Just checked my forms from this year and last year. You're right - my total federal tax (line 16) jumped from $22k last year to $37k this year! But my federal withholding only went up slightly. I think the side gig income plus not adjusting my W-4 after getting married really did mess things up. Now I'm wondering if I should adjust my California withholding too, or if I should leave it alone since I'm getting a refund there? I don't want to end up owing both federal AND state next year.

That's a huge jump in your tax liability! Definitely don't leave your California withholding alone just because you got a refund this year. Your goal should be to get close to zero on both returns (not owing much and not getting much refunded). For the most accurate withholding, I'd recommend using both the IRS withholding calculator for federal and the California FTB's DE 4 form for state withholding. They'll help you account for both your W-2 income and your side gig. Also, you should start making quarterly estimated tax payments for your side business - that alone would have prevented a big chunk of what you're owing.

Not OP but this happened to me once. I filed MFJ on federal but accidentally filed as Single on my state return. Made a huge difference in what I owed vs. what I got back. Always double-check your filing status across both returns!

I checked and I'm using Married Filing Jointly for both returns. So that's not causing the issue. But I've realized I really messed up by not updating my W-4 after getting married and not accounting for my side income. I'm going to fix both issues right away! The good news is I just talked to the IRS about a payment plan (finally got through!) and they were actually super helpful. Going to spread the payments over 36 months which makes it much more manageable. And I'll be adjusting my withholding immediately so this doesn't happen again next year.

This is really helpful! A lot of that money did go to developers creating new algorithms for the app. Is there a specific way I need to document these expenses to qualify for the R&D credit? And can I claim this credit as a single-member LLC?

You can absolutely claim the R&D credit as a single-member LLC, since the credit will flow through to your personal return. Documentation is crucial though - you need to track not just the expenses but also what specifically was being developed. For developer costs to qualify, you need to document what technical uncertainties they were addressing, the process of experimentation, and how it relies on hard sciences (computer science counts). Keep timesheets showing hours spent on qualified activities, project plans showing the research component, and any technical documentation describing the innovations.

Did you face any issues with the IRS questioning your business vs hobby status since you weren't profitable? I've heard they scrutinize tech startups that show losses for multiple years.

Are there any special considerations for the 5472 when all the company's income is from digital products? My Delaware corp sells software but I'm the only employee and I live in Germany.

For digital products, the 5472 requirements still apply, but you need to be especially careful about documenting any IP rights or licensing between you and the corporation. Since you're in Germany and the only employee, all transactions between you and the company need proper documentation and arm's length pricing. Make sure you're tracking any payments for services you provide to the corporation, any IP you're licensing to it, and any other transactions that cross borders. Digital businesses have a tendency to blur these lines, which can create issues with the 5472. Consider having transfer pricing documentation prepared, even for a small operation.

I tried using TurboTax Business for my foreign-owned corp last year and it was a disaster. It didn't handle the 5472 properly and didn't clearly indicate which mailing address to use. Ended up having to redo everything with a CPA who specializes in international taxation.

Thanks for sharing your experience. That's really disappointing to hear about TurboTax Business. I was hoping to save some money by doing it myself, but sounds like I might need to look for a specialist CPA after all. Did you find someone reasonable who understands these foreign-ownership situations?

Does the IRS ever actually check these kinds of deductions? I've been taking medical deductions for years and never been asked for receipts. I'm wondering if creating all this documentation is even necessary.

The IRS uses statistical algorithms to flag returns for review, and medical deductions that are unusually large relative to income are definitely one of the triggers they look for. While many people never get audited, when it happens, you'll need to provide documentation for everything. Creating good records isn't just about avoiding audits though. It's about accuracy and peace of mind. I've seen cases where people missed legitimate deductions because they didn't keep good records. The documentation system I described takes less than an hour to set up and can potentially save thousands in deductions. It's definitely worth the small effort for that potential return.

OP already said neither her mom nor she have a car. Reading comprehension ftw.

Thanks for this! Do you know if I need to do anything special to prove my income since I won't have a 1099? Should I download all my transaction history from the app as proof?

Yes, definitely download and save all your transaction history from the payment app. I recommend exporting it to a spreadsheet if that option is available, and categorizing each transaction (income vs. deposits that will be returned, etc). For tax filing purposes, you don't need to submit proof of income with your return, but you absolutely should keep those records for at least 3 years in case of an audit. Also make sure you're tracking all your business expenses with receipts - things like needles, jewelry, gloves, cleaning supplies, and even a percentage of your phone bill if you use it to schedule clients. Good record-keeping can save you a lot in taxes through legitimate business deductions.

I used TurboTax last year for my dog walking business which also uses payment apps. It worked pretty well - there's a self-employment section that walks you through entering income and expenses, even without a 1099. Just make sure you get the Self-Employed version, not the basic one.