Thank you for this! That's actually really good to know. So I did the right thing by filing even though I can't pay right now. Do you know if there's any way to get the penalties waived? I read something about "first time abatement" somewhere.

Yes, there is a First Time Penalty Abatement that the IRS offers if you haven't had any penalties in the past 3 tax years. You usually need to call and request it, and they don't automatically tell you about it. It won't waive the interest, but it can remove the failure-to-pay penalties. Definitely worth asking for if this is your first time owing or being late with payment. You typically need to have paid the tax or set up a payment plan before requesting the abatement.

I did this last year. The processing fee was around 2% of the tax amount. My credit card had 22% APR, while the IRS interest rate was like 6-7%. So unless you can pay off that credit card REALLY fast or have a 0% intro offer, the IRS plan is usually cheaper.

Thanks for bringing up state considerations! I'm in Michigan, so I'll have to look into what the fees are here. Do you know if the liability protection is significantly different between sole prop with good insurance vs an LLC?

Michigan is actually pretty reasonable - filing fee is around $50-75 and annual statement fee is just $25. Much better than California! Insurance and LLCs protect you differently. Insurance covers specific claims up to policy limits, while an LLC creates a legal separation between business and personal assets. Even with good insurance, as a sole prop, someone could still come after your personal assets if they win a judgment exceeding your coverage limits. The LLC creates a legal barrier they'd have to overcome (though not impossible). For graphic design, professional liability insurance is probably more immediately important than an LLC, but having both gives the strongest protection. Many designers start with good insurance, then form an LLC once profits justify the additional paperwork.

The QBI deduction phases out though, right? I think once you make over a certain amount it starts to disappear?

Thanks so much for this! One question - my daughter lives with me 100% of the time, but her dad keeps claiming he's "entitled" to claim her some years because he pays child support. Is that true? The custody agreement doesn't mention taxes at all.

Child support payments do NOT give someone the right to claim a child as a dependent. The IRS has very specific tests for who can claim a child, and the main one is where the child lived for more than half the year (the residency test). If your daughter lives with you 100% of the time, you are the qualifying parent. Your ex might be thinking of the "dependent exemption release" (Form 8332) where the custodial parent can voluntarily release their claim to the non-custodial parent. But this is completely voluntary - you don't have to do this unless it's specified in your custody agreement. No custody agreement means you, as the parent with 100% physical custody, have the right to claim your child.

Did they end up penalizing your ex for filing incorrectly? I'm wondering if there are any consequences for the person who's been claiming my kid.

Yes, they did eventually! The IRS sent him a notice disallowing the child tax credit and earned income credit he'd claimed. He had to pay back all of that money plus interest and a 20% accuracy-related penalty. It took about 14 months from when I filed my paper return with documentation, but the IRS did resolve it in my favor. I also found out he'd been doing this for 3 years, so they went back and audited his previous returns too. Expensive lesson for him!

How often do you need to document shareholder meetings if you're the only owner? Is that even necessary for a single-member S Corp? Seems like excessive paperwork.

Yes, it's still necessary even as a single owner! I hold and document quarterly meetings with myself (sounds ridiculous, but it's important) and maintain a corporate minute book. My accountant advised doing this because maintaining the corporate veil is critical - if you're ever challenged, you need to show you're treating the business as a separate entity. The documentation doesn't need to be complex, but should demonstrate you're making business decisions as a corporation rather than as an individual. This includes formally approving major purchases, loans, salary changes, etc. Many single-owner S Corps get sloppy with this paperwork and it can create real problems during an audit.

This is actually a common misconception. S Corp shareholders who own more than 2% can still deduct health insurance premiums on their personal returns (Form 1040) as an adjustment to income, so it ends up being a wash tax-wise in most cases. You just can't deduct it directly on the S Corp return.

Do you write any additional info on the receipts? Sometimes I get receipts that aren't clear what they were for.

Great question! Yes, I absolutely write notes on any vague receipts right away while the purchase is still fresh in my mind. For business meals, I jot down who I met with and the business purpose. For supplies or other purchases, I note what project they were for. I also staple any relevant info together - like if I have an email approving a business expense, I'll print and staple it to the receipt. Makes it much easier to justify deductions if you're ever questioned about them.

I use QuickBooks for my small business and the receipt capture feature is decent. You take pics in the app and it attaches them to transactions. Not perfect but integrates well if you're already in that ecosystem.