Is this still true if the LLC owner is on payroll too? Like if they're getting a W-2 from their own company?

No, that changes things significantly. If the LLC owner is receiving a W-2 from the business (putting themselves on payroll), then they're treating the LLC as an S-Corp for tax purposes, not a single-member LLC with pass-through taxation. In that case, the owner's W-2 would have withholding just like any employee, and those withholdings would be credited automatically when you enter the W-2 in TurboTax. The business would still file its own return (typically Form 1120-S for an S-Corp), and the owner would receive a K-1 for their share of profits beyond their salary.

Not the OP but our accountant recommended we switch to S-corp status once our profits hit about $40k annually. The savings on self-employment tax were worth the extra paperwork.

Can I ask how long it took between submitting your S corp election and receiving the rejection/notices about your unfiled returns? Was there any warning or did they just hit you with everything at once?

It took about 6 weeks from when I submitted Form 2553 until I received the rejection letter. There was no warning at all - the rejection came first which specifically mentioned "taxpayer not in compliance with filing requirements" as the reason. Then about 2 weeks after that rejection letter, I started receiving separate notices for each unfiled tax year requesting that I file returns immediately. The notices came with proposed penalty amounts that increased with each year I was behind. The whole process created a much bigger headache than if I'd just caught up on filings first.

I used a CPA when I was in this exact situation last year. Having them handle everything definitely helped. They filed my missing returns first, waited about 45 days, then submitted the S corp election. Everything went through without issues. They told me the key was getting the personal returns processed BEFORE submitting Form 2553. Also, they filed a disclosure statement with my catch-up returns explaining the late filing was unintentional which may have helped avoid penalties.

Thanks for sharing your experience! That 45-day waiting period between filing the missing returns and submitting the S corp election makes a lot of sense. Did your CPA mention anything about whether you needed to wait for formal processing confirmation from the IRS before submitting the 2553?

Any recommendations on what income level typically makes it worth claiming? I'm in a similar situation with about $12k in AMT credits but not sure if my $110k salary will trigger enough regular tax to recover anything.

At $110k, you'll likely recover some of your credits, but it depends on your deductions, filing status, and other factors. If you're single with standard deduction, you'd probably begin to recover credits at that income level. Generally, I've found that married couples often need $150k+ combined income before recovering significant AMT credits, while singles can start seeing benefits around $90-100k. Consider consulting with a tax pro for a year-by-year projection based on your specific situation.

If you do a disqualifying disposition (selling before meeting holding requirements), it gets even more complex. The good news is you'll generally receive an AMT income adjustment that can help recover some of your AMT in the year of sale. The bad news is you'll pay ordinary income rates on the spread instead of capital gains rates.

Thanks for the tip about checking the codes! My 1099-R definitely shows both P and J in Box 7. I'll make sure the software is reading both codes correctly. Did you end up having to file Form 5329 separately or were you able to include it with your regular return through the software?

You can include Form 5329 as part of your regular tax return through the software - no need to file it separately. Most tax software has a section for additional forms where you can find 5329. Just make sure you're selecting exception code 12 specifically for "removal of excess contributions.

I've done this exact thing for 3 years (kept making the same mistake with foreign income and Roth contributions) and never had an issue. As long as you have documentation showing you properly removed the excess contribution, you're doing exactly what the IRS procedures specify.

Thanks for breaking it down so clearly! I've never filled out a W-9 before. Is there anything tricky about it that I should watch out for?

The W-9 is actually pretty straightforward. The main things to be careful about: Make sure you're using the current version of the form from IRS.gov - it's occasionally updated. Fill in your legal name (as shown on your tax return), not a business name unless you have one registered. For most independent contractors, you'll check the "Individual/sole proprietor" box. The trickiest part is deciding whether to provide your SSN or an EIN (Employer Identification Number). If you're just working as yourself, your SSN is fine. If you've set up a formal business structure, you might have an EIN to use instead.

This is why I use QuickBooks Self-Employed - it explains all this stuff and tells you what forms you need vs what forms others should give you. Helped me avoid so many headaches with clients who dont understand contractor taxes.