I did this last year! Had a $3400 tax bill with about $400 in penalties. Called the IRS, mentioned "First Time Penalty Abatement" specifically, and they checked my history. Since I had a clean record for the previous 3 years, they approved it on the spot. Still had to pay the tax and interest, but getting the penalties removed helped a lot. Definitely worth asking for!

Thanks for sharing your experience! That's really encouraging to hear. Did you have to fill out any specific forms or did you just request it verbally over the phone? I've been a good taxpayer for years and this is my first time owing, so hopefully they'll do the same for me. I'll definitely make sure to specifically mention "First Time Penalty Abatement" when I call. Did they give you any pushback or was it a pretty straightforward process?

OMG this!!! I made this mistake last year and got HAMMERED with the failure-to-file penalty. Ended up owing like 20% more just because I was scared to file without having the money to pay. Worst decision ever. File on time people, even if you can't pay a dime!

I had no idea about losing all those credits! That's super helpful info - I think we'd definitely lose more than we'd gain by filing separately. Can you explain more about the IRA contribution part? My husband maxes out his IRA every year.

For IRA contributions, when you're married filing separately, if you lived with your spouse at any time during the year, the income limit for deducting traditional IRA contributions is much lower - phasing out starting at just $10,000 of modified AGI. And for Roth IRAs, the contribution limit phases out between $0-$10,000 if you're MFS and lived together. So if your husband is making more than $10,000 (which it sounds like he is), his ability to make deductible traditional IRA contributions would be reduced or eliminated when filing separately. With a Roth IRA, he might not be able to contribute at all if filing separately. This is one of those "marriage penalties" built into the tax code that makes MFS disadvantageous for many couples.

We've done both over the years depending on our situation. You're right that the prep is way more involved for MFS. The year we did it, we had to literally create spreadsheets to divide household expenses appropriately. Our tax guy charged us more too because it was basically preparing two separate returns. The student loan IDR benefit can be huge though. My wife's payments dropped about $300/month, which more than made up for the slightly higher tax bill. Just weigh all the factors carefully!

Are there certain expenses that are particularly valuable to track for a relatively small side business? I'm doing mostly digital work from home, so I don't have a lot of obvious business expenses.

For digital work from home, there are several valuable deductions people often miss. Track your internet bill (you can usually deduct a percentage based on business use), any software subscriptions you use for work, your cell phone bill (again, the business percentage), and home office deductions if you have a dedicated workspace. Also don't forget about equipment - even if you're using your existing computer, you might be able to deduct a portion of its value through depreciation. Office supplies, professional development courses, and even some of your utilities can be deductible. Even small expenses add up when you're only making $3-4K from side work.

Totally agree! I started a side gig when my second baby was 2 months old. The flexibility was actually great with a newborn - I could work during naps or when my partner was on baby duty. And the extra money came in handy for all the surprise expenses babies bring!

Wait I thought the marriage penalty was eliminated with the Tax Cuts and Jobs Act? I've been telling all my friends who are getting married not to worry about it.

The Tax Cuts and Jobs Act reduced the marriage penalty for many taxpayers, but it didn't eliminate it completely. It's true that for many tax brackets, the MFJ threshold is now exactly double the single threshold, which helps. However, the marriage penalty still exists in several areas: the highest tax brackets still don't have exactly doubled thresholds, and many credits and deductions have phase-out ranges that aren't doubled for married couples. Examples include the student loan interest deduction, capital loss deductions, and certain credits that phase out based on AGI. Also, SALT deductions and AMT can still create marriage penalties for some taxpayers. So while it's less common now, couples with similar higher incomes, like the OP with $135k combined, can still experience some marriage penalty effects, especially if they have other specific deductions that phase out.

Oh that's a good point! I'm going to check our last few pay stubs from 2022 to see if the withholding actually changed after we submitted the new W-4s. And yes, I did have about $3,000 in freelance income that didn't have any withholding. I completely forgot about that! That might explain part of why we're owing.

Does it help to send it via Priority Mail or does regular certified mail work fine? Also wondering if I should call the IRS first to verify the correct mailing address for 941-X forms?

Regular certified mail with return receipt is perfectly fine. The key is having that tracking number and delivery confirmation, not the speed of delivery. I wouldn't bother calling the IRS just to verify the address - those addresses are listed in the 941-X instructions and rarely change. Plus, getting through to someone just to ask about an address will be a huge waste of time. Just double-check the address in the most current version of the instructions (available on irs.gov) and you'll be good to go.

No, you don't need to issue corrected W-2s for ERTC claims. The ERTC doesn't change the wages you paid your employees or what was reported on their W-2s. The credit is based on qualified wages, but claiming it doesn't retroactively reduce the actual wages paid to employees. It's a credit for the employer only. The employees' taxable income and withholding amounts remain the same, so the original W-2s remain correct.