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One thing nobody's mentioned is that you might want to adjust your W-4 withholding with this change. Since you're effectively getting more taxable income, your current withholding might not be enough to cover the additional tax liability. I learned this the hard way last year when my company did something similar - ended up owing at tax time when I normally get a refund. Might be worth using the IRS withholding calculator to make sure you're having enough taken out to cover the difference!
Would you need to fill out a new W-4 form for this? Or can you just ask payroll to withhold an additional specific amount each paycheck? I've never adjusted my withholding before and don't want to mess anything up.
You would need to submit a new W-4 form to your employer. There's a section on the form (Step 4c) where you can specify an additional amount you want withheld from each paycheck. You don't necessarily need to complete the whole form again. Many employers will let you just indicate the additional amount you want withheld. I'd recommend using the IRS Tax Withholding Estimator on the IRS website to calculate how much extra you should have taken out based on this new income. It's much better to handle this now than to get surprised with a tax bill next April!
Does anyone know if companies are required to gross up these kinds of changes? My employer is planning to switch from $200 monthly stipends to a $2400 annual increase, but they're acting like they're doing us a favor when I know I'll lose money on this deal.
No, there's no requirement for employers to gross up the amount. It's completely at their discretion. But it's definitely not a favor if they're just converting the same dollar amount from non-taxable to taxable!
Thanks for clearing that up. I figured that was the case but wanted to check. Guess I'll be having a chat with my manager tomorrow with some calculations in hand!
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Why not just keep the stocks if they've been performing well? Moving from individual stocks to index funds isn't always necessary, especially if they're blue chip companies. You're guaranteeing a tax bill by selling now.
I've considered that, but the inheritance left me really overweighted in just two sectors (finance and healthcare). The financial advisor at Vanguard recommended I diversify since these stocks now make up almost 30% of my total portfolio. I'm just trying to be smart about when and how I make the transition to minimize the tax hit.
I understand wanting to diversify, but consider doing it gradually over a couple of tax years instead of all at once. You could sell enough this year to stay in a lower tax bracket, then do the rest next year. Also worth checking if any of these companies offer dividend reinvestment plans (DRIPs). If they do, you could potentially shift some portion to those programs and slowly diversify without selling and triggering capital gains.
Don't forget about the wash sale rule! It doesn't apply to gains, only losses. So if you really like some of these companies but want to reset your basis, you can sell them and buy them right back. Your new basis would be the repurchase price.
That's actually incorrect. The wash sale rule only applies when you sell at a LOSS and then rebuy within 30 days. OP is dealing with GAINS, so the wash sale rule isn't relevant here at all. Plus, what would be the point of selling at a gain, paying taxes, and immediately rebuying? That would just create a tax bill with no benefit.
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Have you run the numbers both ways (joint vs separate) to see the actual tax difference? In my experience with clients who have LLCs, the self-employment tax isn't affected by filing status, so your wife will owe that regardless. But filing jointly often provides other benefits that outweigh the unpaid estimated tax issue. Also, look into whether the grant was taxable income. Some state grants are exempt from taxation depending on their purpose.
I haven't run the full numbers yet. I was hoping to understand the principles first before diving into calculations. That's helpful to know about the self-employment tax being unaffected by filing status. The grant was specifically for childcare program enhancement, so I'll definitely look into whether it qualifies as tax-exempt. Hadn't even considered that possibility!
One thing no one's mentioned is the audit risk. If your wife's LLC has issues with missed estimated payments, filing separately might keep you from being included in any potential audit of her business. My brother-in-law got dragged into a 3-year audit nightmare because of his wife's side business when they filed jointly.
This is actually a misconception. Filing separately doesn't protect you from audit risk if the business is legitimately your spouse's. The IRS can still look at both returns regardless of filing status. What might help is filing for innocent spouse relief if there are unreported income issues.
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I work at a community tax clinic, and I see cases like yours frequently. One option that hasn't been mentioned yet is an Offer in Compromise, where the IRS agrees to settle your tax debt for less than the full amount if you qualify based on your income, expenses, asset equity, and ability to pay. With your health issues and limited income, you might be a good candidate. The IRS has become more flexible with these programs in recent years. You can check if you might qualify using the IRS's Offer in Compromise Pre-Qualifier tool on their website. Another option is Currently Not Collectible status. If your financial situation is dire enough, the IRS can temporarily classify your account as CNC, which stops collection activities while you're financially unable to pay.
This is incredibly helpful - I had no idea these options existed. Do these programs stop the levy process right away? And if I apply for an Offer in Compromise, how long does that typically take to process?
Yes, both applying for an Offer in Compromise or being placed in Currently Not Collectible status will stop the levy process immediately. The IRS can't continue collection actions while your offer is being evaluated or while you're in CNC status. The Offer in Compromise process typically takes 6-9 months from submission to decision. During this time, your collection statute (the 10-year period the IRS has to collect) is extended. If your offer is accepted, you'll typically need to pay the settlement amount within 24 months or in some cases as a lump sum within 5 months (which often results in a lower settlement amount).
One important thing - KEEP IN MIND that the 10-year statute of limitations on collecting tax debt!!! Each tax year has its own 10-year clock that starts when the tax is assessed. If some of your unfiled returns are from 10+ years ago, the IRS may not be able to collect on those specific years anymore.
This is only partly right. The 10-year clock doesn't start until the tax is actually assessed, which requires filing a return or the IRS creating a substitute return for you. For unfiled returns, that clock might not have even started yet!
Lilly Curtis
Since you're just starting out, I'd recommend the free workshops from SCORE (Service Corps of Retired Executives). They offer free business mentoring including tax guidance from retired business owners and executives. I went to a few of their tax workshops when I started my freelance business, and the advice was incredibly practical since it came from people who had actually run businesses themselves. They can even pair you with a mentor in your specific industry who can guide you through the tax considerations.
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Kevin Bell
•Thanks for mentioning SCORE! I hadn't heard of them before. Do they offer online options or is it all in-person? And would they be able to help with digital/creative business tax questions specifically?
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Lilly Curtis
•They offer both online and in-person workshops depending on your location. During covid they moved most of their programs online and many stayed that way, which is great for accessibility. They definitely can help with digital/creative businesses! Many of their mentors have backgrounds in marketing, design, and digital services. When you sign up, you can specifically request someone familiar with your industry. The tax principles are largely the same across industries, but having someone who understands your specific business expenses and revenue models is super helpful.
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Leo Simmons
One practical tip beyond just learning the basics - start tracking EVERYTHING now. I messed up my first year by not keeping good records. Get accounting software like Wave (free) or QuickBooks Self-Employed ($15/month) right away. The biggest tax issues for freelancers aren't about filing the forms wrong - it's about not having the right documentation or missing deductions because you didn't track properly. Trust me, you don't want to be scrambling in April trying to remember what that $83 expense from last March was for!
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Lindsey Fry
•This! I use a simple spreadsheet with categories for all my expenses and take photos of receipts with my phone. Makes tax time so much easier. Also, put 30% of every payment into a separate savings account for taxes - that saved me from panic when I got hit with my first self-employment tax bill.
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