How exactly does the SEP IRA thing work? Is it complicated to set up? And what percentage should I be setting aside if I don't want to get hit with this kind of bill again?

A SEP IRA is pretty straightforward to set up - most major brokerages (Vanguard, Fidelity, etc.) can help you open one in about 20 minutes online. You can contribute up to 25% of your net self-employment income or $66,000 for 2023, whichever is less. It directly reduces your taxable income dollar-for-dollar, which is huge. For setting aside money, I'd recommend 30-35% of every payment you receive. I actually have a separate savings account called "Tax Fund" where I immediately transfer that portion whenever I get paid. It seems high, but it covers both income tax and self-employment tax. If you're in a state with income tax, you might want to bump that to 35-40%. It's better to have a little extra saved than not enough when tax time comes around.

I've used both and honestly found TurboTax Self-Employed to be more thorough for 1099 income. It asks more specific questions about potential business deductions and seemed to find more write-offs. It's more expensive but worth it IMO.

What happens if someone never filed Form 8606 in previous years when making non-deductible contributions? Is there any way to fix that or are they just screwed and will be double-taxed?

You're not screwed if you didn't file Form 8606 in previous years, but you'll need to do some cleanup work. You should file amended returns (Form 1040-X) for each year you made non-deductible contributions but didn't file Form 8606. The good news is that the IRS generally allows you to establish your basis even after the fact if you can provide documentation showing that the contributions were indeed non-deductible. This might include account statements, contribution confirmations, and tax returns showing you were over the income limits for deductible contributions.

Yes, this applies to partial conversions too. When you convert only a portion of your traditional IRA to a Roth, you'll still get a 1099-R with likely a code 2. The key difference is how Form 8606 calculates the taxable amount. For partial conversions, the IRS doesn't let you just convert the non-deductible (already taxed) portion. Instead, each conversion is treated as containing a pro-rata portion of your taxable and non-taxable funds. Form 8606 will calculate this "pro-rata rule" based on the percentage of your non-deductible contributions compared to your total IRA balance.

Do you have any tips for what counts as "reasonable cause"? Would my scenario qualify? And did you just include the letter with your late return or file first and then send the letter separately?

Reasonable cause includes things like serious illness, death in the family, natural disasters, or inability to access records. Your family emergency might qualify depending on the specifics. The more documentation you can provide, the better. I filed my return first (to stop additional penalties from accruing) and then sent the reasonable cause letter separately. I referenced my return and included my tax ID number. Keep the letter concise but include specific dates and explain exactly how the situation prevented you from filing on time.

Not always true! My brother got hit with almost $1200 in penalties for missing his extended deadline last year. Depends a lot on your specific situation and how much you owe.

This is really helpful, thanks! Do you think it would be worth meeting with a CPA for just a consultation to get set up properly, then maybe using software to actually file? And do you have any tips on finding a decent CPA who won't charge an arm and a leg?

A consultation with a CPA is definitely a smart middle ground. Many offer an initial meeting at a reduced rate or even free. This gives you professional guidance on setting up your books and understanding what expenses to track, without the full cost of having them prepare your return. For finding an affordable CPA, I'd recommend asking other small business owners in your area for recommendations. Also look for smaller firms or solo practitioners rather than larger firms, as they often have more competitive rates for small businesses. Some CPAs even offer special rates for startups or businesses that lost money. Don't be afraid to call around and ask about their fee structure - most are very transparent about costs.

TurboTax actually has a business version that handles LLCs pretty well. It's more expensive than the basic version but WAY cheaper than a CPA. It walks you through all the business questions and helps with categorizing expenses properly.

I've definitely been considering that option more seriously now! We've been together 7 years and were planning to get married eventually, but this tax situation might accelerate our timeline. Do you know if getting married mid-year would fix the issue for the partial year, or would we need to be married on January 1st for it to apply to the full tax year?

Your tax filing status is determined by your marital status on December 31st of the tax year. So if you get married any time during 2023 - even on December 31st - you're considered married for the entire 2023 tax year. For the imputed income specifically, it would likely be prorated - so the portion of the year before marriage would have imputed income, and the portion after marriage wouldn't. Your employer's HR department should handle this adjustment automatically once you update your marital status with them.

Unfortunately, even in states with Registered Domestic Partnerships, the federal tax issue remains. The IRS only recognizes legal marriage for tax purposes, not state-registered domestic partnerships. While your state return might have some benefits if you're in a state that recognizes domestic partnerships for state tax purposes, the federal imputed income issue will persist unless you're legally married or your partner qualifies as your dependent under the strict IRS definition.