Can you explain more about how to document this? Like what kind of proof would you need to show the IRS that your education is "ordinary and necessary" for your business? I'm taking some digital marketing courses and want to deduct them for my Etsy shop.

Documentation is crucial. I keep a business education folder with: course descriptions/syllabi highlighting specific skills taught, a written explanation connecting each course to specific aspects of my current business operations, evidence that these skills are industry standards (like professional association recommendations), and a log tracking how I've implemented these skills in my business. For your digital marketing courses and Etsy shop, save the course descriptions, then create a document explaining how each marketing technique directly applies to growing your existing Etsy business. Track your marketing metrics before and after implementing what you learn to show business purpose. If similar businesses commonly use these marketing techniques, note that as evidence that the education is "ordinary" in your field.

That's a really good point about credits vs deductions! I think business expense deductions don't have the same caps as education credits though? At least that was my understanding. Can you take BOTH the business education deduction AND education credits for the same expenses?

But what happens if the amount the company reports paying you (if they filed anything before going bankrupt) doesn't match what you report? Could that trigger an audit?

That's a good question. If there's a discrepancy, it potentially could raise a flag in the IRS system. However, if you're reporting based on your actual income records (bank deposits, etc.), you're still doing the right thing. If the company reported incorrectly before going bankrupt, that's their mistake, not yours. Just make sure you have documentation of all the income you received - bank statements, invoices, contracts, emails confirming payments. If you're ever questioned, you can show you reported based on your actual earnings. The IRS is generally understanding when you can show you made a good-faith effort to report accurately.

CA resident here too. The Franchise Tax Board definitely wants documentation, but I found they accepted my own records (invoices + bank statements) when I couldn't get a 1099 from a client who went out of business. I included a brief statement explaining the situation with my filing.

I've heard about EFTPS but am confused about the setup process. Does it link directly to your bank account? And does it automatically calculate how much you should pay each quarter or do you still need to figure that out yourself?

Yes, you link it directly to your bank account during the setup process. It's a government system that lets you schedule and make federal tax payments online. It doesn't calculate your estimated payment amounts for you - you'll still need to determine that yourself based on your income projections. But it does give you an immediate confirmation number when you make a payment, which is super helpful for record-keeping. You can also view your payment history anytime, which makes it easier to verify that your payments were received if you get duplicate notices.

That's a good point. I've seen people get confused between different IRS notices because they all look so similar with that same intimidating letterhead! The details really matter.

What exactly do we need to check on the W-2? Like which specific boxes should I pay attention to the most?

The most critical things to verify are your personal information (name, SSN, address) since those are used to match your return to IRS records. An error there can cause your entire return to be rejected. As for the financial information, check Box 1 (Wages, tips, other compensation) against your final paystub of the year to make sure it matches. Also verify Box 2 (Federal income tax withheld) since that directly impacts your refund or amount due. If you contributed to a 401(k), check that Box 12 has the correct code and amount for your contributions.

It works but it's unreliable. Last year mine said "still processing" for 3 weeks AFTER I already received my refund. The IRS systems don't talk to each other very well. I'd just set up direct deposit and forget about it - the money will show up eventually.

Thanks for this insight. The discretionary nature is really appealing since her income can vary quite a bit. Do you know if there's a deadline for deciding whether to make a profit sharing contribution for the current tax year? Like could we wait until March 2025 to decide about 2024 contributions?

You can actually wait until your S Corp's tax filing deadline including extensions to make the profit sharing contribution for the prior year. So for 2024 contributions, if your S Corp files for an extension, you could have until September 15, 2025, to make the decision and the actual contribution. This flexibility is one of the biggest advantages of profit sharing plans for professionals with variable income. Just make sure the plan documents are amended before the end of the plan year in which you first want to make profit sharing contributions. The plan has to allow for profit sharing before you can actually make those contributions.

Not necessarily a compliance issue. In many medical groups, the LLC sponsors the 401k plan but the participating doctors are technically employed by their own S Corps. The plan documents just need to specifically allow for this arrangement. It's super common in group practices.