This is really helpful advice. I hadn't thought about documenting the strategy formally. Is there a specific format you'd recommend for this kind of business plan? Also, does the board approval need to happen annually or just once when implementing the strategy?

There's no required format, but I'd recommend including projected capital needs, specific growth milestones, timeline for expansion, and how the retained earnings will be used. Make it clear this is a temporary strategy until the business can support you full-time. Board approvals should definitely happen annually. At minimum, you should have annual minutes documenting review of the compensation strategy and business progress. Each year, note how the retained capital is being used toward your stated goals and reaffirm the strategy. This creates a pattern of consistent business purpose rather than looking like an afterthought if questioned.

YES! My brother-in-law got absolutely hammered for this exact situation. Ran his consulting S-corp for 2 years taking zero salary and only distributions. Got audited, and the IRS reclassified ALL his distributions as salary, meaning he owed back payroll taxes plus penalties and interest. Cost him over $30k when all was said and done. They specifically target S-corps for this issue because it's such a common tax avoidance strategy.

That's an interesting approach I hadn't considered. Would that be simpler to manage than tracking all these loan amounts and interest calculations? What kind of documentation would we need for a cost sharing arrangement?

A cost sharing arrangement could be simpler operationally but requires careful upfront documentation. You'd need a formal agreement specifying how costs will be allocated (usually based on projected benefits like expected sales or profits in each territory), which costs qualify for sharing, and how developed IP will be owned. The documentation is actually quite extensive. You'll need economic analysis to support your allocation method, regular documentation of actual costs incurred, and annual true-ups if estimates differ from reality. The IRS scrutinizes these arrangements closely under Section 482, so you'd want to prepare a transfer pricing study to support your approach.

We designated our intercompany loans as long-term investments so the foreign currency gains/losses are reported as Other Comprehensive Income instead of hitting our P&L directly. Talk to your accountant about whether that approach might work for your situation.

Thanks for bringing this up! We are claiming the Child Tax Credit for both kids, but I'm not sure if we've maxed it out. My husband does get 1099s and I know he needs to do the quarterly payments but honestly we never knew how to calculate them properly. Is there a simple formula to figure out roughly how much we should set aside from each check?

A simple rule of thumb is to set aside about 25-30% of his 1099 income for taxes. This covers both income tax and self-employment tax (which is roughly 15.3% alone). For proper quarterly payments, you can use the IRS Form 1040-ES worksheet, which helps calculate your required payments based on expected income. The due dates are April 15, June 15, September 15, and January 15 of the following year. Setting up a separate savings account just for taxes can be really helpful - deposit that percentage from each check immediately before you're tempted to spend it.

This is great advice! I'm a contractor too and opened a SEP IRA last year. Was able to contribute almost 20% of my income and it dropped me into a lower tax bracket. Saved me thousands.

Just be aware that SEP IRAs have an earlier deadline than traditional IRAs! For 2024 taxes, you need to set up and contribute to a SEP IRA by the tax filing deadline (including extensions) in 2025. Don't wait until last minute like I did!

I've used FreeTaxUSA for the last three years including for my small business (Etsy shop) and rental property. It's handled everything perfectly and I've never had an issue. The interface isn't as pretty as TurboTax but it asks all the same questions and I've gotten identical results when I've compared them side by side. Saved me like $120 each year.

Thank you for mentioning this! I had no idea this was a thing. I'll definitely ask our CPA about the Voluntary Disclosure Program. Is there anything specific we need to do to qualify for this?

You're already taking the right first step by working with a CPA to file all the past returns. The key requirements are that you're coming forward voluntarily (before the IRS contacts you about the unfiled returns) and that you're filing accurate returns for all missing years. Make sure your CPA specifically requests penalty abatement using Form 843. They should cite "reasonable cause" and explain the circumstances that led to the unfiled returns. Having professional help with this process is crucial because the specific language and approach matter a lot in how the IRS responds.

That's not entirely accurate. The IRS doesn't immediately put liens on property, especially if you're voluntarily coming forward. They typically only place liens after multiple notices and lack of response or cooperation.