Freaking out - 31% effective tax rate on taxable income of $72k?? Am I calculating something wrong?

Wait, so even though the K1 is from an S-corp, you still have to pay self-employment tax? I thought the whole point of having an S-corp was to avoid some of those taxes?

If it's an S-corp K1, then you're right that not all of that income should be subject to self-employment tax. Only the amount paid to you as reasonable compensation (reported on a W-2) should have employment taxes. The K1 distributions from an S-corp aren't subject to self-employment tax. That's actually a good point - if this is an S-corp K1, you should double-check that you're not incorrectly calculating self-employment tax on those distributions. This could potentially save you thousands.

I think that explains it. I didn't realize the self-employment tax would be so brutal. This is only my second year having the K1 income and my accountant handled everything last year. The K1 is from a partnership, not an S-corp, so I think I do have to pay the full self-employment tax on it. Is there anything I can do at this point to reduce this? Or am I just stuck paying the full amount?

Yes, for partnership K1 income, you definitely owe self-employment tax on the entire amount. Unfortunately, there's not much you can do to reduce your 2024 taxes at this point. For future years though, you might want to talk to your accountant about making quarterly estimated tax payments to avoid this kind of surprise. Also, consider whether converting the partnership to an S-corporation would make sense for your situation. With an S-corp, you'd pay yourself a reasonable salary (which would be subject to employment taxes) but could take the rest as distributions not subject to self-employment tax. This can create significant savings, though there are additional costs and complexities to consider.

Does this tool connect with tax software like TurboTax or do you have to enter everything manually? I'm in a similar situation with K1 income and wanna make sure I'm not overpaying.

I'm skeptical of online tax tools. How do you know they're giving you accurate info? And are they keeping your sensitive financial data secure? Seems risky to me.

You can upload your previous tax returns and W-2/K-1 forms directly to the tool, or you can manually enter the information - it's flexible that way. I used the upload feature and it pulled everything automatically, then suggested what I could change for this year. It doesn't directly connect to TurboTax, but it gives you specific recommendations you can implement in whatever tax software you use. About security - totally understand the concern. They use bank-level encryption and don't store your documents after analysis. I was hesitant too but did some research on their security practices before using it. For me, saving thousands in taxes was worth it, especially since my tax situation got complicated with this partnership income.

How does this actually work though? Does someone else talk to the IRS for you? Cause I'm pretty sure they need to verify your identity before discussing your tax stuff.

Yeah right. Pay money to talk to the IRS? Sounds like a scam to me. You can just call them yourself for free if you're patient enough.

No, they don't talk to the IRS for you. The service just handles the waiting on hold part. When an IRS agent actually picks up, you get a call connecting you directly to that agent. You handle all the identity verification and the actual conversation yourself - they just eliminate the hours of hold time. I thought the same thing initially, but after wasting an entire afternoon on hold and getting disconnected twice, I was desperate enough to try it. It was honestly such a relief not having to sit by my phone for hours. When the IRS agent finally picked up, I was able to set up a payment plan for my large bill in about 15 minutes, and they explained all my options clearly.

Do you know how I figure out how much to pay for those quarterly payments? Is it just roughly 25% of what I'd expect to owe for the year?

You have a couple of options for calculating your estimated payments: You can pay 100% of your prior year tax (110% if your AGI was over $150,000), divided into four equal payments. This is the safest method to avoid penalties. Alternatively, you can estimate your current year tax and divide by four. This works better if your income fluctuates a lot or if you expect significantly lower income than last year. The IRS has a form called 1040-ES that includes a worksheet to help calculate your payments. You can also use tax software to calculate this for you. Just remember that you need to account for both income tax and self-employment tax on that K1 income.

Can you really do that? Just ask them to withhold extra? How do you figure out how much extra to withhold?