This is exactly what I needed - thank you! So if he's primarily moving his household and family, those expenses aren't deductible even if the reason for the move is business-related. But if he's also moving actual business property, that portion could potentially be deductible?

That's correct. The expenses for moving actual business property (like specialized equipment, inventory, business furniture, etc.) to the new location could potentially qualify as legitimate business expenses. Those would be reported on the business tax return. The personal household moving expenses remain non-deductible regardless of the business motivation behind the move. This is a common area where business owners often blur the lines, but the IRS is quite clear on maintaining the distinction between personal and business expenses. Your friend should keep meticulous records and separate receipts for anything that might qualify as a legitimate business expense versus personal moving costs.

Sorry you had to learn this the hard way. How did the audit go overall? Was it just a matter of paying the additional tax or were there penalties too?

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.

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.

Thanks for this practical advice. I hadn't thought about doing it in TurboTax first and then just getting a review. That seems like a good middle ground between doing it all myself and paying the full price for preparation. Did your CPA find many errors when they reviewed your self-prepared return?

The first year, yes - my CPA found several issues. I had misunderstood how to enter some 1099-MISC income and had incorrectly calculated my home office deduction. The corrections actually increased my refund by about $800. In subsequent years, I've gotten better at using the software correctly, and now the review is mostly just peace of mind. The CPA usually just verifies everything looks right and occasionally suggests an additional deduction I might have missed. Most errors happen when your tax situation changes significantly - like in your case with marriage, home purchase, and dependents all at once.

This is such a good point about withholding! When I got married, we both kept our "single" withholding rates for most of the year and ended up with a massive refund that seemed wrong but was actually correct.

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.