It's actually pretty complicated. The 2020 W4 form eliminated allowances entirely. Now it's about additional income, tax credits, and extra withholding. The IRS has a Tax Withholding Estimator tool on their website that walks through your full tax situation and calculates the right W4 settings. I'd start there - it's much better than the "claim 0" oversimplification.

Omg you're right! Can't believe I've been saying that wrong all these years. Thanks for the correction - guess I'm learning all kinds of tax stuff today!

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!

Now that you mention it, we did get a small "appreciation bonus" in November - it was only about $50 but they made a big deal about it being special somehow. Maybe that's what's showing up in that box? That would actually make a lot of sense.

That's almost certainly what it is! Those "appreciation bonuses" or "spot bonuses" often get classified differently in payroll systems depending on how they're structured. Companies sometimes use these special classifications because they can be advantageous for either the company's tax situation or yours. The $50 bonus matching up with a small amount in Box 12b makes perfect sense. You definitely don't need to worry about amending your return for something this small and routine. It's just one of those quirks of the tax system that seems confusing but is actually pretty standard once you understand what's happening behind the scenes.

Which app do you use? I'm always missing something when I file.

Thanks for this advice. What kind of documentation did they specifically want to see during your audit? Just invoices or something more detailed? I'm worried because I'm not sure we've been tracking things that carefully.

This is so true! My brother-in-law used his resale certificate to buy a TV for his "office" and got caught in an audit. Ended up paying the tax plus a 25% penalty! Not worth the risk.

You need to submit a new W-4 form to your employer. It's fairly straightforward: 1. You can get the form from your HR department or download it from irs.gov 2. The current W-4 doesn't use "allowances" anymore - instead you directly enter dollar amounts 3. If you want less withheld (bigger paychecks, smaller refund), you'd use Line 4(b) to list deductions or use the worksheet to calculate an additional withholding amount Most payroll systems also have an online tool where you can update your W-4 electronically without filling out the paper form.

Thank you, that makes sense! I had no idea it was called a W-4, I was looking for some kind of "withholding adjustment request" or something. Will definitely talk to our HR person tomorrow.

Not odd at all - I've heard financial advisors call this "defensive financial planning." Sometimes the mathematically optimal choice isn't the best one when you factor in real-world complications. As long as you're making an informed choice rather than just defaulting into it, I think that's totally reasonable.