That's an excellent point I hadn't considered. So even if I'm able to zero out my income tax through 401k contributions, I'd still be paying unnecessary SE tax if I don't claim my business expenses. Could you explain a bit more about how the SE tax calculation works with Solo 401k contributions?

Exactly! Solo 401k contributions don't reduce your self-employment tax liability - only your regular income tax. SE tax is calculated on your net earnings from self-employment (Schedule C profit) before any retirement plan contributions. So if you have $19,500 in income and don't deduct that $4,000 in expenses, you'd pay SE tax on the full $19,500. But if you properly deduct the $4,000, you'd only pay SE tax on $15,500. At the 15.3% SE tax rate, that's a savings of about $612. That's real money you'd be leaving on the table by not claiming legitimate expenses!

Did you get audited or have any issues with the IRS over it? I've been wondering how they would even know if you didn't report some expenses.

That's really good advice! What kind of documentation would be acceptable for cash jobs? Most of his work is for neighbors who just pay cash, no invoices or anything formal.

For cash jobs, create your own simple invoice system - even a notebook where you write down the date, customer name, service provided, and amount paid is better than nothing. Some people use apps like Square or PayPal for small jobs which automatically creates a record. The key thing the IRS wants to see is consistency and reasonableness. If you can show a regular pattern of work and income that matches the lifestyle you report on your taxes, that goes a long way. For expenses, keep ALL receipts for anything related to the work. Home improvement stores, gas, work clothes, tool repairs - these can all potentially be deductible depending on how they're used. Just make a note on each receipt what job it was for.

Self-employment tax is currently 15.3% of net earnings (12.4% Social Security + 2.9% Medicare). On $4,000 of net income, that would be about $612 in self-employment tax. However, you can deduct half of that on your 1040, which slightly reduces your income tax. But remember, you'll likely have deductible expenses that reduce your net income. If your husband spent money on tools, supplies, transportation to jobs, etc., those costs can lower the taxable amount significantly. Sometimes with proper expense tracking, the taxable income might be much lower than the gross income.

Thanks! That's helpful to know. I didn't realize I could deduct expenses against that income. I was worried about owing a big chunk of that $4k, but if I can deduct the gas, tool repairs, and other expenses, it might not be so bad.

Doesn't switching to independent contractor status mean losing unemployment insurance protection? And what about health insurance? I'm weighing these options too but worried about losing safety nets.

Yes, switching to independent contractor status does mean losing unemployment insurance protection, which is definitely something to consider in your decision. You'd need to essentially create your own safety net through savings. Regarding health insurance, as an S-Corp owner, you can actually establish a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) or an Individual Coverage Health Reimbursement Arrangement (ICHRA) to pay for health insurance premiums with pre-tax dollars. Alternatively, the health insurance premiums for self-employed individuals are deductible on your personal return. Many find that the tax savings from properly structured self-employment more than cover the additional costs of independently obtained insurance.

That's super helpful, thanks! I'm in Pennsylvania - does anyone know if they allow these deductions? Going to look it up now but figured I'd ask.

I can confirm this works in New York too. I deducted over $8,000 in unreimbursed business expenses last year as a W-2 employee on my state return. The key is keeping meticulous records - mileage log, home office measurements and expenses, etc. The state can audit these deductions separately from your federal return.

That's a really good point that I hadn't even considered! She's currently living in Australia and I have no idea what their rules are for small self-employment income like babysitting. Would we need to file tax returns in both countries then? And how does that work with the tax treaty stuff?

Australia definitely taxes residents on worldwide income, so yes, she likely needs to file there too. The good news is that the US and Australia have a comprehensive tax treaty. If she pays taxes in Australia, you can generally claim a Foreign Tax Credit on your US return using Form 1116 to offset US taxes on that same income. This helps prevent double taxation. Australia has a tax-free threshold of about 18,200 AUD, so if she's making less than that from babysitting, she might not owe Australian taxes anyway.

This FBAR stuff is terrifying! I've been doing my taxes myself for years and just found out about this requirement. Is there any kind of amnesty program if you've messed up in previous years? Also, does it matter if the account has barely any money in it?

This is really helpful info. Should I also include a copy of my original W-2 that matches the amended return? And do I need to explain why the original return was wrong or just focus on showing that I fixed it?

Yes, definitely include a copy of the W-2 that matches your amended return. That's one of the most important documents to include. For your second question, I'd include a brief explanation of what happened - that you initially filed with pay stub information but then submitted an amended return as soon as you received your actual W-2. Keep it factual and straightforward without placing blame. The focus should be on showing that you proactively corrected the issue as soon as you had the right information.

H&R Block's "audit assistance" is a joke. I had a similar situation last year and they basically just printed out my return again and said "here you go." They didn't help draft any responses or talk to the IRS for me. Maybe OP's location is better, but my experience was terrible.