That's a good point about keeping the LLC active. My state charges $125 annually to maintain it. Do you track W-2 income and LLC income separately? And how do you handle retirement contributions when you have both types of income?

Yes, you absolutely need to track W-2 income and LLC income separately. I keep separate bank accounts and credit cards for business expenses to make this clean and audit-proof. For retirement contributions with both income types, it gets interesting and potentially advantageous. If your W-2 employer offers a 401k, you can max that out ($22,500 in 2023 plus catch-up if eligible), AND you can still contribute to a Solo 401k through your LLC as the "employer" portion. You can't double-dip on the employee contribution, but the employer contribution is based on your LLC profit. This lets you potentially put away significantly more for retirement than you could with just W-2 employment. Just make sure you're working with a tax professional who understands these nuances, particularly if you're juggling both types of income. These hybrid situations can be tax-advantageous but require careful documentation.

Is there a cheaper alternative to QuickBooks? $15/month seems steep when I'm just starting out with a small side business.

This is super important advice! My daughter started her first job last year and we had to figure this out. The rules are: If you're under 24 and a student, or under 19 otherwise, AND your parents provide more than half your support, they can claim you. But you need to coordinate with them before either of you file.

Oh! I totally forgot about state taxes. I moved from Michigan to California for this job in August. Does that mean I need to file in both states?

Yes, you'll need to file a part-year resident return for both Michigan and California since you earned income in both states during 2024. This is called filing a "part-year resident return" in each state. The good news is that tax software can handle this situation - you'll just need to indicate when you moved and which parts of your income were earned in each state. There are credits to prevent double taxation, so you won't pay taxes twice on the same income. California has some of the highest state income taxes in the country, while Michigan's rates are lower, so be prepared for that difference. The software will calculate everything correctly as long as you input your moving date and income sources accurately.

Thanks for mentioning this! I didn't think about the Additional Child Tax Credit. Do you know if unemployment income counts toward eligibility for that? And does the Child and Dependent Care Credit apply if the childcare was only for part of the year (Jan-Mar before I lost my job)?

Unemployment income does count toward eligibility for the Additional Child Tax Credit, which is good news in your case. The ACTC looks at your total income, not just earned income like the EITC does, so your unemployment benefits will help you qualify. For the Child and Dependent Care Credit, you can absolutely claim it for just part of the year. You can claim expenses you paid for childcare during the months you were working (January-March). Even though it was only a few months, every bit helps when it comes to maximizing your refund.

I just checked the IRS website and unfortunately I think the EITC lookback provision expired. It was specifically extended for 2021 taxes (filed in 2022) but I don't see anything about it being available for 2023 tax returns. That might explain why your refund is lower.

This is good advice. What about state taxes? Does making the federal election to treat spouse as resident mean you have to do the same for state taxes? My wife just got here in October and earned income in California for 3 months.

Great question about state taxes. It varies by state, but most states will follow the federal filing status. However, state residency rules can be different from federal rules. For California specifically, they generally respect the federal election, but your wife would only be taxed on California-source income for the period she was physically present in the state. I'd recommend checking with the California Franchise Tax Board or running your scenario through tax software that handles state taxes well. California is particularly strict about residency and taxation, so you'll want to get this right.

Totally agree - my wife had a good job in Singapore for 7 months before moving here and we ended up paying more tax by filing jointly than if we'd kept her as a non-resident for that first partial year.

Does this work if my car is used like 90% for personal use and maybe 10% for business? I occasionally drive to clients or networking events but it's pretty rare.

Yes, you can absolutely still claim the business portion! That's exactly why you need to keep a mileage log - to separate personal from business use. You'd only deduct that 10% of your use that was business-related. The easiest way is to track all your business trips with a mileage tracking app (I use MileIQ but there are free options too). At tax time, you multiply your business miles by the standard mileage rate. So if you drove 1,000 business miles in a year, that's a $655 deduction even if you drove 9,000 personal miles that you don't count.

I learned this the hard way last year - got hit with penalties for not making quarterly payments. How much should you typically set aside? I've heard anywhere from 25-40% of income.