Omg I totally didn't even think about state taxes! I'm in California - do you know if they have any special requirements for small online businesses?

California definitely has state income tax, and they're pretty thorough about collecting it! You'll need to report your income on your CA state tax return. California also technically requires a business license for most businesses, though many small online sellers operate without one initially. If your sales exceed $600 annually, you should register for a Seller's Permit with the California Department of Tax and Fee Administration, especially if you're selling any physical products alongside your digital content. For purely digital goods like photos, the rules can be a bit different, but it's still income that needs to be reported.

This is actually helpful tax advice for OP's question though? Maybe save the economic commentary for another thread.

Do you know if Cash App Tax has import features? I've heard mixed things but thinking about trying it this year.

Cash App Tax does have some import capabilities, but not as extensive as TurboTax. Last I checked, they could import W-2s by taking a picture, and they can import some 1099s from major brokerages like Robinhood and a few others. The coverage isn't nearly as comprehensive as TurboTax though, which can connect to hundreds of financial institutions. If you have accounts at smaller or less common brokerages, you might still need to enter things manually with Cash App Tax.

The free versions often miss deductions though. My cousin works for H&R Block and says they train them to upsell because the free version is designed to be incomplete.

How exactly did you format your response? Did you use any specific IRS forms or just write a letter explaining the situation?

I wrote a formal letter that referenced the notice number and my tax ID at the top. I didn't use a specific IRS form, but made sure my letter was very clear and organized. I started with a direct statement: "I am writing to request abatement of the substantial understatement penalty because all income was properly reported on my original return." Then I included a table showing exactly where each item appeared on my return with line numbers and amounts. I attached highlighted copies of both my filed return and the 1099 forms, with the relevant numbers circled. I find that making it super easy for them to see the evidence increases your chances of success. Don't make them hunt for information or they might just deny your request due to lack of clear documentation.

Most tax software doesn't have great features for handling notices after filing. TurboTax has an "audit support" feature but it's pretty basic - mostly just gives you general guidance. H&R Block offers actual representation if you pay for their Peace of Mind extended service, but that's something you have to purchase when you file, not after you get a notice.

That's a really good point. I started contracting around April 2021 and didn't form the S Corp until September. So I definitely had some income before the corporation existed. And yes, I'm pretty sure I filed the 2553 - the bookkeeper handled that paperwork and I signed it. I got something back from the IRS confirming the S election but I'd have to dig through my files to find it.

That's good you filed Form 2553 and have confirmation. Your approach should be to file two different types of returns for 2021 then: For January-August 2021, report your contracting income on Schedule C as a sole proprietor. This will be part of your personal 1040. For September-December 2021, file an 1120-S for your S Corporation. You'll need to report any reasonable salary you should have taken (even if you didn't actually run payroll) and any distributions you took from the business.

I use TurboTax Business for my S Corp. Would that work for someone in OP's situation or is this too complex for DIY software?

I don't have any foreign income, so that's not the issue. But I'm wondering if maybe something else is affecting it? Does child support count toward earned income? I receive about $400/month for each kid but didn't think that counted as income for tax purposes.

You're right about child support - it doesn't count as taxable income and doesn't affect your earned income calculation for EITC purposes. That's definitely not the issue. Since you mentioned selling stocks for $12,000, another factor might be investment income. If you had other investment income besides the stock sale (interest, dividends, etc.) and the total investment income exceeds $11,500 for 2024, you could be disqualified from the EITC completely. Check if you have other investment income that, combined with any capital gains from your stock sale, might be pushing you toward that limit.

Yeah the EITC is one of the most complicated tax credits. The IRS has an EITC Assistant tool on their website that might help you calculate it more accurately than TurboTax. Google "IRS EITC Assistant" and it should come up. You answer questions about your situation and it estimates your credit amount.