Thanks for the practical breakdown! Do you have any payroll services you'd recommend specifically? And how did you decide what salary to set for yourself?

I use Gusto for payroll and have been happy with it. Very user-friendly and they handle all the filings automatically. OnPay and Square Payroll are also good options that several of my contractor friends use. All run about $45-60/month depending on features. For salary, I researched construction project managers in my area on sites like Glassdoor and Indeed. The range was $90k-140k, so I settled on $120k as my reasonable salary. I also documented this research and keep it with my tax records in case of questions. My accountant suggested keeping the salary above 40% of business profit as a general rule to avoid red flags, but that varies by industry.

Yikes! I didn't know about state franchise taxes. Does anyone know what the requirements are in Texas?

Texas doesn't have state income tax but does have a franchise tax (also called margin tax). However, there's a threshold - businesses with less than $1.23 million in annual revenue are exempt. So for most small S-corps in Texas, you wouldn't owe this tax.

This is really good advice. Different payroll systems handle the transition differently. I work in HR (not a tax expert though) and we've had tons of questions about this exact issue. Some systems use a "behind the scenes" conversion while others actually require you to fill out both the old and new formats.

Exactly! It's even more complicated because some of these systems were updated in phases. For my company, employees hired before 2023 still see the allowances language while newer employees get a different interface entirely. The most important thing is to make sure your actual withholding amounts align with your tax situation, regardless of how the form presents it. When in doubt, the payroll or HR department can usually provide a withholding calculator or estimate specific to their system.

Try using the IRS Tax Withholding Estimator (it's free on the IRS website). It's way more accurate than just guessing with allowances. You can adjust throughout the year too if your situation changes.

Do those limits apply to both Traditional and Roth 401k combined? Or can I do $23,000 in Traditional and another $23,000 in Roth? Also, does the employer match count toward the limit?

The $23,000 limit applies to your combined Traditional and Roth 401k contributions - it's a total limit for all your elective deferrals. So you can split it however you want between Traditional and Roth, but the total can't exceed $23,000 (or $30,500 if you're 50+). Good news though - employer matching contributions don't count toward this limit! They fall under a separate, much higher limit (the "415(c) limit") which is $69,000 for 2024. This higher limit includes all contributions to the plan (your elective deferrals plus employer contributions).

Code "E" actually means distribution under a QDRO (qualified domestic relations order), which is usually for divorce situations. For excess contributions, you should normally see code "P" for principal or code "8" for earnings on excess contributions. You might want to contact your plan administrator because they may have coded your 1099-R incorrectly.

That's an interesting alternative I hadn't considered. Would the interest I earn be considered passive income? And would the business still be able to deduct the interest payments? Seems like it could be win-win if structured properly.

Yes, the interest you earn would typically be considered portfolio income (not passive income in the tax sense, but not subject to self-employment tax either). It's reported on Schedule B and taxed at your ordinary income rate. The business could generally deduct the interest payments as a business expense, subject to certain limitations if the business is very large (which doesn't sound like the case here). This creates a tax-efficient arrangement where the business reduces its taxable income and you receive income without the complications of partnership taxation. You could even structure it with an equity conversion option if the business performs well and you later decide you want ownership.

What tax software did you use to handle your K-1? I'm looking at a similar situation and wondering if TurboTax can handle it or if I need something more specialized.

I started with TurboTax but switched to a CPA halfway through. TurboTax can technically handle K-1s, but it doesn't provide much guidance for complex situations. If your K-1 is straightforward it might be fine, but mine had unusual allocations, guaranteed payments, and some weird depreciation issues from business property. The best advice I can give is to either use a more specialized tax software like UltraTax if you're comfortable with tax concepts, or just pay for a CPA who specializes in partnership taxation. It's worth the money to avoid the headache and potential errors. My CPA actually found several deductions TurboTax missed that more than paid for her fee.

That's reassuring to hear. Did you get hit with any penalties or just the back taxes and interest? And did you use a tax professional or just do it yourself?

I ended up paying a penalty of about 20% on top of the taxes owed, plus interest. It wasn't fun writing that check, but it was bearable and totally worth the peace of mind. I used a CPA for the amended returns. It cost me about $350, but they found some deductions I'd missed that probably saved me twice that amount. Plus they handled all the paperwork correctly which I think helped avoid any audit flags. If you've got somewhat complicated taxes or multiple years to amend, a professional is definitely worth the money.

The IRS doesn't automatically know about your eBay income though. They only know what gets reported to them through forms like W-2s and 1099s. If eBay/PayPal didn't issue 1099s (which they wouldn't for smaller sellers back then), the IRS has no way of knowing about that income until they audit you or match bank deposits.