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!

Thanks for this suggestion! I tried the online transcript option but couldn't get through the identity verification (apparently my phone isn't registered in my name for some reason). I'll try requesting by mail, but I'm in a bit of a time crunch - do you know if there's any way to expedite that?

Unfortunately there's no way to expedite the mail transcript that I know of. The 5-10 business days is the standard timeframe. If you're in a time crunch, you might want to try one of the other suggestions like the Claimyr service to speak with an IRS agent directly, or see if you can find a copy of last year's return somewhere in your records or email. If you used tax software last year, definitely try logging into that account first - most services keep your returns available for several years. Even if you don't remember which service you used, try the major ones (TurboTax, H&R Block, TaxAct, etc.) with your email to see if you have an account.

This is exactly right! I work seasonal tax prep and we tell clients this all the time. AGI is always on Line 11 of the main 1040 form (at least for current forms). And yes, most tax software keeps your returns for several years - TurboTax keeps them for 7 years I believe.

Do you think this would affect different types of restaurants differently? Like would high-end places where servers make $300+ per night handle it differently than diners where tips might be way smaller?

Absolutely. High-end establishments would likely see even more dramatic effects. In fine dining where servers can make $70,000-$100,000 annually primarily through tips, the impact on lending, retirement, and benefits would be catastrophic. Their reported income would suddenly appear to be just $15,000-$20,000 on paper. Smaller diners and casual places would still see negative effects, but the dollar amount difference wouldn't be as extreme. However, servers at these establishments often rely more heavily on programs like EITC and healthcare subsidies, which are all income-based. So while the absolute numbers might be smaller, the relative impact on their financial lives could actually be worse.

I did the calculations for my situation. Last year I made about $42k total, with $35k from tips. I paid roughly $4,800 in federal taxes on that income. But I received $2,300 in EITC and child tax credits. I also qualified for a $1,200/month apartment based on that income and got approved for a car loan at 5.9% interest. If only my hourly wage counted ($7k), I'd save $4,800 in taxes but lose $2,300 in credits. Plus my apartment application would be rejected (they require income 3x rent) and my car loan interest would jump to 18.5% as a "high-risk" borrower. Not worth it at all.

How difficult was the NAEA content? I don't have any formal accounting background - just basic bookkeeping for my business. Would I be in over my head?

You wouldn't be in over your head with NAEA courses. They're designed to be accessible to people without accounting backgrounds, starting with fundamental concepts and building from there. Each module typically begins with basics and progressively gets more detailed. The S Corporation course specifically explains concepts like reasonable compensation and pass-through taxation in plain language before diving into the more technical aspects. They also provide plenty of real-world examples that make it easier to understand how the concepts apply to actual businesses. Most of my fellow students were business owners like yourself rather than accounting professionals.

I did their S Corporation specialist course last year. It's good info but very focused on California tax issues, so if you're in another state, just be aware of that limitation. Their materials are easy to understand though, and they explain things much better than the dry IRS publications.