How exactly do you document this? Do you just keep records in case of an audit, or do you need to file something special with your tax returns showing your justification?

I keep detailed internal records rather than filing additional documents with tax returns. My documentation includes industry compensation surveys for similar positions, a detailed job description outlining all my responsibilities, logs of hours worked in various capacities, and board meeting minutes approving my compensation with reference to these factors. I also maintain records of my professional qualifications, training, and unique skills that justify my compensation level. In my S corp, I document dividend distributions separately, making it clear they're not disguised salary. For my C corp, I document why my salary is appropriate for my role and not artificially inflated to avoid dividend taxation.

That's really interesting! So theoretically, could a C corp owner take a very low salary (or no salary) and just dividends, and be technically compliant with the tax code? Would there be any other issues with doing that besides the obvious double taxation problem?

Do you know if you can e-file with the injured spouse form or do you have to mail it in? I've heard both things from different people.

You can definitely e-file with Form 8379 (Injured Spouse) included! Most tax software supports this now. I've done it through TurboTax and H&R Block in different years. If you file the injured spouse form with your original tax return, it processes much faster than if you submit it separately after filing. That's probably why you've heard conflicting information - submitting it separately after filing often requires mailing it in and takes much longer.

That's good to know. Does the injured spouse form work for state taxes too or just federal?

Wait this is interesting. I thought my tax software said I couldn't take the home office deduction because I don't use the space 100% for work, but maybe I was answering the question wrong? I have a desk area that I ONLY use for work (both W-2 and 1099), but sometimes I use it for my main job and sometimes for my side gig. Would that still qualify?

That's where it gets tricky. The space needs to be used exclusively for business purposes, not for your W-2 job. Using the same desk for both your W-2 employment and 1099 self-employment work technically disqualifies it from the home office deduction. If you could create a separate, dedicated space that you ONLY use for your 1099 work, then you'd qualify. Some people set up a specific corner or section that's exclusively for their self-employment work. But if you're using the same exact workspace for both types of work, the IRS would likely not consider it "exclusive" for business use.

This is good advice but be careful with cell phone deductions. The IRS looks at these carefully. Make sure you have a logical way to calculate the business percentage. I track my business calls/texts in a spreadsheet each month to support my deduction percentage.

Thank you all for the explanations! I called the number on the notice today (took forever to get through) and you were right - it was actually GOOD news. They found I was eligible for some additional pandemic relief I didn't claim and they're sending me $790! Apparently there was some provision about carrying losses back that I qualified for but didn't know about. The agent explained that they're still processing these adjustments from the CARES Act and I just happened to be in this batch. I was so worried they were coming after me for something, but it was actually them giving me money back. What a relief!

That's great news! The IRS isn't always the bad guy (though their communication could definitely use some work). Glad it worked out in your favor!

Good point. My sister got a fake IRS letter that looked super official last month. Real IRS notices also usually come with detailed explanations of your appeal rights and will reference specific tax code sections.

Thanks for this advice. What specifically should I include in this documentation? Should I mention my suspicion that he hasn't filed taxes, or just stick to the facts about the W-4 exemption not seeming appropriate for someone at his income level?

Stick strictly to the facts and avoid speculation about his tax filing history or intentions. Your documentation should focus only on what you directly observe: that an employee making approximately $75,000 has claimed complete exemption from federal tax withholding, which appears unusual and potentially concerning from a compliance perspective. Phrase your concerns as questions rather than accusations. For example: "I noticed our operations manager has claimed exemption from all federal withholding despite having a salary of $75K. Given this income level, I want to confirm this is being handled correctly and that we're following proper procedures for verifying unusual W-4 claims.

That's a good point! The lock-in letter process shows the IRS definitely monitors these situations. My brother works in HR and said they received one for an employee who had claimed exempt for 3 years while making over 100k. The IRS specified exactly what withholding to use and they weren't allowed to change it without IRS approval.