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Table of Contents

Self-employed FAQ (you are here)

Self-Employed Bookkeeping

📈 How can I do my own bookkeeping?

Simple Guide to Bookkeeping for Self-Employed People

Should I save receipts?

How should I save receipts?

Should I track miles driven for work? What about expenses for my car?

Schedule C Income & Expense Categories

Self-Employed Taxes

How to Calculate Your Estimated Taxes (for the Self-Employed)

Quick & Easy Estimation Shortcut

Self-Employed Retirement

What retirement plan do I want?

Employment Classification

Contractor versus employee considerations

I’m a contractor or pay contractors in California, do I need workers compensation?

Other guides in this FAQ

Business deductions (across entity types)

Non-business Tax Optimizing

Interacting with Tax Agencies (IRS, CA FTB)

Business Entities and their fine points

Radical Accountant Services

Self-Employed Bookkeeping

📈 How can I do my own bookkeeping?

We have a bookkeeping template we made that you can copy and use! Enjoy :)

Here’s what you need to know to use it…

Simple Guide to Bookkeeping for Self-Employed People

(No accounting degree required!)

1. Start With the Right Bank Setup

Keeping your business money separate from your personal money makes everything easier.

Why this matters:
If you mix everything in one account, you’ll waste hours sorting through personal transactions at tax time. If you keep them separate, your “business books” are already 90% done.

2. Download Your Transactions

You don’t have to enter every receipt manually. Your bank already has the list.

  1. Log into your business checking account online.
  2. Look for a button that says Export or Download.
  3. Choose CSV format (looks like a spreadsheet).
  4. Do the same for your business credit card.
  5. Save them somewhere safe – like a “Bookkeeping” folder on your computer.

Tip: Download transactions monthly so you’re not buried at year-end.

3. Combine and Sort Your Data

You can use Excel, Google Sheets, or bookkeeping software like QuickBooks, Wave, or Xero.

4. Categorize Your Transactions

Categories are just labels that tell you what each transaction was for. The IRS uses these when you file taxes on Schedule C.

Here are the main ones you’ll use (more on this below!):

Pro Tip:
 If you’re not sure what category something fits into, put it in “Other Expenses” with a note. Your accountant can reclassify it later.

5. Watch Out for These Confusing Things

Here’s where non-accountants often get tripped up:

6. Do This Monthly (Not Year-End!)

At the end of each month:

  1. Download that month’s CSVs.
  2. Categorize each transaction.
  3. Make sure you didn’t miss any income.
  4. Keep digital copies of receipts for large expenses or anything unusual (scan or snap a pic).

If you do this regularly, your taxes will be way less painful — and you’ll always know how your business is doing.

7. When to Call an Accountant

Even if you DIY your monthly bookkeeping, a tax pro can:

Bottom line:
 Keep business and personal separate, download your bank data regularly, and keep your categories consistent. That’s 90% of bookkeeping — the rest is just practice.

Should I save receipts?

For all business expenses, it's best to save the receipt! If the expense is under $75, it’s not strictly required by the IRS except in certain cases. For expenses under $75, you should save the receipt if the vendor doesn't make it clear what you bought, OR if the expense is for airfare, hotel stays, meals, or car rentals. For example, purchases from Target or Amazon don't make it clear what you bought so you should always save the receipt showing what was bought, but a transaction from the fabric store, a business consultant, or the specialty spices shop is already specific about what you purchased. For every transaction, a written record containing four pieces of information is required: Date, amount, vendor, and what was purchased.

How should I save receipts?

Should I track miles driven for work? What about expenses for my car?

For car-related expenses -- you'll be tracking miles driven for work. An app like Stride Tax or MileIQ can be handy for this! It's a bit complicated, but your actual expenses *could* be relevant if you've never deducted using the standard mileage rate before AND your actual expenses (as a percentage of miles for vs not for work) is a more valuable deduction than the standard mileage rate (unusual, but it happens). So... short answer -- yes, it's good to track vehicle expenses (insurance, registration, repairs, maintenance, gas, cleaning, payments/lease) but you may not use that data, and it's much more important to track miles driven for work.

Schedule C Income & Expense Categories

When you’re self-employed, your net profit on Schedule C is simply:

Income – Expenses = Taxable Profit

To reduce your taxable profit, you need to track expenses in the IRS-approved categories below. If something doesn’t fit neatly, you can use “Other Expenses” (Line 27a) with a description.

Income Section (Lines 1–7)

  1. Gross Receipts or Sales – All income from your business before expenses.
  2. Returns and Allowances – Refunds or price adjustments given to customers.
  3. Other Income – Miscellaneous business income not from your main sales/service (e.g., grants, interest on business accounts).

Cost of Goods Sold (COGS) – Part III

(Only if you sell products or make things)

Expense Categories (Lines 8–27)

  1. Advertising – Ads, flyers, social media promotions, business cards.
  2. Car & Truck Expenses – Actual expenses (gas, repairs, insurance) or standard mileage rate (keep mileage log).
  3. Commissions & Fees – Payments to sales agents, marketplace selling fees, referral fees.
  4. Contract Labor – Independent contractors and freelancers (file 1099-NEC if required).
  5. Depletion – Rare; for natural resources like timber, minerals, oil.
  6. Depreciation & Section 179 – Deducting the cost of big assets over time (equipment, furniture, vehicles).
  7. Employee Benefit Programs – Benefits for employees (health insurance, retirement contributions).
  8. Insurance (Other than Health) – Business liability, malpractice, property insurance.
  9. Interest – Mortgage – Interest paid on loans for business property.
  10. Interest – Other – Credit card interest or other non-mortgage business loans.
  11. Legal & Professional Services – Attorneys, accountants, tax preparers, consultants.
  12. Office Expense – Office supplies, postage, small office equipment.
  13. Pension & Profit-Sharing Plans – Contributions to employee retirement plans.
  14. Rent or Lease – Vehicles, Machinery, Equipment – Renting tools, equipment, or vehicles.
  15. Rent or Lease – Other Business Property – Renting office, studio, or storage space.
  16. Repairs & Maintenance – Fixing or maintaining business property/equipment.
  17. Supplies – Items used in your business that aren’t part of inventory (cleaning supplies, tools).
  18. Taxes & Licenses – State and local taxes, business licenses, regulatory fees.
  19. Travel – Transportation, lodging, and incidental expenses while away from your main work area for business.
  20. Deductible Meals – 50% of business-related meals with clients, during travel, or work-related events.
  21. Utilities – Electricity, gas, water, internet, and phone for your business space.
  22. Wages – Employee pay (not contractors; not your own owner draws).
  23. Other Expenses – Anything else business-related that doesn’t fit above (must list details).

💡 Commonly Missed Deductions

(Often forgotten but still valid if business-related)

📂 Ideas for “Other Expenses” (Line 27a)

These items don’t have their own dedicated Schedule C line but are legitimate if they’re ordinary and necessary for your business:

✅ Tip: Always label each “Other Expense” clearly on your records — vague terms like “miscellaneous” can trigger IRS questions.

Self-Employed Taxes

How to Calculate Your Estimated Taxes (for the Self-Employed)

When you work for yourself, no one withholds taxes from your paycheck.

That means you have to set aside and pay them yourself, four times a year.

1️⃣ Know What Taxes You’re Paying

If you’re self-employed, your estimated taxes generally include:

  1. Income tax – based on your profit and your personal tax bracket.
  2. Self-employment (SE) tax – covers Social Security & Medicare.

2️⃣ Figure Out Your Net Income

You only pay tax on net earnings—that’s your business income minus business expenses.

Example:

$85,000 total income  

- $25,000 business expenses  

= $60,000 net income

3️⃣ Calculate Your Self-Employment Tax

The IRS says you only pay SE tax on 92.35% of your net earnings.

Example:

$60,000 × 92.35% = $55,410  

$55,410 × 15.3% = $8,472 SE tax

You also get to deduct half of your SE tax when figuring your income tax. You can also use a tax calculator to figure this.

4️⃣ Calculate Your Income Tax

Take your net income minus half your SE tax, subtract your standard deduction (or itemized deductions), and apply your tax bracket.

We recommend using an income tax calculator like this one! Plug in your expected total income, and it will do the math!! Here’s how to interpret it:

If you have capital gains income, this calculator will help!

5️⃣ Add Them Together

Estimated total tax = Income tax + SE tax.

6️⃣ Divide Into Four Payments

The IRS wants four equal payments:

Example:

Income tax: $4,500  

SE tax: $8,472  

Total: $12,972  

Quarterly payment: $12,972 ÷ 4 = $3,243

7️⃣ Use the “Safe Harbor” Rule to Avoid Penalties

You won’t get an underpayment penalty if you pay at least:

This means if last year you owed $10,000 total, paying $2,500 each quarter will avoid penalties—even if your income goes up.

8️⃣ How to Pay

See the tabs How to Pay the CA FTB and How to Pay the IRS for lots of details about this!!

Quick & Easy Estimation Shortcut

If you don’t want to run the full numbers every quarter:

✅ Tip: If your income changes during the year, you can adjust your payments in later quarters to avoid overpaying or underpaying.

Self-Employed Retirement

What retirement plan do I want?

That's a big question to answer 😅 But this calculator might be helpful! I generally recommend solo 401(k) to self-employed folks who have more than $7,000/year they want to put into retirement savings or more than $150,000 in income (you lose the traditional IRA deduction). Roths are fine, but really you should get that tax deduction now for maximum savings!!

How much should I save? I love using this retirement savings calculator. It’s a simple, useful tool

Additional information about retirement savings

Employment Classification

Contractor versus employee considerations

Here's my shortlist of things to consider between being paid as a contractor and an employee:

  1. Legality. If the work you're doing should be considered employee work, it's in you and your employer's best interest to have you correctly classified
  2. Taxes. You will have a lower tax burden as an employee, since you're not responsible for employer-share payroll taxes (even over an S-Corp)
  3. Retirement contributions. You'll have a lower amount of tax-deductible retirement contributions you can make as an employee, since self-employed folks can contribute to a solo 401(k)
  4. Business expense deductions. If you currently have a lot of business expenses, that is reducing your taxable income and could lead to a higher tax burden as an employee, especially if your employer will not be reimbursing you for those expenses
  5. Health insurance and other benefits. As a self-employed person, you can deduct your health insurance premium costs. If your employer doesn't provide a health insurance plan, you'll be paying for that with post-tax dollars
  6. Unemployment and Disability benefits: If you're not paying into disability or unemployment as a contractor, you don't have access to collect from those services in the case that you do lose your job or retain a disability.
  7. Compliance burden. As a contractor, you're responsible for your own bookkeeping, business tax filings, business registration, etc. You won't have these responsibilities as an employee
  8. Liability. As a contractor, you are responsible for the work you're completing and have legal liability for the outcome of that work. As an employee, your employer takes on the burden of legal liability
  9. Paid Time off. Contractors don't receive paid time off, and while only required to provide paid sick time, many employers will offer PTO or other vacation time.

I’m a contractor or pay contractors in California, do I need workers compensation?

Probably not! There’s a bill in California that affects licensed contractors – people who do construction work. So, if you’re a licensed contractor there are some workers compensation requirements for you. Here’s a great article with more information.

Deducting Meals

Guide to Deducting Meal Expenses for Your Business

 (For Sole Proprietors, S Corps, C Corps, and Nonprofits)

Types of Meal Deductions

Special Situations

Recordkeeping Requirements

How to Track Meals

Differences by Entity Type

In summary:

Meal deductions can be valuable, but the IRS has specific rules about what qualifies. Below is a simple guide to help you know what you can deduct and how much.

Types of Meal Deductions

1. Team Meals – 100% Deductible
 Meals with employees and contractors for legitimate business purposes (for example, team meetings, training sessions, or appreciation lunches) are fully deductible.
Example: You buy lunch for your team during a planning day. That’s 100% deductible.

2. Cafe as a Workspace, Eating at the Office, or Travel Meals – 50% Deductible
 If you’re working at a cafe, eating while traveling for business, or grabbing food at the office during your workday, these are generally 50% deductible.
Example: You’re on a business trip and eat dinner alone while traveling—deduct 50%.*

3. Groceries for a Home Office – Not Deductible
 Buying groceries to eat at home, even if you work there, doesn’t count as a business expense.
Example: Lunch at home while you and your business partner discuss strategy—unfortunately, not deductible.*

4. Networking, Marketing, or Client Meals – 50% Deductible
 Meals with clients, prospective clients, or professional contacts for business purposes are 50% deductible.
Example: Lunch with a potential client to discuss your services—50% deductible.*

5. Food for Income-Producing Events – 100% Deductible
 If you provide food at an event that generates income (such as a workshop or fundraising event), the cost is fully deductible. Sometimes these costs are categorized as Event Supplies instead of Meals.
Example: You cater lunch at a paid training session you host—100% deductible.*

Special Situations

Owner Meals When Working from Home
 If business partners working from home eat lunch together and discuss business, the IRS generally considers this personal rather than business-related. It’s not deductible, even if you talk about work.
Only meals connected to a clear business purpose (like meeting with a client or a separate contractor) qualify for deduction.

Recordkeeping Requirements

To protect your deductions:

Do all meals need notes on the receipt?
 Yes, ideally every business meal—team, client, or travel—should include a short note of who attended and why. It doesn’t have to be long; just write it on the receipt or in your app.

How to Track Meals

You can track your meal expenses in several ways:

Always include a brief note like “Client meeting with Alex – discussed Q4 project” or “Team lunch – strategy planning.”

Differences by Entity Type

Entity Type

Deduction Rules

Sole Proprietor / Single-Member LLC

Report on Schedule C. Follow the same 50% or 100% rules as above.

Partnership / Multi-Member LLC

Deduct meals at 50% or 100% on the partnership return (Form 1065). Owner-only meals usually don’t qualify.

S Corporation

Same 50%/100% rules. Meals reimbursed to owners through an accountable plan are deductible by the S Corp.

C Corporation

Same rules apply. Meals are deductible at 50% or 100% depending on category.

Nonprofit

Deduct meal expenses as part of program or administrative costs if directly related to the organization’s mission or operations. Follow the same 50%/100% treatment.

In summary:

Self Employed Vehicle Deductions

Vehicle Deductions for Business Use

If you use your vehicle for business purposes, you may be eligible to deduct certain expenses on your tax return. There are two primary methods to claim vehicle-related deductions: the Standard Mileage Rate and the Actual Expense Method. Below is an overview of both options to help you determine which is best for your situation.

1. Standard Mileage Rate

The IRS allows a set deduction per mile driven for business purposes. The mileage rate is updated annually, so be sure to check the current rate.

Requirements:

Pros:

Cons:

2. Actual Expense Method

This method allows you to deduct the actual costs associated with operating your vehicle for business purposes. Deductible expenses include:

Requirements:

Pros:

Cons:

Depreciation Calculation

If you use the Actual Expense Method, you can deduct depreciation on your vehicle. Depreciation allows you to recover the cost of a vehicle used for business over time. The IRS provides different methods for depreciation, including:

1. Modified Accelerated Cost Recovery System (MACRS)

2. Straight-Line Depreciation

Required Information for Depreciation:

Which Method Should You Choose?

Reporting Vehicle Deductions on Tax Returns

The method of reporting vehicle deductions depends on the business structure:

For 1099 independent contractors or sole proprietors, the deduction is typically reported on Schedule C of the personal tax return. If the vehicle is used both for business and personal purposes, only the business-use percentage is deductible.

Additional Considerations:

If you need assistance in determining the best deduction method for your situation, feel free to contact us for personalized tax advice.

Expenses for Therapists

Deductible Business Expenses for Self-Employed Therapists

Fully deductible

1. Professional Fees & Licensing

These are standard Schedule C deductions:

2. Client Care–Related Expenses

These support your therapy practice:

3. Office & Workspace

If you lease or rent office space:

Furnishings & décor

Office supplies

4. Technology & Electronics

100% deductible when used solely for business:

5. Marketing & Promotion

6. Transportation & Travel

If related to client work or professional development:

❗ Note: commuting from home to your regular office is not deductible.

7. Professional Development

8. Personal Appearance & Clothing (Important Rules)

Usually NOT deductible, unless:

Deductible ONLY IF:

Generally not deductible:

Mixed Business/Personal Expenses (Split Deductions)

1. Cell Phone

You may deduct the business-use percentage of:

Typical deduction range for therapists: 40–80% business use depending on telehealth frequency.

2. Internet

Deduct the portion used for telehealth, documentation, research, and admin tasks.
Common: 20–50% business use.

3. Home Office Deduction (if applicable)

Allowed if space is:

Deductible items (pro-rated by square footage):

You can use simplified option ($5 per sq. ft. up to 300 sq. ft.) or actual expense method.

4. Computer & Electronics Used Personally

Deduct only the business use percentage:

5. Car

Deduct either:

Standard mileage method

Actual expenses method

Business % of:

Expenses Not Allowed (Common Therapist Confusions)

Residential energy tax credits

Energy Efficient Home Improvement Credit

This is the credit most homeowners use for energy-saving upgrades to their existing primary residence. It’s part of the Inflation Reduction Act.

What It Does

You can claim 30% of the cost of qualifying energy-efficient improvements you install in the tax year (e.g., 2025). IRS

⚠️ 2025 Deadline: These credits currently only apply to improvements placed in service through December 31, 2025 unless the law changes. Kiplinger

 Annual Credit Limits

Qualifying Improvements & Credit Amounts

Below is a simplified list — all credits are generally 30% of the amount you paid (materials + sometimes labor), up to the limits shown:

Improvement / Property

Annual Credit Limit

Notes

Insulation & air sealing

Up to $1,200 (within $1,200 cap)

No separate item limit besides overall cap. Stay Exempt

Exterior doors

$250 per door (max $500 total)

30% of cost qualifies. Stay Exempt

Exterior windows & skylights

$600 total

30% of cost qualifies. Stay Exempt

Home energy audit

$150

Must be done by a qualified auditor. Stay Exempt

Central A/C units

$600 per unit

30% of cost qualifies. IRS

Water heaters (gas/propane/oil)

$600 per item

30% of cost qualifies. IRS

Furnaces & boilers

$600 per item

30% of cost qualifies. IRS

Electric or gas heat pumps

Up to $2,000

Separate annual category. Stay Exempt

Heat pump water heaters

Up to $2,000

Separate annual category. Stay Exempt

Biomass stoves & boilers

Up to $2,000

30% of cost. Stay Exempt

👉 Tip: Because of the overall caps, you can mix and match improvements in one year, but you can’t exceed $3,200 total. Taxpayer Advocate Service

 Residential Clean Energy Credit

This credit is for on-site renewable energy systems — like solar panels — and is very generous in some cases.

What It Does

You get 30% of the cost of qualified renewable energy systems installed on your home. EITC Central

How Much You Get

📉 After that, the rate gradually phases down (26% in 2033, 22% in 2034). EITC Central

Qualifying Clean Energy Systems

Examples of improvements that qualify:

 This credit can be carried forward to future tax years if the credit amount is more than your tax liability that year. EITC Central

 How to Claim These Credits

 Important Deadlines & Notes

Quick Summary

Tax Credit

Percentage

Caps

Example Projects

Energy Efficient Home Improvement Credit

30%

Up to $1,200 + $2,000 for big systems (max ~$3,200)

Insulation, doors, heat pumps, furnaces

Residential Clean Energy Credit

30%

No dollar limit (phases down after 2032)

Solar panels, wind, geothermal, solar water heaters

California state residential energy tax credits and rebates

 1. Inflation Reduction Act (IRA)-Funded State Rebates (HEEHRA & HOMES via TECH Clean California)

California is distributing federal IRA home energy rebates through TECH Clean California (California Energy Commission) — but these are state-administered rebates, not state tax credits. California Energy Commission

Home Electrification & Appliance Rebates (HEEHRA)

 Designed to offset the cost of high-efficiency electric systems (especially heat pumps).

Rebate Amounts

What Qualifies

➡️ These rebates are not tax credits — they are upfront payment or rebate checks that reduce your installed project cost. California Energy Commission

2. California Energy Smart Homes Program

This program offers incentives for whole-home electrification, especially when you fully transition off gas (all electric). California Energy Smart Homes

Typical Incentive Levels (2025)

This helps fund things like electric panel upgrades, insulation work, smart system add-ons, and battery storage — especially when part of a full electrification project. California Electric Homes Program

 3. Self-Generation Incentive Program (SGIP)

Administered by the California Public Utilities Commission (CPUC), SGIP provides rebates for energy storage (and solar + storage) systems. California Public Utilities Commission

 Typical Rebate Examples

Note: These rebates are generally applied at installation and reduce your system cost. California Public Utilities Commission

4. Local Utility & Regional Rebates

In addition to statewide programs, many local utilities and community energy providers offer additional incentives on top of the statewide rebates:

Bay Area Examples (and Similar Programs Statewide)

(Availability varies by service territory and funding status.) Bay Area Regional Energy Network

Utilities like PG&E, Southern California Edison (SCE), SDG&E, and others often have their own programs (instant rebates or mail-in offers) for energy-efficient appliances, insulation, & electrification equipment. PG&E

 5. Financing Programs That Can Reduce Upfront Costs

While not direct rebates/credits, these programs help homeowners pay for energy upgrades:

PACE Financing (Property Assessed Clean Energy)

GoGreen Home Energy Loans

 6. California Climate Credit

Not tied directly to specific upgrades, but all residential customers of major utilities (e.g., PG&E, SCE, SDG&E) receive California Climate Credits on their energy bills — effectively lowering overall energy costs. Wikipedia

 Key Notes

Summary: Typical California Energy Incentives

Program

Type

Who Qualifies / Amount

HEEHRA Rebates

State-administered rebate

$4,000–$8,000 for heat pump HVAC (income-qualified) Tech Clean CA

California Energy Smart Homes

Electrification rebate

~$3,000+ base per home + bonuses for upgrades California Electric Homes Program

SGIP Storage/Equity Incentives

Rebate for storage/solar+storage

$ per kWh rebates, higher for equity/low-income California Public Utilities Commission

Utility / Local Rebates

Various rebates

Hundreds to thousands for heat pumps, appliances, battery storage Bay Area Regional Energy Network

PACE Financing & GoGreen Loans

Financing support

Low-cost financing for energy upgrades Wikipedia

California Climate Credit

Utility bill credit

Biannual/monthly credits for eligible utility customers Wikipedia

MFJ vs MFS filing status

Filing Statuses - which should I pick?

Married filing jointly or separately

Here are the considerations you and your partner can discuss:

1. Student loan payments

If one or both of you has income-based student loan payments, filing jointly will mean that both incomes will be taken into account for income-based payments. Higher income, higher payments. Filing separately will mean only the borrower's income will be used to calculate their respective income-based payments.

2. Student loan interest

If one or both of you make payments to student loans, you might be used to seeing a deduction for the amount of the payments that goes to interest. If you file jointly, you'll see no change. If you file separately, neither of you will get this deduction.

3. Difference in income between partners

When two partners have a large difference in income, filing jointly can result in a lower overall tax bill compared to if each of you were not married and filed a Single return. It's kind of like taking an average of two Single returns. A nice way to think about it is that the higher earner's tax bill is lowered by filing jointly compared to filing Single, so whatever the tax savings totals, it is nice to share those savings across both partners. You can run an estimator for each of you filing Single, and then filing together as Joint, to get a sense of the savings.

If you both make about the same income, there's usually not a huge difference between filing joint or separate, but jointly is a little simpler.

4. Separate vs shared finances

If you and your partner share some portion of finances (a joint bank account, sharing household expenses, co-owning property like a car or house), a joint return can be simpler and is designed to reflect that "shared finances" status. Sharing some finances doesn't have to mean sharing ALL finances.

If you and your partner keep completely separate finances, a Separate return can keep those two lines more, well, separate. But just know that in community property states (like California), income earned by each partner during a marriage is considered community (aka legally shared) property, regardless of whose bank account the income lived in and whose expenses it paid for.

5. Dependents

If you file separately, only one partner can claim any dependents you might share (kiddos or other family members you financially support). That means a tax break for one partner but not the other.

6. Itemized vs Standard deduction

If you file separately, both returns must elect the same type of deduction on Form 1040 line 12e, either both must Itemize deductions or both must elect the Standard deduction. If only one partner has high medical expenses, or a lot of charitable contributions / state taxes paid / mortgage interest on a home they owned pre-marriage*, then it's possible that Itemizing deductions would benefit one partner and penalize the other. It's not uncommon for couples to have a bigger benefit with Itemizing when filing jointly, but to elect the Standard Deduction when filing separately because the latter has a greater overall benefit to both partners.

* there's more to the story with regards to community property laws on home ownership and being married, for another time

How to pay the IRS

How to Use IRS Direct Pay

Make a Federal Tax Payment Online Without Fees

IRS Direct Pay is a free, secure service to send payments directly from your checking or savings account to the IRS — no registration required.

1. Gather What You Need

Before you start, have ready:

2. Go to the Official IRS Website

⚠️ Tip: Never use links from emails or texts — go directly to the official IRS site to avoid scams.

3. Choose Your Payment Type

You’ll be asked to select:

4. Verify Your Identity

Select a tax year from one of your past returns (within the last 6 years) and enter:

💡 Tip: Use the exact address formatting from your return (abbreviations matter).

5. Enter Your Payment Information

6. Review & Submit

7. Save Your Confirmation

Extra Tips

IRS Direct Pay – Quick Checklist

(Free, secure online payments from your bank account)

✅ Before You Start

1. Go to the IRS Website

⚠ Tip: Only use the official IRS site — never links from emails or texts.

2. Select Payment Details

3. Verify Your Identity

4. Enter Payment Information

5. Review & Submit

6. Save Your Proof

💡 Helpful Notes

IRS transcripts

Getting transcripts from the IRS

  1. Go to IRS online accounts: https://www.irs.gov/payments/online-account-for-individuals
  2. Login or create an account
  1. Hover over “Records and Status,” then click “Tax Records”
  2. Click “View Transcripts”










  3. You’ll have four options for transcript types:

We usually want one of these two!

IRS payment plans

IRS Payment Plans

How to Set Up a Payment Plan with the IRS (Individual)

IRS Payment Plan Quick Checklist (Individual)

How to Set Up a Payment Plan with the IRS (Individual)

If you owe federal taxes but cannot pay the full amount right now, the IRS offers payment plans (also called installment agreements) that let you pay over time. Here’s how to set one up.

1. Understand Your Options

The IRS has several types of payment arrangements:

💡 Tip: If you owe $50,000 or less in combined tax, penalties, and interest, you can often apply online without submitting financial documents.

2. Gather Your Information

Before applying, have ready:

3. Check Your Balance

You can confirm exactly how much you owe (including interest and penalties) by:

4. Apply for the Payment Plan

Option A – Apply Online (fastest and preferred)

  1. Go to: https://www.irs.gov/payments/online-payment-agreement-application
  2. Sign in with your IRS account or create one.
  3. Follow the prompts to enter your balance, desired monthly payment, and bank info.
  4. Review and submit your request.

Option B – Apply by Phone

Option C – Apply by Mail

5. Choose a Monthly Payment You Can Afford

💡 Tip: Paying more than the minimum reduces interest and penalty charges.

6. Set Up Automatic Payments (Recommended)

7. Keep Up with Future Taxes

8. Be Aware of Fees and Interest

9. If You Can’t Afford the Minimum Payment

If the standard plan is too high:

10. Monitor Your Account

✅ Bottom line: Setting up a payment plan with the IRS is straightforward if you prepare your information, apply online when possible, and commit to making consistent payments.

IRS Payment Plan Quick Checklist (Individual)

✅ Before You Start

1. Choose Your Plan Type

2. Apply

Best: Apply online: irs.gov/opa
OR: Call 1-800-829-1040
 OR: Mail Form 9465 to the IRS address on your bill

3. Decide Your Monthly Payment

I can pay each month: ______________________________________

4. Set Up Payments

Routing number: _______________________

Account number: _______________________

5. Stay Compliant

💡 Quick Tips

Late 1040 filing penalties

IRS Penalties, Fees, and Interest for Late Form 1040 Filing

When you file your personal income tax return (Form 1040) late—or pay your taxes after the due date—the IRS can charge penalties and interest. These charges add up quickly, so it’s important to understand how they work and what you can do about them.

1. Late Filing Penalty (Failure to File)

This is a penalty for not filing your tax return on time.

2. Late Payment Penalty (Failure to Pay)

This is charged when you don’t pay your taxes by the deadline (usually April 15).

3. Interest Charges

Interest accrues on both the unpaid tax and the penalties until everything is paid off.

4. Combined Penalties

If you’re both late to file and pay, the IRS combines the two—but limits the total monthly charge.

5. Reasonable Cause & First-Time Abatement

You may be able to reduce or remove penalties.

6. How to Minimize or Avoid Penalties

 ✅ File on time, even if you can’t pay.
✅ Pay as much as you can by the deadline.
✅ Set up a payment plan to reduce the penalty rate.
✅ Request penalty abatement if you qualify.
✅ Stay current going forward to qualify for future relief.

Summary Table

Type of Penalty

Rate

Maximum

Applies To

Key Tip

Late Filing

5% per month

25%

Unpaid tax

File even if you can’t pay

Late Payment

0.5% per month

25%

Unpaid tax

Set up a payment plan to lower rate

Interest

Variable (~8%)

None

Tax + penalties

Keeps growing until paid

Combined

Up to 5%/month

47.5% total

Both

File first, pay next

Request IRS abatement of penalties

Request IRS Abatement of Penalties and Interest

Request IRS Abatement of Penalties and Interest

Phone call script for calling the IRS to request penalty and interest abatement

1. Before You Call (Important Prep)

2. IRS Phone Call Script (Verbatim-Friendly)

3. Reasonable Cause Abatement — How to Explain Your Situation

4. Explanation Outlines (Use What Fits — Don’t Overshare)

5. Explicitly Ask for the Abatement

6. If Reasonable Cause Is Denied → Request First-Time Penalty Abatement

7. Ask for Confirmation Before Ending the Call

8. Common Pitfalls — What Not to Say

9. IRS Phone Numbers (As of Current IRS Operations)

10. Final Pro Tips

Reasonable Cause Penalty Abatement Letter

Background and Compliance History

Explanation of Reasonable Cause

Ordinary Care and Prudence

Request for Relief

Attachments Checklist

Practical Tips Before Sending

Phone call script for calling the IRS to request penalty and interest abatement

1. Before You Call (Important Prep)

Have this in front of you:

Tip: The IRS agent will type your explanation directly into their system. Clarity and conciseness matter more than emotion.

2. IRS Phone Call Script (Verbatim-Friendly)

Opening the Call

“Hello, thank you for taking my call. I’m calling regarding penalties and interest assessed on my tax account, and I’d like to request penalty abatement if possible.”

(After identity verification)

“Specifically, I’d like to request Reasonable Cause Abatement for the late [filing/payment] penalties. If reasonable cause is not available, I’d like to request First-Time Penalty Abatement.”

Confirm the Details

“Before we proceed, could you please confirm:

(Wait for confirmation)

3. Reasonable Cause Abatement — How to Explain Your Situation

Transition Phrase

“I’d like to explain the circumstances that caused the late [filing/payment].”

Then pause, and explain using one of the outlines below.

4. Explanation Outlines (Use What Fits — Don’t Overshare)

A. Individual Form 1040 — Common Reasonable Cause Scenarios

You should frame these around ordinary business care and prudence.

1. Reliance on Incorrect Professional Advice

“I relied on the advice of a tax professional who advised me that no filing/payment was required by the deadline. I later learned that advice was incorrect, and I acted promptly to file/pay once I became aware.”

2. Serious Illness, Injury, or Mental Health Event

“During the filing period, I experienced a serious medical issue that prevented me from managing my financial affairs. Once I was able to do so, I filed/paid as soon as possible.”

3. Family Emergency or Death

“There was a death or serious emergency in my immediate family during the filing period, which significantly disrupted my ability to meet the deadline.”

4. Records Unavailable or Destroyed

“Critical tax records were unavailable due to circumstances beyond my control, and I made a good-faith effort to obtain them as quickly as possible.”

B. Business Returns — Common Reasonable Cause Scenarios

1. Officer or Responsible Party Incapacitated

“The individual responsible for tax compliance was unexpectedly incapacitated, and the business lacked the ability to reassign those duties immediately.”

2. Professional Error or Transition

“The business relied on a tax professional who failed to file or advised incorrectly. Once discovered, the business took immediate corrective action.”

3. First Year or Structural Change

“This occurred during the business’s first year or during a significant transition, and we misunderstood the filing/payment requirements despite good-faith efforts to comply.”

C. Multiple Years Involved

“The issue affected multiple tax years due to the same underlying circumstance. Once the issue was identified, all outstanding returns were filed and payments were made or arranged.”

5. Explicitly Ask for the Abatement

After explaining:

“Based on these facts, I’m requesting reasonable cause abatement of the penalties. I understand interest is statutory, but I’m requesting abatement of interest to the extent it’s related to the penalties.”

(Important: Interest tied to penalties can be abated if penalties are removed.)

6. If Reasonable Cause Is Denied → Request First-Time Penalty Abatement

If the agent says reasonable cause doesn’t apply:

“Thank you for checking. In that case, I’d like to request First-Time Penalty Abatement, if I qualify.”

FTA eligibility generally requires:

If eligible:

“I believe I meet the criteria, as I’ve been compliant in prior years.”

7. Ask for Confirmation Before Ending the Call

Always close with:

“Could you please confirm:

Ask for:

“Could you also note this request in my account history?”

8. Common Pitfalls — What Not to Say

Avoid these phrases 🚫:

Do not:

9. IRS Phone Numbers (As of Current IRS Operations)

Individuals

Businesses

International

Best calling times: early morning (7–8 AM local) or midweek (Tue–Thu).

10. Final Pro Tips

Reasonable Cause Penalty Abatement Letter

(To accompany IRS Form 843)

[Your Full Name or Business Legal Name]
 [SSN or EIN]
 [Current Address]
 [City, State, ZIP Code]
 [Phone Number]
 [Email Address (optional)]

Date: [Month Day, Year]

Internal Revenue Service
 [Address listed on IRS notice OR Form 843 instructions]

Re: Request for Reasonable Cause Penalty Abatement

Tax Year(s): [YYYY, YYYY]
Tax Form(s): [Form 1040, 1120-S, 1065, 941, etc.]
Notice Number (if applicable): [CP14, CP161, etc.]

Dear Sir or Madam,

I am writing to formally request abatement of penalties and associated interest assessed on the above-referenced tax return(s) pursuant to IRC §6651 and Treas. Reg. §301.6651-1(c) on the basis of reasonable cause and not willful neglect.

This request is submitted in good faith and in support of Form 843, which is enclosed.

Background and Compliance History

I have historically made a good-faith effort to comply with all federal tax filing and payment requirements. Prior to the tax year(s) referenced above, my account was generally compliant, and I have taken prompt corrective action to resolve this matter once it was identified.

All required returns have now been filed, and all taxes due have been paid or are subject to an approved payment arrangement.

Explanation of Reasonable Cause

The late [filing/payment] occurred due to circumstances beyond my reasonable control, despite exercising ordinary business care and prudence.

[Choose and adapt ONE or more of the following explanations]

[Reliance on Incorrect Professional Advice]

During the relevant filing period, I relied on the advice of a qualified tax professional regarding my filing and/or payment obligations. I was advised that [describe the advice—e.g., no filing was required, filing would be handled, or payment timing was different].

I later learned that this advice was incorrect. Upon discovering the error, I acted promptly to file the required return(s) and address any outstanding balance. My reliance on professional guidance was reasonable under the circumstances, and I had no reason to believe the advice was inaccurate at the time it was given.

[Serious Illness, Medical Condition, or Family Emergency]

During the filing period, I experienced a serious medical condition or family emergency that significantly impaired my ability to manage my financial and tax affairs. This circumstance was unforeseen and outside my control.

Once the condition resolved and I was able to resume normal activities, I promptly addressed my tax obligations.

[Business Disruption or Responsible Party Unavailability]

For business-related returns, the individual responsible for tax compliance was unexpectedly unavailable due to circumstances beyond the business’s control. The business did not have the immediate ability to reassign these responsibilities without disruption.

Once the issue was identified, corrective steps were taken to bring the account into compliance.

[Multiple Years Affected by the Same Circumstance]

The same underlying circumstance affected multiple tax years. Upon discovering the issue, I took corrective action to file all outstanding returns and resolve the matter in full.

Ordinary Care and Prudence

At all times, I acted with ordinary business care and prudence. The failure to timely [file/pay] was not due to willful neglect, disregard of IRS rules, or intentional delay. Rather, it resulted directly from the circumstances described above.

Request for Relief

Based on the facts presented, I respectfully request:

  1. Abatement of all late filing and/or late payment penalties assessed for the tax year(s) listed above; and
  2. Abatement of interest attributable to those penalties, as permitted when penalties are removed.

If reasonable cause abatement is not granted, I respectfully request that the IRS consider this request under the First-Time Penalty Abatement administrative waiver, if applicable.

Closing

Thank you for your time and consideration of this request. Please feel free to contact me at the phone number listed above if additional information is needed.

Respectfully,

__________________________________
 [Your Name]
 [Title, if business]

Attachments Checklist

Include:

Practical Tips Before Sending

Amended return processing delays

🚨 Escalating a Stuck Amended Tax Return (Form 1040-X)

1. Wait the Minimum Required Time

2. Try Standard Channels First

3. File a Formal Follow-Up Letter

4. Escalate to the Taxpayer Advocate Service (TAS)

TAS is an independent branch of the IRS that helps when normal processing breaks down.

5. Contact Your Congressperson (Optional but Effective)

6. Document Everything

✅ In short: Letter → IRS phone line → TAS (Form 911) → Congress.

Things to know about delayed amended tax returns

If your amended return (Form 1040-X) has been “processing” for 4 months, you’re right in the gray area between normal and delayed. Here’s what you can do:

1. Know the Normal Timeline

2. Check Your Status Online

3. When to Call the IRS

4. What You Can Do Now

👉 Bottom line: At 4 months, you’re still within the IRS’s stated processing time. You don’t need to take action yet unless you’ve received a notice or the “Where’s My Amended Return?” tool shows something unusual. But if you hit 20+ weeks with no movement, that’s the time to call.

Calling the IRS about your amended return

IRS Amended Return Hotline Call Script

You:
 “Hello, I’m calling to check on the status of my amended tax return. It’s been over 20 weeks since I filed, and the IRS ‘Where’s My Amended Return?’ tool still says it’s processing. I’d like to confirm whether you have everything you need from me, and if there are any issues delaying the return.”

If they ask for details, be ready with:

If they say “still processing” with no explanation:

You:
 “I understand these returns can take a while, but since I’m past 20 weeks, is there a way to confirm whether my return has been assigned to a reviewer, or if additional documents are needed from me? I just want to make sure it hasn’t been lost in the system.”

If they say they’ll send correspondence:

You:
 “Thank you. Can you confirm which address it will be mailed to, and about how long I should wait before following up again if I don’t receive it?”

If they mention a backlog or no update available:

You:
 “I appreciate the update. Should I call back after a certain number of weeks, or is there a way to escalate if I don’t see movement?”

👉 The key is to politely press for whether your return has been assigned to an examiner and whether any correspondence has been generated. Sometimes returns get stuck in review or need extra ID verification, but they won’t tell you unless you ask directly.

Writing the IRS after calling, if you don’t get progress

Here's a follow-up letter template you can use if your amended return has been “processing” past 20 weeks and the IRS call center isn’t giving clear answers. This creates a paper trail and can sometimes help shake loose a stalled file.

📄 IRS Follow-Up Letter – Amended Tax Return

[Your Name]
 [Your Address]
[City, State ZIP]
[Phone Number]
[Date]

Internal Revenue Service
[Use the address where you originally filed the 1040-X — usually the same “where to file” for amended returns by state]

Re: Follow-Up on Amended Tax Return (Form 1040-X)
 Tax Year: [Insert Year]
SSN: [Last 4 digits only]

To Whom It May Concern,

I am writing to follow up on the status of my amended tax return (Form 1040-X) for the [Tax Year] tax year, which I filed on [Date Filed]. According to the IRS “Where’s My Amended Return?” tool, the return is still listed as “processing.” As of today, more than 20 weeks have passed since filing.

I want to confirm that my amended return has been received, is in the processing queue, and that no additional information or documentation is required from me at this time.

For your reference, I have included:

Please advise if additional action is needed on my part to move this return forward. I appreciate your assistance and look forward to your confirmation.

Sincerely,
[Signature]
[Printed Name]

📌 Tips for using this letter:

Example: Form 911 (Request for Taxpayer Advocate Service Assistance)

Part I – Taxpayer Information

Part II – Description of the Problem
 Explain in simple, clear language:

I filed an amended return (Form 1040-X) for tax year [Year] on [Date Filed]. According to the IRS “Where’s My Amended Return?” tool, the return is still showing as “processing.” It has now been more than [X months] since filing, which is well beyond the normal 20-week timeframe. I have not received any notices requesting additional information, and I am concerned the return may be stuck in error resolution.

Part III – Hardship / Why TAS Should Step In
 You need to show either financial hardship or significant IRS delay. Example wording:

The delay is creating a financial hardship because I am due a refund of approximately $[amount]. The extended delay has made it difficult to manage my personal finances. Despite multiple attempts to obtain information from the IRS, I have not been able to get a resolution. I believe the Taxpayer Advocate Service’s assistance is necessary to move my case forward.

(If no refund is owed, you could instead say:)

The delay is unreasonable and outside the IRS’s stated processing times. Without TAS assistance, I cannot resolve the issue, as normal channels have been unresponsive.

Part IV – Previous Attempts to Resolve
 Show you tried the normal IRS routes first.

I have:

Despite these efforts, no progress has been made.

Part V – Requested Resolution

I respectfully request that TAS assist in reviewing and resolving the processing delay for my amended return, and ensure that it is either completed or that I am informed of any further action needed on my part.

Signature
 [Sign and date]

📌 How to File

  1. Download Form 911 PDF from the IRS site.
  2. Fill in your details using the above language.
  3. Attach:
  1. Send to your local TAS office by fax or mail. (Find office info: TAS Contact Page)

How to pay the CA FTB

How to Pay the California Franchise Tax Board

What you’ll need

Getting started

Personal payments

Business payments

What you’ll need

Personal payments:

Business payments

Getting started

  1. Go to ftb.ca.gov
  2. Click Pay
  3. Click Bank Account – credit card and payment plan has additional fees, but also available options
  4. Choose Business or Personal – and now we will diverge!

Personal payments

  1. Enter your Social Security Number and Last Name. Skip any special characters, such as dashes and apostrophes
  2. Enter your first name and address as prompted. Use an address from a filed and accepted CA tax return
  3. Select payment type
  1. Estimated tax payment – if you are making a sole proprietor / self-employed estimated tax payment, or other estimated tax payment (for example, underwithholding, investment or interest income)
  2. Bill payment – for example, if you received a notice for a penalty
  3. Tax return payment – for your CA taxes due at time of filing the tax return
  4. Amended tax return payment – if you owe when filing an amendment
  5. Extension payment (Form 3519) – if you are filing an extension and expect to owe taxes
  6. Notice of proposed assessment or Form 3834 payment – if you’ve received either of these
  7. Pending audit tax deposit payment (Form 3576) – ouch
  1. Select the tax year
  2. If you’re making estimated tax payments, you can schedule several throughout the year from here! It’s awesome
  3. Is this a joint tax payment? – If you file jointly, check yes, then add your spouse or RDP’s name and SSN on the next screen
  4. Enter routing number and account number
  5. Optional to enter email and phone number, check the box to agree, and submit!
  6. Print the Payment Scheduled page and send to your accountant so they have a record of the payment you made!

Business payments

  1. Choose entity type
  1. Corporation = S Corp, C Corp, LLC as S Corp
  2. Limited Liability Company = single or multi member LLc
  3. Partnership = partnership only
  1. Enter entity ID. This is from CA Secretary of State, NOT your EIN

So JSRA LLC copies their entity number from the CA Secretary of State business search –

Into the FTB Web Pay, selecting corporation because it’s an LLC taxed as S Corp

  1. Enter contact information. Doesn’t need to be a legal name or the name of anyone registered with the business, just the person making the payment
  2. Select the correct tax form. I’m going to try to explain all the options, sorry this is long and, for LLCs, gets pretty technical! I’ve highlighted the most common choices

For Corporations:

  1. 100, 100S, 100W, or 100X – if you have a C Corp, S Corp, or LLC as S Corp
  2. Form 109 – if you have a non-profit with unrelated business income
  3. Form 199 – regular non-profit filing

        Then you’ll get a new series of options!

  1. Estimated tax payment (Form 100ES) – for paying estimated 1.5% corporate tax. Annual taxes and fees are due in quarterly increments, with $800 due 3/15 or 4/15!
  2. Extension payment (Form 3539) – for payments with extension of time to file
  3. Original return payment (Form 100, 100S, 100W, or 3586) – for payments due at time of filing the return
  4. Bill payment – for example, if you received a notice for a penalty
  5. Secretary of State (SOS) Certification Penalty Payment – if you need to pay this penalty
  6. Amended return payment (Form 100X) – if you owe when filing an amendment
  7. Notice of proposed assessment (NPA) payment – if you have received a notice of proposed assessment and are paying it
  8. Pending audit tax deposit payment (Form 3577) – ouch
  9. Pass-through entity elective tax (Form 3893) – if you are paying for the pass-through entity elective tax (PTE)

For Limited Liability Companies:

  1. Annual tax payment (Form 3522) – for paying the $800 annual fee applicable to all LLCs, even in their first year. Annual taxes and fees are due 3/15 or 4/15 of the current year, for the current year!
  2. Estimated fee payment (Form 3536) – for paying estimated LLC fees if your LLC expects to have gross receipts over $250,000 in the current year. Annual taxes and fees are due 3/15 or 4/15 of the current year, for the current year! (A little louder for the folks in the back.)
  3. Extension / nonconsenting nonresident (NCNR) member payment (Form 3537) – for payments with extension of time to file, if estimated taxes have not already been paid, also used for taxes being paid for nonresident members of LLCs who might not otherwise file and pay their CA taxes due as an owner of a CA LLC (because yes, if you are a member of a California LLC, you are required to file and pay California taxes on your income from California sources such as the LLC you are a member of)
  4. Original return / NCNR member payment (Form 568 or 3588) – for payments due at time of filing the return, including taxes being paid for NCNR members
  5. Bill payment – for example, if you received a notice for a penalty
  6. Secretary of State (SOS) Certification Penalty Payment – if you need to pay this penalty
  7. Amended return payment (Form 568) – if you owe when filing an amendment
  8. Notice of proposed assessment (NPA) payment – if you have received a notice of proposed assessment and are paying it
  9. Pending audit tax deposit payment (Form 3578) – ouch
  10. Pass-through entity elective tax (Form 3893) – if you are paying for the pass-through entity elective tax (PTE)

For Partnerships – it would be unusual for a partnership to owe any taxes to California, but, you know what, let’s be thorough!

  1. Original return payment (form 565 or 3587) – for taxes due at time of filing the original return, very unusual
  2. Extension payment (Form 3538) – for payments with extension of time to file, again very unusual
  3. Bill payment – for example, if you receive a notice for a penalty due to late filing
  4. Amended return payment (Form 565) – if you owe when filing an amendment
  5. Notice of proposed assessment (NPA) payment – if you have received a notice of proposed assessment and are paying it
  6. Pending audit tax deposit payment (Form 3578) – ouch
  7. Pass-through entity elective tax (Form 3893) – if you are paying for the pass-through entity elective tax (PTE)
  1. Select the period. This is generally a calendar year January 1 to December 31
  2. Enter the payment amount. Requires dollars and cents – for example, 200.00 not 200
  1. If you’re making estimated tax payments, you can schedule multiple payments
  1. On the next screen, email is optional, phone number is required, and check the box to agree
  2. Print the Payment Scheduled page and send to your accountant so they have a record of the payment you made!

Owner distributions

How Owner Distributions Are Taxed (by Entity Type)

Big picture first (the rule people miss)

For pass-through entities, owners usually pay tax on profits, not on the money they take out.
For C-corps, owners pay tax when money is distributed.

That one distinction explains almost all confusion.

1. Sole Proprietorship

(Including a single-member LLC that has not elected S- or C-corp status)

What a “distribution” is

There is no formal distribution concept. Any money the owner takes out is called an owner draw.

Taxability

How it’s reported

Common misconception

“If I leave the money in the business, I don’t pay tax yet.”
❌ Incorrect. Profit is taxable regardless of withdrawals.

2. Single-Member LLC (Default Taxation)

(Disregarded entity)

Tax treatment

Exactly the same as a sole proprietorship for federal tax purposes.

Distributions

Key note

3. Multi-Member LLC (Taxed as a Partnership)

What a distribution is

A payment of cash or property from the LLC to a member.

Taxability

How it’s reported

When distributions are taxable

Common misconception

“I only pay tax on what I withdraw.”
❌ Incorrect. You pay tax on what you’re allocated.

4. S-Corporation

Two separate concepts (critical)

  1. W-2 wages (for services)
  2. Distributions (return on ownership)

Taxability of distributions

Limits

Distributions are tax-free only up to stock basis. (See below for a longer explanation of this and why basis tracking is very important!)

When distributions become taxable

Compliance trap

Owners must take reasonable W-2 compensation before distributions.

5. C-Corporation

What a distribution is

A dividend (unless part of liquidation or return of capital).

Taxability

Dividend treatment

  1. Return of capital (to extent of basis) – not taxable
  2. Dividend (to extent of earnings & profits) – taxable
  3. Capital gain (once basis is exhausted)

Reporting

Key difference

C-corp owners are not taxed on profits unless money is distributed.

Side-by-Side Summary

Entity Type

Taxed When Profit Is Earned?

Taxed When Cash Is Withdrawn?

Sole prop

✔ Yes

❌ No

Single-member LLC

✔ Yes

❌ No

Multi-member LLC

✔ Yes

❌ Usually no

S-corp

✔ Yes

❌ Usually no

C-corp

❌ No

✔ Yes

Why people get this wrong

Most confusion comes from mixing:

Practical explanation (plain English)

“In most small businesses, you pay tax on what the business earns, not on what you take out. The exception is C-corporations, where profits are taxed at the corporate level and owners pay tax again only when profits are distributed as dividends.”

S-corp distributions

  1.  S-corp owners are taxed on net income

  1. That taxed income increases your stock basis

This is the key step people miss.

Each year:

Because income increases basis, most distributions are just giving you back money you’ve already paid tax on.

  1. Normal S-corp distributions are NOT taxable

If:

then the distribution is:

This is why S-corp distributions feel the same as sole prop / LLC draws in most real-world cases.

So when are S-corp distributions taxable?

Case 1: Distribution exceeds stock basis

This is the big one.

If:

Then:

Think of it as:

“You’re pulling out more than you put in + earned.”

When would this happen? The corporation has received loans or other cash that is not taxable income, had prior C-Corp earnings & profits

Case 2: S-corp has prior C-corp earnings & profits (E&P)

Less common, but important.

If:

Then distributions can be:

  1. Tax-free return of basis
  2. Taxable dividends (to extent of E&P)
  3. Capital gain (after basis is exhausted)

This is a legacy issue, not a normal S-corp problem.

Concrete example (numbers help)

Year 1

Tax result

Year 2

Tax result

No second tax. No surprise.

Year 3 (problem case)

Tax result

That $10,000 was never previously taxed.

How this compares to sole prop / LLC

Entity

Tax on profits

Tax on normal distributions

Sole prop

✔

❌

LLC / partnership

✔

❌

S-corp

✔

❌ (up to basis)

Distributions are limited by basis, not by “already taxed income” alone.

S-corp owners do not pay tax twice on the same income.
They pay tax on net income once, and distributions of that taxed income are tax-free, as long as stock basis is sufficient.

Corporation owner pay

1. Employee compensation (W-2 wages)

Most common and most scrutinized

When required:

What it is

Owner is also an employee (officer, executive, staff).

Tax treatment

Compliance requirements

Key risks

When it’s appropriate

2. Bonuses (still W-2 wages)

A subset of employee pay, but worth separating

What it is

Discretionary or formula-based compensation paid to owner-employees.

Tax treatment

Compliance requirements

Key risks

3. Dividends (distributions as an owner) (C-Corp only)

Pure ownership return — not compensation

What it is

Payment based on stock ownership, not services.

Tax treatment

Compliance requirements

Key risks

When it’s appropriate

4. Independent contractor payments (1099-NEC)

Usually inappropriate for owners — high audit risk

What it is

Owner provides services as a contractor instead of an employee.

Tax treatment

Compliance requirements

Key risks (very high)

When it might work

5. Rent payments

Owner as landlord

What it is

Owner leases property (office, building, equipment) to the C-corp.

Tax treatment

Compliance requirements

Key risks

6. Interest on loans (shareholder loans)

Owner as lender

What it is

Owner loans money to the corp; corporation pays interest.

Tax treatment

Compliance requirements

Key risks

7. Reimbursements under an Accountable Plan

Tax-free when done correctly

What it is

Corporation reimburses owner-employees for business expenses.

Tax treatment

Compliance requirements

Key risks

8. Stock-based compensation

Common in startups and growth companies

Forms

Tax treatment

Compliance requirements

Key risks

9. Fringe benefits

Some tax-favored, some not

Examples

Tax treatment

Compliance requirements

Key risks

What does NOT work in a C-corp

Practical hierarchy (how it usually looks in real life)

  1. Reasonable W-2 salary
  2. Bonuses (profit-based)
  3. Accountable plan reimbursements
  4. Fringe benefits
  5. Dividends (if profits justify)
  6. Rent / interest (if properly structured)

Comparison: S-Corp and C-Corp owner pay

1. Core difference (the lens to keep in mind)

Topic

C-Corporation

S-Corporation

Taxation

Entity taxed separately

Pass-through

Owner income

Only when paid

Allocated regardless of payment

Payroll planning

Secondary

Central

Double taxation

Yes (by design)

No

This single difference drives everything else.

2. W-2 salary (owner-employee)

C-Corp

S-Corp

Audit reality:
 IRS challenges S-corp wages far more aggressively than C-corp wages.

3. Bonuses

C-Corp

S-Corp

Deductible to entity

✔

✔

Subject to payroll tax

✔

✔

Planning use

Income shifting + profit smoothing

Limited (still payroll taxed)

Key distinction:

4. Distributions vs dividends

C-Corp → Dividends

S-Corp → Distributions

This is the single biggest structural difference in owner pay.

5. Accountable plan reimbursements

C-Corp

S-Corp

Deductible to entity

✔

✔

Tax-free to owner

✔

✔

Payroll taxes

❌

❌

Planning value

Moderate

High

Especially valuable in S-corps to reduce pressure on “reasonable salary.”

6. Fringe benefits (big divergence)

C-Corp (especially owner-employees)

S-Corp (≥2% shareholders)

Planning insight:
 If benefits are a major goal, C-corps often win.

7. Retirement plans

Feature

C-Corp

S-Corp

Deductible contributions

✔

✔

Owner inclusion

✔

✔

Planning leverage

High

High

Differences are usually economic, not structural — driven by compensation level.

8. Rent & interest (owner as landlord or lender)

Works nearly identically in both structures:

More commonly used in C-corps to extract profits without dividends.

9. Contractor payments to owners

C-Corp

S-Corp

Generally allowed?

Rarely appropriate

Almost never appropriate

Audit risk

High

Extremely high

Owners who control the company are usually employees.

10. What the IRS focuses on

S-Corp enforcement focus

C-Corp enforcement focus

11. Typical owner-pay “stack”

S-Corp (most common)

  1. Reasonable W-2 salary
  2. Accountable plan reimbursements
  3. Tax-free distributions
  4. Retirement contributions

C-Corp (most common)

  1. W-2 salary
  2. Bonuses
  3. Fringe benefits
  4. Rent / interest
  5. Dividends (last)

12. When each structure wins on owner pay

S-Corp is usually better when:

C-Corp is usually better when:

13. Common planning mistakes

S-Corp

C-Corp

Bottom line

S-corps optimize payroll taxes.
C-corps optimize flexibility and benefits — at the cost of double tax.

Neither is “better” in the abstract; they are optimized for different owner goals.

How does an S Corp even work

How does an S Corp even work?

What’s an S Corp—and Why Might You Want One?

Breaking Down the OBBBA Tax Changes: SALT & PTET Explained Simply

TL;DR — Why S Corps Still Make Sense (Especially Now)

💡 Example S Corp Tax Benefits Scenario

🗺 S Corp / SALT / PTET Decision Guide

S Corporation & LLC Taxed as an S Corporation – FAQ & Step-by-Step Guide

S Corporation / LLC Taxed as S Corporation – Quick Checklist

How to Claim “Reasonable Cause” for a Late-Filed Form 2553

Statement of Reasonable Cause

Health Insurance for S Corp Owners

Retirement Plan Options for S-Corporation Owners

Coming soon:

What’s an S Corp—and Why Might You Want One?

The Basics

An S Corporation isn't a different type of legal business. It's a tax classification you can elect for your existing LLC or corporation. You still have your LLC or corporation; electing S Corp changes how you're taxed.

The Main Reason to Choose S Corp: Lower Self-Employment Taxes

Other Benefits That Matter

How It Actually Works

  1. Elect S Corp status with IRS Form 2553.
  2. Run payroll for yourself as an employee.
  3. Take distributions smartly (reasonable salary typically defined).
  4. Reimburse business expenses properly.
  5. Pay health insurance and retirement contributions through the business.

This strategy can lead to thousands of dollars in tax savings—especially once payroll is handled correctly and distributed wisely.

Breaking Down the OBBBA Tax Changes: SALT & PTET Explained Simply

What’s That Acronym?

OBBBA stands for the One Big Beautiful Bill Act—a recent tax law (2025–2029) that tweaks some important tax rules for high earners and business owners.

1. SALT (State & Local Tax) Deduction Cap

2. Pass-Through Entity Tax (PTET) Workaround

Why That Matters for S Corp Owners

TL;DR — Why S Corps Still Make Sense (Especially Now)

💡 Example S Corp Tax Benefits Scenario

1. Federal + State Tax Scenarios

Scenario

How Income Is Taxed

Self-Employment Tax

Federal Income Tax (approx.)

State Tax After SALT Cap

Total Tax

Key Points

Sole Prop / LLC (no S Corp)

All $150K subject to SE tax & income tax

$22,950 (15.3% of $150K)

$18,000

$12,000 (8% of $150K, but only $10K deductible due to old SALT cap)

$52,950

All income is hit by SE tax; SALT deduction capped

S Corp

$80K salary + $70K distribution

$12,240 (15.3% of $80K)

$17,000

$12,000 (SALT cap still applies individually)

$41,240

Saves $10K+ in SE tax; must run payroll

S Corp + PTET

$80K salary + $70K distribution; entity pays state tax

$12,240

$17,000

$0 (state tax paid at entity level, fully deductible)

$29,240

Biggest savings—state tax deduction bypasses SALT cap

S Corp + OBBBA SALT cap $40K

Same as S Corp, but higher SALT deduction allowed

$12,240

$17,000

$12,000 − (extra deduction worth ~$7,400)

~$33,840

Mid-income earners benefit; high-income phaseout applies

2. Key Takeaways from the Table

🗺 S Corp / SALT / PTET Decision Guide

Start →
 ⬇
1️⃣ Do you have net business income (after expenses) of at least $80K/year?

⬇
2️⃣ Are you willing to run payroll & keep corporate formalities?

⬇
3️⃣ Does your state have a Pass-Through Entity Tax (PTET) election?

⬇
4️⃣ Are you phased out of OBBBA’s higher SALT deduction?
 (Phaseout starts ~$500K married / $250K single)

⬇
5️⃣ If no PTET:

📝 Quick Rules of Thumb

S Corporation & LLC Taxed as an S Corporation – FAQ & Step-by-Step Guide

1. Understanding S Corporations

An S Corporation is a tax classification, not a type of legal entity. You can elect S Corp taxation for:

The main benefit: avoiding self-employment tax on distributions, while still paying yourself a reasonable salary through payroll.

IRS resource: Form 2553 – Election by a Small Business Corporation

2. Forming an LLC Taxed as an S Corporation

Step-by-Step:

  1. Check Name Availability
  1. Register Your LLC
  1. Get an EIN
  1. Create an Operating Agreement
  1. Elect S Corp Taxation
  1. Open a Business Bank Account
  1. Update Contractor Records
  1. Obtain a Local Business License
  1. Get a DBA (if needed)

3. Forming a Corporation Taxed as an S Corporation

Step-by-Step:

  1. Check Name Availability (e.g., CA Secretary of State)
  2. Register Your Corporation
  1. Get an EIN (IRS application)
  2. Create Corporate Bylaws
  1. Hold First Organizational Meeting
  1. Elect S Corp Status
  1. Open a Business Bank Account
  1. Update Contractor Records
  1. Get a Local Business License
  1. Get a DBA (if needed)

4. Setting Up Payroll for an S Corporation

Once your entity is registered and your S Corp election is in place:

  1. Complete State Registration
  1. Add Yourself as an Employee
  1. Add Contractors (if applicable)
  1. Run Payroll

5. Key Tax Deductions & Retirement Contributions

6. Ongoing Compliance Requirements

Quarterly

Annually

Bottom Line:
 Forming an S Corporation or LLC taxed as an S Corp requires following both state formation rules and federal tax election rules. Keeping up with payroll, reimbursements, and annual filings is critical to maintaining compliance and protecting your tax advantages.

S Corporation / LLC Taxed as S Corporation – Quick Checklist

Part 1 – LLC Taxed as S Corporation

Part 2 – Corporation Taxed as S Corporation

Part 3 – Payroll Setup

Part 4 – Key Deductions & Benefits

Part 5 – Ongoing Compliance

Quarterly:

Annually:

💡 Tip: Keep a recurring checklist in your calendar for quarterly and annual deadlines — missed filings can cause penalties or S Corp status loss.

How to Claim “Reasonable Cause” for a Late-Filed Form 2553

1. What is Form 2553?

Form 2553 is how a corporation or LLC elects S Corporation tax status with the IRS.

2. What Counts as “Reasonable Cause”?

The IRS defines reasonable cause as circumstances beyond your control that caused you to miss the filing deadline — and that you acted promptly to fix the problem once discovered.

Common acceptable reasons include:

3. What Is Not Reasonable Cause

The IRS will likely reject reasons such as:

4. The IRS “Relief for Late Elections” Rule

The IRS provides automatic relief for late-filed S Corp elections under Revenue Procedure 2013-30, if you meet all of these:

  1. Intended to be an S Corporation as of the intended effective date.
  2. Had reasonable cause for not filing Form 2553 on time.
  3. Acted diligently to correct the mistake once discovered.
  4. Have not filed a tax return inconsistent with S Corp status.

If you qualify, the IRS will backdate your election to your intended start date.

5. How to Claim Reasonable Cause on Form 2553

When filing late, you must:

  1. Write “Filed Pursuant to Rev. Proc. 2013-30” at the top of Form 2553.
  2. Complete the form normally.
  3. In Part I, Line I (Reason for late filing), write “See attached statement.”
  4. Attach a Reasonable Cause Statement — this is a separate letter that includes:

Example Reasonable Cause Statement:

On [intended effective date], the corporation intended to be classified as an S Corporation. The failure to file Form 2553 on time was due to reliance on advice from our tax preparer that the election would be automatic upon formation. We first became aware of the missed filing on [date discovered] and are submitting this Form 2553 immediately. Since [intended effective date], the corporation has met all the requirements of S Corporation status, and all shareholders have reported their income consistent with S Corporation treatment on their tax returns. The failure to timely file was inadvertent and not due to willful neglect.

  1. Mail Form 2553 and your statement to the correct IRS address listed in the instructions.

6. Tips for Approval

Reasonable Cause Statement for Late Form 2553 Filing

Filed Pursuant to Rev. Proc. 2013-30

[Your Corporation/LLC Name]
 [EIN: XX-XXXXXXX]
 [Business Address]

Intended Effective Date of S Corporation Election: [MM/DD/YYYY]

Statement of Reasonable Cause

On the intended effective date above, [Corporation/LLC Name] intended to be classified as an S Corporation. The failure to timely file Form 2553 was due to [brief but specific explanation of reason — see examples below].

We first became aware of the missed filing on [date discovered] and have acted promptly to correct the mistake by submitting this Form 2553 immediately.

Since the intended effective date, the corporation has met all the eligibility requirements to be treated as an S Corporation under Internal Revenue Code §1361(b). All shareholders have reported their income, deductions, and credits consistent with S Corporation treatment on all affected federal tax returns.

This failure to file timely was inadvertent and not due to willful neglect. The corporation requests relief for a late S Corporation election under Rev. Proc. 2013-30.

Examples of How to Fill the “Reason” Section:

Signed:

[Name], Title
 Date: ___________

[Name], Shareholder
 Date: ___________

(Repeat signature lines for all shareholders)

✅ How to Use This Template:

  1. Type or handwrite your specific details in the placeholders.
  2. Attach this statement behind your completed Form 2553.
  3. Write “Filed Pursuant to Rev. Proc. 2013-30” at the top of both the form and this letter.
  4. Mail to the IRS address listed in the Form 2553 instructions.

Health Insurance for S Corp Owners

Retirement Plan Options for S-Corporation Owners

A Guide to SEP-IRA, Solo 401(k), and SIMPLE IRA

If you own an S corporation (or are considering electing S-corp taxation), choosing the right retirement plan is an important planning decision. Unlike sole proprietors or partnerships, S-corp retirement contributions are generally based on W-2 wages, not K-1 income, which makes plan selection especially important.

This guide compares the three most common retirement plan options for S-corp owners: SEP-IRA, Solo 401(k), and SIMPLE IRA.

Key Rule for All S-Corp Owners (Important)

For S-corp owners who work in the business:

This means that how much you pay yourself in wages directly affects how much you can contribute.

SEP-IRA

Overview

A SEP-IRA is an employer-only retirement plan that is simple to set up and administer.

Contribution Rules

Pros

Cons

Best For

Solo 401(k)

Overview

A Solo 401(k) (also called an Individual 401(k)) is designed for business owners with no employees other than the owner and their spouse.

Contribution Rules

Two components:

  1. Employee deferral (owner as employee)

  1. Employer profit-sharing contribution

Pros

Cons

Best For

SIMPLE IRA

Overview

A SIMPLE IRA is designed for small businesses with employees and offers a balance between simplicity and required contributions.

Contribution Rules

Pros

Cons

Best For

Side-by-Side Comparison

Feature

SEP-IRA

Solo 401(k)

SIMPLE IRA

Based on W-2 wages only

✅

✅

✅

Employee deferrals

❌

✅

✅

Employer contribution

✅

✅

✅

Max flexibility

❌

✅

❌

Required employer contributions

❌

❌

✅

Works with employees

✅

❌ (except spouse)

✅

Admin complexity

Low

Moderate

Low

Best for maximizing owner savings

❌

✅

❌

Common Planning Takeaways for S-Corp Owners

Late S Corp elections

Forming an entity late in the year but elect S-corp status effective January 1 of the same year

This is allowed, but only if the IRS lets you choose a retroactive effective date for the S-corp election.

How it works

  1. You form a corporation (or LLC electing to be taxed as a corporation) in December 2025, for example.
  2. You file Form 2553 and request S-corp status effective January 1, 2025.
  3. The IRS can accept this retroactive election if:

What this gives you

This mismatch is allowed for tax purposes, but you must maintain clean records.

But you cannot treat the corporation as legally existing before you formed it

You cannot retroactively create a corporation under state law.
So anything you did earlier in the year:

This is normal and common.

Important! You cannot contribute income and expenses earlier than the election effective date, but you can contribute income and expenses earlier than the formation date

Practical Issues & Limitations

Even though tax law allows a retroactive S-corp election, you may face these challenges:

1. Payroll requirements

If the S-corp is retroactive to Jan 1, you must:

We recommend filing $0 payrolls for the quarter(s) before formation.

2. State-level issues

Some states don’t allow retroactive corporation formation for state tax purposes.
You may be required to:

3. Income before formation

All income received before the corporation’s formation legally belonged to you, so if you want it to be treated as the corporation’s income for tax purposes, you need to document it as being assigned or contributed when the corporation is formed.

Most realistic answer for most people

If you want the S-corp to apply for the whole year, the workable path is:

Form the entity (even in December) → file Form 2553 with a January 1 effective date → use late-election relief → run full-year payroll.

It’s allowed. It’s just an administrative headache.

If you want a simpler option

You can also:

This avoids late-election filings.

Guide: Filing Form 2553 Late With a January 1 Effective Date

This guide assumes:

The good news:
Rev. Proc. 2013-30 allows generous late S-corp election relief with a simple statement—no special IRS ruling, no fee.

1. What You Must Include in a Late Form 2553

Your late Form 2553 must include:

A. Completed Form 2553

B. A “Reasonable Cause” Statement

This is required when filing late.
It can be attached as:

It must contain these four core elements:

  1. The entity intended to be an S corporation as of Jan 1
  2. The cause for why Form 2553 was filed late
  3. Affirmation that the corporation and shareholders reported income consistently with S-corp treatment
  4. Statement requesting relief under Rev. Proc. 2013-30

2. IRS-Accepted “Reasonable Causes” (Pick One or Combine)

Below is a list of causes the IRS routinely accepts:

Common + Accepted Causes

Avoid as Reasonable Cause

 3. Model “Reasonable Cause” Language You Can Copy

Choose one of the following templates depending on your situation.

Template 1 — Simple Administrative Oversight (Most Common)

Reasonable Cause Statement – Form 2553 (Late Election)

The corporation intended to be classified as an S corporation effective January 1, 20XX, and has operated as such since that date. The failure to file Form 2553 on time was due to an inadvertent administrative oversight during the entity formation process. The shareholders reasonably believed the election had been or would be filed by the tax preparer, and only recently discovered that the form had not been submitted.

Since January 1, 20XX, the corporation and all shareholders have consistently reported income, deductions, and credits as if the S corporation election were valid. The corporation and its shareholders request relief for a late S corporation election under Rev. Proc. 2013-30.

Template 2 — Tax Preparer or Legal Advisor Miscommunication

The shareholders intended S corporation status as of January 1, 20XX. The timely filing of Form 2553 was not completed due to a misunderstanding between the corporation and its tax preparer/legal advisor regarding who would submit the election. The corporation acted in good faith and believed the form had been filed.

The corporation and shareholders have consistently treated the entity as an S corporation since January 1, 20XX. Relief is requested under Rev. Proc. 2013-30 for the late filing.

Template 3 — Belief that Formation or EIN Application Included the Election

The corporation intended to elect S corporation status as of January 1, 20XX. The shareholders believed that either the filing of the Articles of Incorporation or the EIN application constituted or initiated the S corporation election. The error was discovered only upon later review with a tax professional.

The corporation and shareholders have consistently treated the entity as an S corporation since January 1, 20XX. Relief is requested under Rev. Proc. 2013-30 for the late election.

Template 4 — Illness or Personal Difficulty

The corporation intended to elect S corporation status effective January 1, 20XX. The responsible individual for the filing experienced significant illness/personal hardship during the filing period, resulting in the late submission of Form 2553.

The corporation and shareholders have consistently treated the entity as an S corporation since January 1, 20XX. The corporation respectfully requests late election relief under Rev. Proc. 2013-30.

 4. How to Assemble & File the Package

Option A — Paper Filing (most common)

Send:

  1. Form 2553 (completed and signed)
  2. Reasonable Cause Statement (attached)

To the IRS address for your state (listed in the Form 2553 instructions).

Option B — Fax Filing

Allowed by IRS.
Faster than mail.

Option C — Attach to First 1120-S

If filing the initial 1120-S late-election package:

(Still recommended to send 2553 separately too.)

5. What Happens After You File

The IRS will issue:

Approval rates for properly prepared late elections under Rev. Proc. 2013-30 are extremely high.

 6. Quick Checklist

Before sending Form 2553 late with Jan 1 effective date:

Close an LLC

Big picture (one sentence)

1️⃣ Certificate of Dissolution (Form LLC-3)

When it is required

File a Certificate of Dissolution only if:

What it does

Common examples

2️⃣ Certificate of Cancellation (Form LLC-4/7)

When it is required

File a Certificate of Cancellation when:

This is the form that actually ends the entity.

3️ When you can skip dissolution and file only cancellation

You may file only a Certificate of Cancellation (no LLC-3) if any one of the following applies:

✔️ A. Single-member LLC

✔️ B. Multi-member LLC with unanimous approval

✔️ C. Short-form cancellation (LLC-4/8)

You may use LLC-4/8 if all are true:

4️ Practical decision table

Situation

File LLC-3?

File LLC-4/7?

Single-member LLC

❌ No

✅ Yes

Multi-member, unanimous consent

❌ No

✅ Yes

Multi-member, not unanimous

✅ Yes

✅ Yes

Court-ordered dissolution

✅ Yes

✅ Yes

Short-form (LLC-4/8) eligible

❌ No

✅ Yes

5️ Timing and tax coordination (important)

A “final” tax return alone does not terminate the LLC.

Sales tax for CA nonprofits

Sales Tax for CA Nonprofits

What states do I have nexus in?

https://www.salestaxinstitute.com/resources/economic-nexus-state-guide

Here’s a clear breakdown of California sales tax rules for nonprofits that produce and sell their own goods. The rules are more nuanced than many people expect.

1. Baseline Rule

In California, nonprofits are not automatically exempt from sales tax.

This applies even if:

So the starting assumption is tax applies—unless a specific exemption applies.

2. Exemption: “Occasional Sales” by Nonprofits

A nonprofit may avoid collecting sales tax only if their sales qualify as occasional sales.

To qualify, all must be true:
No more than 2 events per year where taxable items are sold
The organization does not operate as a store, gift shop, or ongoing seller
 It is not required to hold a seller’s permit for other reasons

If these are satisfied:

But this exemption is very limited.
Regular or continuous sales do not qualify.

3. Exemption: Sales of homemade or handcrafted items by the nonprofit’s volunteers

This is the rule you’re asking about.

California has a narrow exemption for items produced directly by volunteers of the organization without paid labor.

To qualify for exemption:
The nonprofit must make the items itself,
The labor must be unpaid, and
The organization must not be buying finished products for resale

📌 Key point
 If paid labor is involved at any stage of production, the exemption is usually lost.

So, does designing T-shirts but paying a printer count?

No.
 If the nonprofit pays a company to manufacture/print the shirts, the shirts are not considered “made” by the nonprofit.”

That means:
The nonprofit must register for a seller’s permit
Must collect and remit sales tax on sales of those shirts

Even if:

Does working with a designer and a printer count?

If either the designer or printer is paid:
❌ This is treated as buying finished product for resale
❌ The exemption does not apply
✅ The nonprofit must collect sales tax

What does qualify?

Example:

Those goods can be sold without sales tax, if not sold more than twice per year.

If sales happen regularly (like an ongoing online shop or church gift store), a seller’s permit is required even if volunteers make the goods.

4. So what does the nonprofit need to do?

If goods are not entirely volunteer-made:

There is no deduction or exemption in this case.

If goods are 100% volunteer-made AND sold no more than two days per year:

If volunteer-made but sold regularly:

Most nonprofits with printed T-shirts do not qualify for the exemption.

5. Source Regulations (plain language)

Quick summary in plain English

Scenario

Sales Tax Required?

Seller’s Permit Required?

Nonprofit designs shirts but pays a printer

✅ Yes

✅ Yes

Nonprofit hires a designer and printer

✅ Yes

✅ Yes

Nonprofit sells items made by volunteers, no paid labor, and only 2 days per year

❌ No

❌ No

Nonprofit sells volunteer-made items year-round (online or in person)

Possibly ❌ tax on items, but ✅ Seller’s permit likely required

Nonprofit runs a shop, booth, or regular merch table

✅ Yes

✅ Yes

Donation guide for nonprofits

Donation guide for nonprofits

Capital gains offset calculator for donations

Donor Acknowledgement for Nonprofits: Key IRS Rules & When They Apply

1. Record-keeping for any monetary contribution (even small ones)

2. Contemporaneous Written Acknowledgment for $250 or more (cash or noncash)

If a donor wants to claim a deduction for a contribution (cash or noncash) of $250 or more, the donor must have a “contemporaneous written acknowledgment” from the charity. IRS+2IRS+2

“Contemporaneous” means the acknowledgment must be received by the donor by the earlier of:

What must the acknowledgment include: IRS+2IRS+2

Additionally, a simple canceled check or bank record is not sufficient for donations of $250 or more. Young Moore Law+2Kean Foundation+2

If multiple donations of $250 or more are made in a year, the charity may either provide separate acknowledgments or a single acknowledgment that lists each contribution and date. IRS+2IRS+2

3. Additional Requirements for Noncash Contributions (Property)

4. “Quid Pro Quo” Contributions — When Donor Receives Goods or Services in Exchange

If a donor makes a payment and receives goods or services in return (e.g. gala ticket, dinner, membership benefits, event admission), this is considered a “quid pro quo contribution.” The rules: IRS+3IRS+3Tenenbaum Law Group PLLC+3

5. Timing / When Acknowledgments/Disclosures Should Be Provided

Summary Table of Key Requirements

Situation / Gift Type

What Donor Must Keep / Obtain

What Charity Must Provide

Notes / Additional Rules

Cash or check (any amount)

Bank record / cancelled check / credit-card statement / written comm. showing name, date, amount

—

Solid proof required even if under $250. IRS+1

Cash or noncash gift ≥ $250 (single contribution)

Contemporaneous written acknowledgment (CWA) from charity

—

A canceled check or bank record not sufficient. IRS+2IRS+2

Noncash gift $250–$500 (single)

CWA including description (not value) of property, plus usual info about goods/services given in return (if any)

—

Donor must also keep records if claiming deduction. IRS+2LawHelp+2

Noncash gift > $500 (single)

CWA + donor must file Form 8283 w/ tax return; if > $5,000 generally need qualified appraisal

— (charity signs 8283 if >$5,000)

More detailed reporting required. IRS+2LawHelp+2

Payment to charity + donor receives goods/services (quid pro quo) — payment > $75

Donor must still keep records; may claim deduction only for excess over FMV of benefit

Written disclosure from charity stating deductible portion and good-faith estimate of benefit’s FMV

If charity fails to disclose, penalty may apply. Tenenbaum Law Group PLLC+2IRS+2

Payment + benefit — payment ≤ $75

Donor deduction limited to payment minus benefit value; no required disclosure by charity (unless benefit isn’t “insubstantial”)

—

Charity usually doesn’t have a legal requirement to acknowledge — but donors still need records. Pro Bono Partnership of Ohio+2Nonprofit Accounting Basics+2

 Primary IRS Guidance Documents (References)

Additional Notes & Common Pitfalls

Donor acknowledgements

  1. Standard donation ≥ $250 (no goods/services provided)
  2. Standard donation ≥ $250 (goods/services NOT provided, but includes optional language for religious orgs)
  3. Quid-pro-quo donation > $75 (donor receives goods/services; required disclosure)

All templates follow IRS Publication 1771 and Publication 526 requirements.

 1. Standard Contemporaneous Written Acknowledgment (No Goods/Services Provided)

Use this for cash or non-cash gifts of $250 or more when nothing of value was given back to the donor.

Subject: Thank You for Your Contribution

Dear [Donor Name],

Thank you for your generous contribution to [Organization Name], a qualified 501(c)(3) charitable organization (EIN: [EIN Number]).

Contribution Details

Goods or Services Provided:
 No goods or services were provided in exchange for your contribution.

Please retain this acknowledgment for your tax records. A contemporaneous written acknowledgment is required by the IRS for any single contribution of $250 or more.

With gratitude,
[Name]
 [Title]
 [Organization Name]
 [Address]
 [Email / Phone]

 2. Standard Acknowledgment (For Religious Organizations)

Use when ONLY “intangible religious benefits” were provided.

Subject: Thank You for Your Contribution

Dear [Donor Name],

Thank you for supporting [Organization Name] with your contribution of $[Amount] made on [Date].

Goods or Services Provided:
 The only goods or services provided were intangible religious benefits, as defined by the IRS.

No other goods or services were provided in exchange for your gift.

Please keep this acknowledgment for your tax records.

Blessings,
[Name / Title]

3. Quid Pro Quo Contribution Disclosure (Payment > $75 With Goods/Services Provided)

Use this when donor receives something in return — e.g., gala dinner, event ticket, membership package.

Subject: Required Disclosure for Your Contribution

Dear [Donor Name],

Thank you for your contribution to [Organization Name].

Contribution Details

Goods or Services Provided in Exchange:
 In return for your contribution, you received the following goods or services:

Deductible Amount:
 Under IRS rules, the amount of your contribution that is deductible for federal income tax purposes is limited to the excess of your payment over the fair market value of the goods or services provided.

Deductible portion:
 $[Total Amount] – $[FMV] = $[Deductible Amount]

This written disclosure is required by IRS rules for quid-pro-quo contributions exceeding $75.

Thank you for your support,
[Name]
 [Title]
 [Organization Name]

 Optional: Add Form 8283 (Non-Cash > $500) Language

If donor contributes non-cash property over $500, add:

“Because your non-cash contribution may require IRS Form 8283 for your tax return, please let us know if you need the charitable organization signature for Section B (required only for contributions valued over $5,000). We do not provide valuation for donated property.”

Taxes with RA

Tax Preparation with Radical Accountant

Step 1: Get to know each other

and/or

Step 2: We get paid!

or

Step 3: We get your info!

or

or

Step 4: You review

or

Step 5: You esign and we file online!

Tax years 2021 and prior must use snail mail. For an extra $50 per return, we will print documents and mail them to you with a prepaid label so you can sign and drop back in the mail!

Bookkeeping with RA

Bookkeeping with Radical Accountant

Step 1: Get to know each other

and/or

Step 2: We get paid!

or

Step 3: We have an initial consultation

What to have ready for this:

Step 4: We send you a bookkeeping guide

Step 5: If you need more support, we’ll figure out next steps

OR

Biz compliance with RA

Business Compliance with Radical Accountant

Step 1: Get to know each other

and/or

Step 2: We get paid!

or

Step 3: We have an initial consultation

or

What to have ready for this call:

Step 4: We send you a business compliance guide

Step 5: If you need more support, we’ll figure out next steps

or

Ongoing business compliance support list of offerings:

Pricing varies based on complexity of services provided

Entity formation includes:

Pricing: $500 for formation in one state + $300 each additional state registered simultaneously

Additional fee for sales tax and sellers permit registration

Employer registration includes:

Pricing: $250 for formation in one state + $150 each additional state registered simultaneously