Hey Freya! I totally understand the confusion - I went through the exact same thing when I first set up my Solo 401k. The distinction absolutely DOES matter, and here's why: You get two separate contribution buckets as a self-employed person. The "employee" contribution is limited to $23,000 for 2025 (this is like your salary deferral), while the "employer" contribution can be up to 25% of your net self-employment earnings (but there's a formula that effectively makes it about 20%). With your $96k income, you could potentially contribute the full $23k as employee contributions PLUS additional employer contributions based on your net profit after expenses and SE tax adjustments. The total combined limit is $69,000 for 2025. The key deadline difference: employee contributions must be made by December 31, 2025, but employer contributions can wait until your tax filing deadline (including extensions). Since you're running out of time for 2025, focus on maximizing your employee contributions first - you can always add employer contributions when you file your taxes next year!

The timing aspect is really crucial here! Since you mentioned you're running out of time, I'd recommend focusing on getting your employee contributions maxed out first before December 31st. You can contribute up to $23,000 as employee deferrals, and this is the portion that has the hard year-end deadline. For your employer contribution calculation with $96k in income, you'll need to factor in your business expenses and the SE tax adjustment that others mentioned. The effective rate works out to about 20% of your net self-employment income after all adjustments, which could be a substantial additional contribution on top of the $23k employee portion. The good news is you have until your tax filing deadline (even with extensions) to make the employer contributions, so don't stress too much about getting that exact calculation perfect right now. Focus on maximizing that $23k employee contribution before year-end, then work with a tax professional early next year to optimize your employer contribution based on your final 2025 numbers. One last tip - if your Solo 401k plan allows Roth contributions, you might want to consider designating some or all of your employee contributions as Roth, especially if you expect higher income in future years. The employer portion will be pre-tax regardless, so this gives you some tax diversification.

This thread has been incredibly helpful in clarifying the S-Corp owning LLCs structure. I'm in a similar situation with multiple business ventures and was also confused about the terminology. One thing I'd add based on my research is that you'll want to consider the state-level implications too. While federally the LLCs owned by your S-Corp will be treated as divisions, some states have different rules for state tax purposes. For example, some states require separate LLC tax filings even when they're federally disregarded entities owned by an S-Corp. Also, regarding the liability protection discussion - make sure you understand that while the LLC structure protects between business lines, it doesn't protect you personally from professional liability in businesses where you're directly involved. If you're providing professional services through any of these LLCs, you'll still have personal exposure for your own actions, regardless of the entity structure. The holding company approach with an S-Corp owning multiple LLCs is definitely a solid strategy for what you're trying to accomplish, just make sure your implementation covers all the operational details mentioned in the comments above.

This discussion has been really enlightening! I've been wrestling with a similar structure question for my consulting and e-commerce businesses. One additional consideration I'd mention is the impact on your Qualified Business Income (QBI) deduction under Section 199A. When you have an S-Corp owning multiple LLCs that are treated as divisions, all the income flows through to your personal return as S-Corp income. Depending on your income level and the nature of your businesses, this could affect how much of the 20% QBI deduction you can claim compared to if you structured things differently. For example, if one of your business lines is a "specified service trade or business" (like consulting, law, accounting, etc.), the QBI deduction phases out at higher income levels. But if your other businesses are non-service businesses, they might not have the same limitations. Your tax advisor should be able to model this out for you, but it's worth understanding how the entity structure affects this deduction since it can be pretty significant. The holding company approach is still likely the right move for liability protection, but the QBI implications might influence other decisions like how you take distributions or whether you elect S-Corp treatment for any of the subsidiaries.

I went through this exact same situation when I got my first big promotion in California! That 39% total deduction rate is completely normal for your income bracket here, especially with bonus/backpay included in the check. What's happening is your payroll system is treating this $5,200 as your new monthly norm and calculating withholding as if you'll make ~$62k annually. Since this included one-time payments, you're probably being over-withheld for your actual annual income. Here's what I'd recommend: - Wait to see your next regular paycheck (without bonus/backpay) before panicking - Use the IRS Tax Withholding Estimator mid-year to check if you're on track - Remember that your 401k (6%) and health insurance aren't "lost" money - they're investments in your future The breakdown is likely: ~22% federal, ~9% CA state, 7.65% FICA, plus your 6% 401k and health premiums. California doesn't mess around with state taxes, unfortunately! Congrats on the promotion after 2 years of hard work! The financial adjustment period is tough but you'll settle into the new income level soon.

I feel your pain! I had almost the exact same experience when I got promoted last year - went from around $3,800/month to $5,100 one month and nearly had a heart attack when I saw the withholding. The 39% you're seeing is definitely normal for California at your income level, especially with bonus/backpay mixed in. Your payroll system is basically calculating as if you'll make $62,400 annually ($5,200 x 12), which pushes you into higher tax brackets temporarily. Here's what helped me get through it: I tracked my actual year-to-date withholding against what I would really owe using a simple spreadsheet. Turns out I was being over-withheld by about $200/month because most of my paychecks were actually lower than that one big promotion check. Don't panic and change your W-4 immediately - wait to see what your regular paychecks look like first. The system will balance out over the year. And hey, congrats on finally getting that promotion you worked so hard for! The financial adjustment is temporary but the career advancement is permanent.

Just want to add one more important point that I learned the hard way - make sure you file your return by tomorrow's deadline even if you can't pay! The failure-to-file penalty is 5% per month (up to 25% total) while the failure-to-pay penalty is only 0.5% per month. That's a huge difference on $20k. I made the mistake of not filing on time a few years ago because I couldn't pay, and it cost me an extra $5,000 in penalties. The IRS is actually pretty reasonable about payment plans if you file on time and communicate with them. They'd much rather work with you than chase you down later. Also, once you set up the payment plan, make sure you never miss a payment or they can default the entire agreement. Set up autopay if possible to avoid any accidents. Good luck!

I just went through this exact situation last month with a similar amount owed. One thing that really helped me was calling the IRS Practitioner Priority Service line (1-866-860-4259) instead of the regular taxpayer line. As long as you have a power of attorney form or are calling about your own account, they typically have much shorter wait times - I got through in about 20 minutes. The agent walked me through all my options and helped me understand that with a $20k balance, I could actually qualify for a "guaranteed" installment agreement since it's under $50k and I was current on filings. They also explained that if I could somehow pay it off within 120 days, there would be no setup fee at all and minimal interest accrual. Another tip: if you're self-employed or have irregular income, ask about a different payment structure. They can sometimes work with seasonal income patterns or allow lower payments during slower months. The key is being upfront about your financial situation when you call.

The LLC structure won't help you bypass the passive activity loss limitations since the IRS focuses on the substance of the activity, not the entity form. However, there are a few other strategies worth exploring for your situation. Since you're already maximizing depreciation on the rental portion and plan to pass the property to your kids, consider whether the current tax benefits outweigh the depreciation recapture you'd face if you ever sold. The stepped-up basis strategy you mentioned is solid for estate planning. One often overlooked opportunity is ensuring you're capturing all allowable expenses for the rental portion - home office deductions if you use part of your space for rental management, travel expenses to purchase supplies, etc. Also, make sure you're properly allocating utilities, maintenance, and insurance between personal and rental use. Given your income level, you might also want to explore whether either you or your spouse could qualify as a real estate professional by documenting time spent on rental activities. Even if it's just property management, maintenance coordination, and tenant screening, those hours can add up. The 750-hour threshold is more achievable than many people think when you properly track all real estate-related activities.

I've been following this thread with great interest as I'm in a very similar situation - primary residence with rental income that exceeds the passive loss limitations. One strategy that hasn't been mentioned yet is potentially converting your current setup into a legitimate boarding house or bed & breakfast operation. If you can document that you're providing substantial services to your tenants (daily cleaning, meals, utilities management, etc.), the rental income might be reclassified as active business income rather than passive rental income. This would allow you to deduct losses against your other income regardless of the $150k threshold. The key is that you need to provide services that go beyond what a typical landlord provides. Things like furnished rooms with daily housekeeping, shared common areas you actively maintain, or meal preparation can help establish this as an active business rather than passive rental activity. Obviously this changes the nature of your living arrangement significantly, and you'd need to check local zoning laws and HOA restrictions. But for the right situation, it could be a way to legitimately convert passive losses into active business deductions while keeping the property in your name for the eventual stepped-up basis benefit you're planning for your children.