-employment, it might work fine, but if there are complexities, you might want a professional who specializes in expat taxes.

Thanks for the insight! I might try TurboTax first since my situation isn't super complex, but keep a tax professional as backup if I get stuck. Did you find any specific resources that helped you figure out the overrides you needed to make?