This is such a helpful discussion! As someone new to S-Corp taxation, I'm realizing I've been overcomplicating this in my head. Amy, your original question really resonates with me because I had the exact same confusion about the timing of taxation vs. distributions. What finally helped me understand was thinking of it in two separate buckets: **Bucket 1: Tax obligations** - You owe taxes on S-Corp profits when the company earns them, regardless of when (or if) you take distributions. This is why you make quarterly estimated payments. **Bucket 2: Basis tracking** - This just ensures you don't get double-taxed when you eventually do take distributions of money you've already paid taxes on. I've been using a simple monthly tracker where I log: starting basis + monthly profit - monthly distribution = ending basis. It's helped me see that as long as I don't distribute more than my accumulated basis, I'm not creating any tax issues. The key insight from this thread is that S-Corp profits are always taxable when earned, but basis determines whether future distributions trigger additional taxes. Once you separate those two concepts, everything else falls into place!

This has been an incredibly enlightening discussion! As someone who's been hesitant to elect S-Corp status for my LLC, reading through Amy's question and all the responses has really helped me understand the mechanics. What I find most valuable is how everyone broke down the distinction between when you owe taxes (when the S-Corp earns profit) versus when you can take tax-free distributions (based on your accumulated basis). I was under the mistaken impression that S-Corp distributions were always tax-free, but now I understand they're only tax-free to the extent of your basis in previously-taxed income. The monthly tracking approach that several people mentioned seems like a smart way to stay on top of this. I'm particularly interested in the tools that were mentioned - it sounds like having proper tracking from day one could save a lot of headaches down the road. One question I still have: if you're just starting an S-Corp election with minimal initial capital (like Amy's $125), does it make sense to make an additional capital contribution early on to create more basis cushion? Or is it fine to just let basis build naturally through retained earnings?

One thing nobody's mentioned - don't forget about state filings for your S-corp! Depending on your state, you might need to file separate state returns for both your S-corp and personal taxes. TurboTax Business handles most state S-corp returns, but the process can be even more confusing than federal. Also, if you do business in multiple states or have nexus issues, self-filing gets complicated real quick. My S-corp operates in two states and I tried doing it myself last year... ended up giving up and hiring an accountant midway through.

I successfully filed both my 1120-S and 1040 myself using TurboTax for the past two years. As a single-member S-corp, it's definitely manageable, but here are some key things that helped me: The biggest challenge isn't the software - TurboTax does a good job with the guided questions. The real work is in preparation. Make sure you have your books reconciled properly before you start. I use QuickBooks and export my P&L and Balance Sheet directly, which saves tons of time. One mistake I made my first year was not keeping proper documentation for business expenses. The IRS wants to see business purpose for everything, especially for home office deductions and travel expenses. Now I keep a simple spreadsheet with receipts and business justification throughout the year. The reasonable compensation issue is real - I research industry salary surveys for my role and document my reasoning. Better to err on the side of paying yourself a bit more in salary than dealing with IRS scrutiny later. Overall, I save about $1,000 annually doing it myself, and I feel much more in control of my tax situation. Just budget extra time your first year and don't wait until the last minute!

Don't forget you can deduct expenses even for those small gigs! I did face painting at birthday parties last year - all under $600 per client - and was able to deduct all my supplies, travel costs to events, and even a portion of my phone bill for taking bookings. It actually made a big difference and almost cancelled out the taxes I would have owed on that income!

The $600 threshold is actually just an administrative rule for businesses - it determines when they have to send YOU a 1099 and report the payment to the IRS. But you're absolutely correct that you still need to report ALL income regardless of whether you get a form or not. Here's what I do to stay organized: I created a simple spreadsheet with columns for date, client/company name, description of work, and amount paid. I also keep screenshots of payment confirmations (Venmo, PayPal, Zelle, etc.) and any invoices I send. This creates a paper trail that satisfies the IRS if they ever ask questions. The key thing to remember is that unreported income can come back to bite you later. Even though the company didn't send you a 1099, they might still deduct that payment as a business expense on their taxes, which could create a mismatch if you don't report it as income on yours. Also, once your total self-employment income hits $400 (from all sources combined), you'll need to pay self-employment tax on it, so it's worth tracking everything carefully even if individual payments seem small.

As a newcomer to this community, I want to echo what many others have said - this thread has been incredibly helpful for understanding bonus taxation! I just went through this exact situation a few months ago and had the same panic reaction when I saw how much was withheld from my bonus. What really helped me was keeping track of my total withholdings throughout the year after my bonus. I created a simple spreadsheet to monitor my year-to-date federal withholding versus what I would actually owe based on my projected annual income. This gave me confidence that I was indeed on track for a refund rather than owing money at tax time. One thing I'd add for fellow newcomers - don't forget about state taxes too! The federal withholding gets most of the attention, but your state likely withheld additional taxes from your bonus as well. In my case, my state used a flat 5% rate for supplemental income, which added to that "sticker shock" feeling. But just like federal taxes, it all gets reconciled when you file your state return. For anyone still feeling anxious about this - I can confirm that when I filed my taxes this past April, I got back almost exactly what the IRS withholding estimator predicted. The system really does work, even though it feels scary in the moment!

As a newcomer to this community, I'm so grateful to have found this discussion! I just received my first bonus last week and was absolutely shocked when I saw that nearly 38% was withheld between federal, state, FICA, and other taxes. Like @Statiia Aarssizan, I was counting on that money for some important expenses and felt like I'd been hit by a freight train. Reading through everyone's explanations has been incredibly reassuring - especially understanding that this is just aggressive withholding, not the actual tax rate I'll pay. The analogy about the payroll system being "overly cautious" really clicked for me. It makes sense that the system would rather withhold too much than risk me owing a huge bill later. I'm planning to use the IRS withholding estimator that several people recommended to get a better sense of my overall tax picture for the year. It's comforting to know that so many others have gone through this exact same confusion and that it all works out properly when filing taxes. This community seems like such a valuable resource for navigating these confusing tax situations - thanks to everyone who shared their knowledge and experiences!

As someone new to F reorganizations, this thread has been incredibly educational! I'm curious about one aspect that hasn't been fully addressed - what happens to any accumulated adjustments account (AAA) and other S corp tax attributes during the F reorg process? I understand that the F reorg should preserve tax attributes, but I want to make sure I'm properly advising clients about how their AAA balance, accumulated earnings and profits, and prior year losses will be handled. Is there any special reporting required on the final S corp return versus the first partnership return? Also, for clients who have been operating as S corps for many years and have significant AAA balances, are there any strategies to optimize the timing of distributions before making the switch to partnership taxation? I'm thinking about potentially distributing some of the AAA tax-free to shareholders before the conversion, but want to make sure this doesn't create complications with the overall reorganization plan.

This has been such an informative discussion! As someone who's relatively new to complex corporate reorganizations, I wanted to add a cautionary note about documentation that I learned the hard way recently. When we completed an F reorg for a client last year, we thought we had all our ducks in a row - proper business purpose, good timing between steps, clean corporate resolutions. But during a subsequent IRS examination (unrelated to the F reorg), the agent questioned whether our reorganization truly qualified under Section 368(a)(1)(F). The key lesson: document EVERYTHING meticulously. We had to reconstruct our business purpose rationale and prove the continuity of the business enterprise. Make sure you have detailed board minutes explaining the business reasons, maintain records of all asset transfers, and keep clear documentation of how the "same business enterprise" continues under the new entity. Also, don't forget about the potential impact on state income tax elections and apportionment factors if your client operates in multiple states. Some states don't automatically follow federal tax elections, so you might need separate state-level entity classification elections. Has anyone dealt with multi-state complications during F reorgs? I'd love to hear about best practices for managing the state tax aspects when federal and state entity classifications might diverge.