Just wanted to add - make sure you check your e-file status on the IRS website directly too. Go to https://www.irs.gov/filing/wheres-my-refund and put in your info. Sometimes the tax software shows "completed" on their end but the actual submission to the IRS failed for some technical reason. Always save the final confirmation page as a PDF and the email confirmation from both the tax software AND the IRS. Tax software isn't perfect and ultimately the IRS holds you responsible for making sure your return is actually filed, which is totally unfair but that's how they see it.

This happened to my sister too! She used TaxAct for 2021 taxes and thought everything went through but found out a year later nothing was ever filed. She called the IRS Taxpayer Advocate Service at 877-777-4778 and they were super helpful. They assigned her a case worker who helped get the penalties removed since she could prove she completed the return in TaxAct before the deadline. Make sure you file ASAP and then immediately request penalty abatement using IRS Form 843. Include screenshots showing you completed the return in TaxAct before the deadline last year. The key is filing the correct form and explicitly requesting "First Time Penalty Abatement" if you've had no penalties in the past 3 years.

Just want to add something that hasn't been mentioned yet - you'll also need to pay self-employment tax on your 1099 income! This catches a lot of new contractors by surprise. Self-employment tax is basically both the employer and employee portions of Social Security and Medicare taxes (15.3% total). When you're a W-2 employee, your employer pays half of this, but as a contractor, you pay the whole thing. The good news is you get to deduct half of your self-employment tax on your 1040, which helps a bit. And making estimated quarterly tax payments can help avoid a big tax bill at the end of the year.

One thing I learned as a freelancer - tracking expenses throughout the year is WAY better than trying to gather everything at tax time! I use a simple spreadsheet with categories like: - Home office (sq footage, rent, utilities) - Internet & phone (% used for work) - Software subscriptions - Equipment/supplies - Professional development - Mileage Take photos of ALL receipts with your phone right away. Future you will be so grateful when tax season comes around!

Your wife's doing it correctly. Her friend is likely confusing LLC rules with S-Corp rules. With an S-Corp, you can pay yourself a reasonable salary and take distributions that aren't subject to SE tax. But with a single-member LLC (without any special tax elections), 100% of the profit is considered self-employment income. I'm a contractor too, and switched my LLC to be taxed as an S-Corp after my 3rd year. The paperwork and payroll requirements are a pain, but I save about $8k annually in SE taxes. Just make sure if you go that route that you pay yourself a "reasonable" salary - the IRS watches for people paying themselves too little to avoid SE tax.

One thing nobody's mentioned - if your wife and her friend are getting all their work from ONE company, they might actually be misclassified! The IRS has rules about who qualifies as an independent contractor vs an employee. Having only one client is a red flag that could trigger reclassification. If they get audited, the company might be forced to treat them as employees, and then this whole LLC discussion becomes moot. Just something to consider.

Before everyone scares you too much, I just want to mention that the IRS has programs specifically for people in your situation. Look into the Voluntary Disclosure Program - it's designed for taxpayers who want to come clean and get back on track. Don't forget to check state taxes too! Everyone's talking about federal, but your state might have separate penalties and procedures.

Don't stress too much about this. I went through almost exactly this in 2024. Hadn't filed for 4 years, was a 1099 contractor making about $70k/yr. One thing nobody mentioned - pull your IRS transcripts BEFORE you file anything. This shows what income the IRS already knows about. You might find some 1099s you forgot about or didn't receive. The worst part is the self-employment taxes + penalties, but it's all manageable with a payment plan. I'm paying $400/month on about $31k total debt including penalties.

I'm a corporate accountant (not a tax professional) and see this issue frequently from the company side. One thing to check is whether your company is treating this as an "installment sale" under section 453 of the tax code. If it is an installment sale, the K-1 should have box 6c checked, and there should be an attached statement explaining the installment aspects. This means you'd only recognize gain as you receive the payments, instead of all at once. However, many companies don't properly communicate this to their PIU holders. Also, check if any portion of your PIU payment went to recapture previously allocated losses - those wouldn't technically be distributions but would reduce your capital gain amount.

Has anyone actually gone through a full audit with PIU issues? I'm in a similar situation but also received a CP2000 notice from the IRS questioning the gains reported on my return vs what was on my K-1. I'm worried the IRS won't understand these complex PIU structures.