We never filed any special elections - just formed the LLC with our state. I guess that means we defaulted to partnership treatment? The thing is, we do intend it to be a profit-making business eventually, we're just in the startup phase where we're developing our product and not making much yet. We've each put in maybe 5-10 hours a week, so it's definitely not just a hobby for tax purposes.

Yes, if you never filed Form 8832, then you defaulted to partnership tax treatment, which means Form 1065 filings were required. Even with the small revenue, the fact that you're spending consistent time on it (5-10 hours weekly) and have an intent to make profit would likely qualify it as a business rather than a hobby in the IRS's view. That means you definitely need to file those past-due 1065 forms, but also that each partner should be able to deduct their share of the losses on their personal returns, which could be beneficial. Make sure to document your business intention well - keep business plans, marketing materials, etc. that show you're legitimately trying to make this profitable, which helps if you're ever questioned about the business vs. hobby distinction.

Partnership returns can get complicated, especially when catching up on multiple years. While it's possible to DIY with tax software like UltraTax or Lacerte, I'd recommend at least consulting with a tax professional who has partnership experience. The forms themselves aren't super complicated for a small business, but allocating items correctly on Schedule K-1s and ensuring consistency across multiple years can be tricky. If your partnership structure is simple and your financials are straightforward, you might be able to handle it yourself after getting some guidance. But if there's any complexity (special allocations, guaranteed payments, etc.), professional help is worth the investment to avoid future headaches.

Thanks for the honest advice. Our LLC is pretty simple - just me and my brother with a 50/50 split and minimal transactions. I'll probably look into one of those tax programs but maybe pay for an hour consultation with a CPA just to make sure I'm on the right track before submitting anything.

Wow, that's a great idea! So I could just have my company job take out extra from each paycheck instead of doing the quarterly thing? Would I need to tell them it's for side income or just put down a higher withholding amount?

You don't need to explain why you're changing your withholding - just submit a new W-4 with the adjusted amount. On the current W-4 form, there's a section specifically for "extra withholding" where you can put a dollar amount to withhold from each paycheck. I used the withholding calculator, which asked for info about both my W-2 job and estimated side income, then it told me exactly what to put on each line of the W-4. Just make sure you're setting aside enough to cover both income tax and self-employment tax (the SE tax is the one that catches most people by surprise).

Oh crap, I didn't even think about state taxes. Do you know if the thresholds are different? My side gig only makes like $900 a month.

Thanks for this! I've been tracking expenses but didn't think about mileage. Is there a specific app you recommend for tracking business miles? And for the home office deduction, does it matter if I'm sometimes using my dining room table vs having a dedicated office space?

I use MileIQ for tracking business miles - super simple and it creates reports you can use for taxes. Some people like Everlance too. For the home office deduction, you unfortunately need a space used exclusively for business. The dining room table wouldn't qualify since it's also used for personal purposes. It needs to be a dedicated area used only for your business. If you have a spare bedroom or even a section of a room that's exclusively for your wedding planning business, that could qualify. The IRS is pretty strict about the "exclusive use" requirement.

This is exactly what I do! So much simpler than doing estimated payments. My accountant suggested withholding an extra $200 per paycheck to cover my side gig, and I've never had issues or penalties.

Absolutely! It's been working for me for 3 years now with zero issues. The key is calculating the right additional withholding amount. I worked backwards by estimating my annual business profit, calculating roughly 15.3% for self-employment tax plus my income tax rate (22% bracket), then dividing by my number of paychecks. The peace of mind from not dealing with quarterly payments is totally worth it. And technically, you're also avoiding potential underpayment penalties since the IRS treats withholding as happening evenly throughout the year, even if you increase it later in the year.

But if someone's selling drugs, wouldn't reporting the income create a paper trail that could get them arrested? I thought there was some law that protected people from having to incriminate themselves on tax forms?

You're thinking of the Fifth Amendment protection against self-incrimination. It's a complex legal area where tax law and constitutional rights intersect. While the Fifth Amendment can protect you from having to provide incriminating information, courts have generally held that it doesn't excuse individuals from filing tax returns or reporting income. The requirement to file and pay taxes applies to everyone. However, the specific way information is reported can sometimes be handled to minimize self-incrimination. This is precisely why someone in this situation should work with both a tax attorney and criminal defense attorney - not just a regular tax preparer. It requires specialized legal knowledge to navigate properly.

There's no specific line for "illegal income" on IRS forms. All income, regardless of source, gets reported in the appropriate categories based on how it was earned (business income, capital gains, etc.). The IRS is concerned with whether income is taxable, not whether it's legal.

That's a really good idea! I do remember paying online through my bank for some quarterly estimated payments too. Would showing the bank statements be enough though? I'm worried they'll say I need the actual tax forms.

Bank statements are considered strong supporting evidence, especially for proving payments were made. While they may not replace the actual return completely, they directly contradict the claim that you paid zero taxes. Include a brief letter explaining your situation and that you're providing the best documentation available to you. Most state auditors are reasonable when presented with clear evidence of compliance. The key is showing you're making an honest effort to resolve the issue. If possible, combine these bank statements with your W-2 from that year and any IRS transcript you can obtain. Together, these paint a clear picture of your tax situation.

I had to deal with this exact situation. What worked for me was getting wage transcripts from the IRS (shows all your income reported on W-2s and 1099s), bank statements showing tax payments, and any other financial records from that year. Put it all together with a letter explaining the situation. In my case, the state tax auditor was actually pretty understanding once I showed I had legitimate documentation, even if it wasn't the exact original return. The key was being proactive and not ignoring their requests.