9 Curious - what specific documentation did you keep that satisfied the IRS during their questions? I'm exercising some QSBS-eligible options next month and want to make sure I'm saving everything I might need years down the road.

22 The most important documents were my option exercise agreement showing the exact date of exercise, company financial statements from that quarter showing assets under $50M, a letter from the company CFO confirming C-Corp status and qualifying business activities, and proof of continuous ownership through statements showing I held the shares the entire time. I also had emails from company executives discussing QSBS eligibility that I'd saved just in case. The IRS didn't even ask for those, but I was glad to have everything thoroughly documented. They were primarily concerned with verifying the company's status at exercise time and proving I'd held the shares for the required period.

19 I claimed QSBS exclusion two years ago. TurboTax Premier technically supports it, but the interface was confusing. You basically report the sale on Form 8949 with code "Q" and then make an adjustment for the excluded gain. I ended up hiring a CPA because I was nervous about doing it wrong - the potential tax savings were too significant to risk messing up the forms.

But if someone's selling drugs, wouldn't reporting the income create a paper trail that could get them arrested? I thought there was some law that protected people from having to incriminate themselves on tax forms?

You're thinking of the Fifth Amendment protection against self-incrimination. It's a complex legal area where tax law and constitutional rights intersect. While the Fifth Amendment can protect you from having to provide incriminating information, courts have generally held that it doesn't excuse individuals from filing tax returns or reporting income. The requirement to file and pay taxes applies to everyone. However, the specific way information is reported can sometimes be handled to minimize self-incrimination. This is precisely why someone in this situation should work with both a tax attorney and criminal defense attorney - not just a regular tax preparer. It requires specialized legal knowledge to navigate properly.

There's no specific line for "illegal income" on IRS forms. All income, regardless of source, gets reported in the appropriate categories based on how it was earned (business income, capital gains, etc.). The IRS is concerned with whether income is taxable, not whether it's legal.

That's actually brilliant! I'm still in touch with my old manager and the company is still around. Do you think the W-2 alone would be enough proof for the state audit, or do they specifically need to see the actual tax return?

The W-2 might be enough depending on what exactly the state is questioning. Since they claim you paid $0 in state taxes, the W-2 would directly contradict that by showing your withholding amounts. It's solid evidence of taxes being taken from your paychecks. For a complete defense, ideally you'd want both the W-2 and the tax return transcript. The W-2 proves what was withheld, while the return shows what you actually filed and calculated. Together they tell the complete story and leave the state little room to argue.

This is good advice. I work for a CPA firm and we always recommend sending what's called a "partial response" before the deadline if you can't get everything together. Document your efforts to comply - keep records of all calls, submission dates of forms, etc. Many state tax authorities will grant reasonable extensions if you're making good faith efforts.

Wow, that's a great idea! So I could just have my company job take out extra from each paycheck instead of doing the quarterly thing? Would I need to tell them it's for side income or just put down a higher withholding amount?

You don't need to explain why you're changing your withholding - just submit a new W-4 with the adjusted amount. On the current W-4 form, there's a section specifically for "extra withholding" where you can put a dollar amount to withhold from each paycheck. I used the withholding calculator, which asked for info about both my W-2 job and estimated side income, then it told me exactly what to put on each line of the W-4. Just make sure you're setting aside enough to cover both income tax and self-employment tax (the SE tax is the one that catches most people by surprise).

Oh crap, I didn't even think about state taxes. Do you know if the thresholds are different? My side gig only makes like $900 a month.

Thanks for this! I've been tracking expenses but didn't think about mileage. Is there a specific app you recommend for tracking business miles? And for the home office deduction, does it matter if I'm sometimes using my dining room table vs having a dedicated office space?

I use MileIQ for tracking business miles - super simple and it creates reports you can use for taxes. Some people like Everlance too. For the home office deduction, you unfortunately need a space used exclusively for business. The dining room table wouldn't qualify since it's also used for personal purposes. It needs to be a dedicated area used only for your business. If you have a spare bedroom or even a section of a room that's exclusively for your wedding planning business, that could qualify. The IRS is pretty strict about the "exclusive use" requirement.

This is exactly what I do! So much simpler than doing estimated payments. My accountant suggested withholding an extra $200 per paycheck to cover my side gig, and I've never had issues or penalties.

Absolutely! It's been working for me for 3 years now with zero issues. The key is calculating the right additional withholding amount. I worked backwards by estimating my annual business profit, calculating roughly 15.3% for self-employment tax plus my income tax rate (22% bracket), then dividing by my number of paychecks. The peace of mind from not dealing with quarterly payments is totally worth it. And technically, you're also avoiding potential underpayment penalties since the IRS treats withholding as happening evenly throughout the year, even if you increase it later in the year.