Could you explain a bit more about the difference between employee and employer contributions when it's just me? I'm a bit confused about how I can be both when I'm a sole proprietor.

When you're self-employed, you act as both the employee and the employer for retirement contribution purposes, even though it's just you. As the "employee," you can contribute up to $22,500 for 2023 (or $30,000 if you're over 50) from your compensation. As the "employer," you can also make an additional profit-sharing contribution of up to 25% of your net self-employment income (after deducting both business expenses and half of your self-employment tax). This dual contribution ability is what makes Solo 401ks so powerful for self-employed individuals - you can potentially put away much more than with other retirement options like SEP IRAs.

I've used both. SEP IRAs are definitely simpler to set up, but Solo 401ks usually let you contribute more overall. Neither one reduces self-employment tax though. The main advantage of a Solo 401k is you can make both employer and employee contributions, while SEP IRAs only allow employer contributions.

17 Which states actually have these lower estate tax thresholds? Is there a simple list somewhere? My parents have property in multiple states and I'm trying to figure out if this is something we need to worry about.

3 As of 2023, the states with estate taxes are: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia. The exemption thresholds range from around $1 million (Massachusetts, Oregon) to $9.1 million (Connecticut). Some states also have inheritance taxes, which are different - they're based on who receives the assets rather than the total estate value. Those states are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland actually has both types of taxes! If your parents have property in multiple states, you definitely need to look into each state's rules. The concept of "domicile" becomes really important in determining which state's laws apply.

8 Yes, you would be personally liable in two ways. First, as the executor, you have a fiduciary duty to handle the estate properly, which includes paying taxes before distributions. Second, as a beneficiary receiving assets from a taxable estate, you have transferee liability for your proportionate share of estate taxes. The IRS can come after you both as the executor who failed to ensure taxes were paid and as the beneficiary who received assets that should have been used to pay taxes. I strongly recommend getting professional help with this situation to avoid serious personal liability.

This is a really interesting angle I hadn't considered! We definitely have tons of texts and some emails where we specifically talk about everyone "investing" in the house and building equity together. We even had a spreadsheet we updated monthly showing everyone's contributions. Would those help establish this kind of arrangement?

Those texts, emails and especially that spreadsheet would be extremely helpful evidence! That's exactly the kind of documentation that can establish an equitable interest or informal partnership arrangement. The spreadsheet showing contributions is particularly valuable since it demonstrates an ongoing system of tracking "ownership" percentages. When I went through this, my accountant advised bringing all this documentation together, then drafting a simple letter documenting the original intent of the arrangement and how the proceeds distribution reflects each person's contributions. This creates a paper trail showing this isn't a random gift but rather the conclusion of a documented investment arrangement.

Wouldn't issuing 1099s mean they'd have to pay income tax on the money though? That seems worse than just filing a gift tax return where no actual tax is owed (assuming below the lifetime limit). Did your roommates have to pay taxes on those distributions?

That's a really good point about the fair market value. I've been researching comparable workshop spaces in my area to make sure I'm charging a reasonable amount. Would you recommend getting some kind of formal appraisal to document the fair market rental value? I hadn't considered selling the garage space to the business - that seems complicated since it's on the same property lot. Wouldn't that create zoning issues or require subdividing the property?

A formal appraisal would be ideal for documentation, but even gathering 3-5 comparable rental listings from your area can serve as reasonable support for your rental rate. Save screenshots or printouts of similar workspace rentals to keep with your tax records. You're absolutely right about the complications with selling just the garage. Unless your property is already zoned for mixed use, you'd likely face zoning issues. Subdividing residential property to sell a portion to a business entity is possible but extremely complex and might trigger reassessment of property taxes or other consequences. The rental approach you're considering is likely simpler from a practical standpoint.

If you convert it to a legal ADU with living facilities, it would likely be considered a separate dwelling unit entirely. This could actually work in your favor for the Augusta Rule because each dwelling unit gets its own 14-day exemption. Just make sure the conversion is permitted and up to code, otherwise you could have issues with both the IRS and local authorities.

Omg I didn't even think about workers comp! Do I calculate that the same way as the other payroll taxes? Is there a standard percentage for bakery workers?

You don't calculate workers comp the same way as payroll taxes. You'll need to contact an insurance provider who offers workers compensation insurance in Illinois. They'll assign classification codes based on the type of work (bakers might be code 9083) and give you a rate per $100 of payroll for each classification. The rates for bakery workers vary widely by state, but in Illinois, you might expect something around $1.50-$3.00 per $100 in payroll, depending on your claims history and other factors. So if you have $10,000 in monthly payroll, you might pay $150-$300 monthly for coverage.

I second this. I messed up some calculations and classified contractors incorrectly. Ended up with huge fines. A payroll service would have been so much cheaper!