Did you have to do anything special to add that explanation letter when e-filing? Or did you just mail it separately?

I e-filed my return and then mailed the explanation letter separately with a cover page that had my name, social security number, and tax year clearly marked. I included a brief note stating it was supplemental documentation for my already-filed return. If you're using FreeTaxUSA like you mentioned, they also have a section where you can add notes or explanations directly in your e-filed return, which might be sufficient without needing to mail anything separately.

The federal threshold for 2023 was actually supposed to be $600, but the IRS delayed implementation and kept it at $20,000 and 200 transactions. But some companies might have already updated their systems for the $600 threshold before the IRS announced the delay.

I've heard about the S-corp option but wasn't sure if it made sense for a small business like mine. Is there a certain income threshold where it becomes worth the extra hassle and paperwork? And would this help me fix my current situation with the incorrect W2?

S-corps generally start making financial sense once your business profit is around $40,000-$50,000 annually, though this varies by industry. Below that, the savings on self-employment tax often don't outweigh the additional costs (filing separate returns, payroll processing, possibly higher accountant fees). For your current W2 situation, converting to an S-corp now wouldn't retroactively fix the issue. You'd still need to correct the reporting for 2024. However, it would provide a clean path forward for properly paying yourself starting this year. The ideal approach is to fix the past issue separately (either by amending returns or following your accountant's guidance) while setting up the proper structure for the future.

This is exactly what I do too. I have a real estate LLC and I just take draws when I need money. Pay quarterly estimated taxes and then report everything on Schedule C at tax time. No need for the whole payroll hassle unless you're making serious money.

I only did payroll to get ADP's promotional rate - they had a deal where we got a big discount if we had at least 3 people on payroll. Since I had 2 actual employees, I added myself as the third to save money. I'm fine just taking draws going forward, but now I'm stuck with this incorrect W2 situation for 2024 that I need to fix. Still learning all the LLC tax stuff as I go!

Code "1" on a 1099-R generally indicates an early distribution with no known exception, which means the custodian (Vanguard in this case) is basically telling the IRS "this person took money out early and we don't know of any exception that would exempt them from the penalty." Code "7" indicates a normal distribution, which wouldn't trigger the 10% penalty automatically. The different code does make a significant difference in how the IRS initially processes the form. If you complete a proper rollover, you'll need to report it correctly on your tax return to override what the 1099-R is indicating. Most tax software has specific sections for handling rollovers that will guide you through this.

Does this vary by state though? I've heard some states actually require the tax to be refunded no matter what, while others leave it up to the store policy?

Yes, it absolutely varies by state. Some states like California have specific regulations requiring retailers to refund sales tax on returned items even with gift receipts, as long as the return meets the store's normal return policy timeframe. Other states leave it up to the retailer's discretion. The complexity increases with online purchases being returned to physical stores, or items purchased in one state being returned in another. The tax jurisdiction issues get very complicated, which is why many corporate retailers default to the simplest accounting approach. Local managers often have some flexibility with store credit though, even if they can't technically "refund" the tax portion through their standard return process.

Totally agree! I work retail and we're WAY more likely to make exceptions for nice customers than demanding ones. We actually have a button in our system for "customer satisfaction adjustment" that managers can use for situations exactly like this.

Couldn't you have just e-filed? Seems like it would have saved you a lot of trouble and rain lol

This was back in 2009 when e-filing wasn't as common or user-friendly as it is today. I was also filing some complicated forms related to foreign income that the e-file systems back then couldn't handle properly. Since that rainy disaster, I've become a huge advocate for filing electronically and doing it at least a month before deadline. Now I e-file in February or March and avoid the stress completely. Best decision ever!

The IRS is actually surprisingly forgiving about system issues on their end. If their systems crash or have problems on deadline day, they typically don't penalize people who make a good faith effort to pay soon after. They're running on technology from the 1960s in some cases!