diff --git a/waspc/.gitignore b/waspc/.gitignore
index f0b0addec0..e2c6093a0e 100644
--- a/waspc/.gitignore
+++ b/waspc/.gitignore
@@ -16,3 +16,6 @@ module-graph.png
 
 # macOS related
 .DS_Store
+
+# apps for testing
+examples/ignored
diff --git a/waspc/data/Cli/templates/skeleton/tsconfig.json b/waspc/data/Cli/templates/skeleton/tsconfig.json
index 506b0e2fc1..8341c73377 100644
--- a/waspc/data/Cli/templates/skeleton/tsconfig.json
+++ b/waspc/data/Cli/templates/skeleton/tsconfig.json
@@ -40,6 +40,9 @@
       // Source 2: https://github.com/testing-library/jest-dom/issues/546#issuecomment-1889884843
       "node_modules/@types"
     ],
+    // Wasp internally uses TypeScript's project references to compile the
+    // code. Referenced projects may not disable emit, so we must specify an
+    // outDir.
     "outDir": ".wasp/out/user"
   },
   "include": [
diff --git a/waspc/data/Generator/templates/react-app/tsconfig.json b/waspc/data/Generator/templates/react-app/tsconfig.json
index a4817e8940..d2b6b1f828 100644
--- a/waspc/data/Generator/templates/react-app/tsconfig.json
+++ b/waspc/data/Generator/templates/react-app/tsconfig.json
@@ -1,4 +1,7 @@
 {
+  // Wasp's TS config arrangement is based on Vite's tsconfig arrangement We
+  // have an extra top-level file because the two projects are independent. The
+  // empty files array is necessary to allow `noEmit` in referenced projects.
   "files": [],
   "references": [
     { "path": "./tsconfig.app.json" },
diff --git a/waspc/data/Generator/templates/server/tsconfig.json b/waspc/data/Generator/templates/server/tsconfig.json
index 6d0f513a17..64133aead4 100644
--- a/waspc/data/Generator/templates/server/tsconfig.json
+++ b/waspc/data/Generator/templates/server/tsconfig.json
@@ -12,6 +12,10 @@
     // make project references work for the TS config), then I believe the
     // correct configuration is "rootDir": "." (the project reference should
     // take care of the user code), but we should double-check.
+    //
+    // Before changing this property, ensure you're aware of the implications:
+    //  - https://github.com/wasp-lang/wasp/pull/1584#discussion_r1404019301
+    //  - https://github.com/wasp-lang/wasp/pull/1713/files#diff-58191eecd9cc55f71c73de89420df8b1866dce38ad35f4ef0f6f8874616eda77R32
     "rootDir": ".",
     // Overriding this because we want to use top-level await
     "module": "esnext",
@@ -30,6 +34,6 @@
     "src"
   ],
   "references": [
-    { "path": "../../../tsconfig.json" }
+    { "path": "{= srcTsConfigPath =}" }
   ]
 }
diff --git a/waspc/src/Wasp/Generator/ExternalConfig/TsConfig.hs b/waspc/src/Wasp/Generator/ExternalConfig/TsConfig.hs
index 4790700385..cb62318327 100644
--- a/waspc/src/Wasp/Generator/ExternalConfig/TsConfig.hs
+++ b/waspc/src/Wasp/Generator/ExternalConfig/TsConfig.hs
@@ -73,7 +73,7 @@ validateFieldValue fullyQualifiedFieldName expectedValue actualValue =
       unwords
         [ "Invalid value for the",
           "\"" ++ show fullyQualifiedFieldName ++ "\"",
-          "field in tsconfig.json, you must set it to:",
+          "field in TS config, you must set it to:",
           showAsJsValue expected ++ "."
         ]
 
@@ -81,13 +81,13 @@ validateFieldValue fullyQualifiedFieldName expectedValue actualValue =
       unwords
         [ "The",
           "\"" ++ show fullyQualifiedFieldName ++ "\"",
-          "field in tsconfig.json must be unset."
+          "field in TS Config must be left unspecified."
         ]
 
     makeMissingFieldErrorMessage expected =
       unwords
         [ "The",
           "\"" ++ show fullyQualifiedFieldName ++ "\"",
-          "field is missing in tsconfig.json, you must set it to:",
+          "field is missing in TS config, you must set it to:",
           showAsJsValue expected ++ "."
         ]
diff --git a/waspc/src/Wasp/Generator/SdkGenerator/CrudG.hs b/waspc/src/Wasp/Generator/SdkGenerator/CrudG.hs
index 5bf7354974..dfa6407166 100644
--- a/waspc/src/Wasp/Generator/SdkGenerator/CrudG.hs
+++ b/waspc/src/Wasp/Generator/SdkGenerator/CrudG.hs
@@ -21,7 +21,7 @@ import Wasp.Generator.FileDraft (FileDraft)
 import qualified Wasp.Generator.JsImport as GJI
 import Wasp.Generator.Monad (Generator)
 import qualified Wasp.Generator.SdkGenerator.Common as C
-import Wasp.Generator.SdkGenerator.Server.OperationsGenerator (extImportToJsImport)
+import Wasp.Generator.SdkGenerator.JsImport (extImportToJsImport)
 
 genCrud :: AppSpec -> Generator [FileDraft]
 genCrud spec =
diff --git a/waspc/src/Wasp/Generator/SdkGenerator/EnvValidation.hs b/waspc/src/Wasp/Generator/SdkGenerator/EnvValidation.hs
index d6d5c163d8..5125a6cac7 100644
--- a/waspc/src/Wasp/Generator/SdkGenerator/EnvValidation.hs
+++ b/waspc/src/Wasp/Generator/SdkGenerator/EnvValidation.hs
@@ -19,7 +19,7 @@ import Wasp.Generator.FileDraft (FileDraft)
 import qualified Wasp.Generator.JsImport as GJI
 import Wasp.Generator.Monad (Generator)
 import qualified Wasp.Generator.SdkGenerator.Common as C
-import Wasp.Generator.SdkGenerator.Server.OperationsGenerator (extImportToJsImport)
+import Wasp.Generator.SdkGenerator.JsImport (extImportToJsImport)
 import qualified Wasp.Generator.ServerGenerator.Common as Server
 import qualified Wasp.Generator.WebAppGenerator.Common as WebApp
 import qualified Wasp.Project.Db as Db
diff --git a/waspc/src/Wasp/Generator/SdkGenerator/JsImport.hs b/waspc/src/Wasp/Generator/SdkGenerator/JsImport.hs
new file mode 100644
index 0000000000..944886b9dd
--- /dev/null
+++ b/waspc/src/Wasp/Generator/SdkGenerator/JsImport.hs
@@ -0,0 +1,38 @@
+module Wasp.Generator.SdkGenerator.JsImport
+  ( extImportToJsImport,
+    extOperationImportToImportJson,
+  )
+where
+
+import qualified Data.Aeson as Aeson
+import Data.Maybe (fromJust)
+import StrongPath ((</>))
+import qualified StrongPath as SP
+import qualified Wasp.AppSpec.ExtImport as EI
+import Wasp.Generator.Common (dropExtensionFromImportPath)
+import qualified Wasp.Generator.JsImport as GJI
+import qualified Wasp.Generator.SdkGenerator.Common as C
+import Wasp.JsImport (JsImport (..), JsImportPath (..))
+import qualified Wasp.JsImport as JI
+
+extImportToJsImport :: EI.ExtImport -> JsImport
+extImportToJsImport extImport@(EI.ExtImport extImportName extImportPath) =
+  JsImport
+    { _path = ModuleImportPath importPath,
+      _name = importName,
+      _importAlias = Just $ EI.importIdentifier extImport ++ "_ext"
+    }
+  where
+    importPath = C.makeSdkImportPath $ dropExtensionFromImportPath $ extCodeDirP </> SP.castRel extImportPath
+    extCodeDirP = fromJust $ SP.relDirToPosix C.extSrcDirInSdkRootDir
+    importName = GJI.extImportNameToJsImportName extImportName
+
+extOperationImportToImportJson :: EI.ExtImport -> Aeson.Value
+extOperationImportToImportJson =
+  GJI.jsImportToImportJson
+    . Just
+    . applyExtImportAlias
+    . extImportToJsImport
+  where
+    applyExtImportAlias jsImport =
+      jsImport {_importAlias = Just $ JI.getImportIdentifier jsImport ++ "_ext"}
diff --git a/waspc/src/Wasp/Generator/SdkGenerator/Server/OperationsGenerator.hs b/waspc/src/Wasp/Generator/SdkGenerator/Server/OperationsGenerator.hs
index e22ca0141f..6652f54389 100644
--- a/waspc/src/Wasp/Generator/SdkGenerator/Server/OperationsGenerator.hs
+++ b/waspc/src/Wasp/Generator/SdkGenerator/Server/OperationsGenerator.hs
@@ -1,8 +1,7 @@
 {-# LANGUAGE TypeApplications #-}
 
 module Wasp.Generator.SdkGenerator.Server.OperationsGenerator
-  ( extImportToJsImport,
-    serverOperationsDirInSdkRootDir,
+  ( serverOperationsDirInSdkRootDir,
     genOperations,
   )
 where
@@ -10,25 +9,22 @@ where
 import Data.Aeson (object, (.=))
 import qualified Data.Aeson as Aeson
 import Data.List (nub)
-import Data.Maybe (fromJust, fromMaybe)
+import Data.Maybe (fromMaybe)
 import StrongPath (Dir, Dir', File', Path', Rel, reldir, relfile, (</>))
 import qualified StrongPath as SP
 import Wasp.AppSpec (AppSpec)
 import qualified Wasp.AppSpec as AS
 import qualified Wasp.AppSpec.Action as AS.Action
-import qualified Wasp.AppSpec.ExtImport as EI
 import Wasp.AppSpec.Operation (getName)
 import qualified Wasp.AppSpec.Operation as AS.Operation
 import qualified Wasp.AppSpec.Query as AS.Query
 import Wasp.AppSpec.Valid (isAuthEnabled)
-import Wasp.Generator.Common (dropExtensionFromImportPath, makeJsonWithEntityData)
+import Wasp.Generator.Common (makeJsonWithEntityData)
 import Wasp.Generator.FileDraft (FileDraft)
-import qualified Wasp.Generator.JsImport as GJI
 import Wasp.Generator.Monad (Generator)
 import Wasp.Generator.SdkGenerator.Common (SdkTemplatesDir, getOperationTypeName, mkTmplFdWithData, serverTemplatesDirInSdkTemplatesDir)
 import qualified Wasp.Generator.SdkGenerator.Common as C
-import Wasp.JsImport (JsImport (..), JsImportPath (..))
-import qualified Wasp.JsImport as JI
+import Wasp.Generator.SdkGenerator.JsImport (extOperationImportToImportJson)
 import Wasp.Util (toUpperFirst)
 
 data ServerOpsTemplatesDir
@@ -153,26 +149,3 @@ getOperationTmplData isAuthEnabledGlobally operation =
         .= maybe [] (map (makeJsonWithEntityData . AS.refName)) (AS.Operation.getEntities operation),
       "usesAuth" .= fromMaybe isAuthEnabledGlobally (AS.Operation.getAuth operation)
     ]
-
-extOperationImportToImportJson :: EI.ExtImport -> Aeson.Value
-extOperationImportToImportJson =
-  GJI.jsImportToImportJson
-    . Just
-    . applyExtImportAlias
-    . extImportToJsImport
-
-applyExtImportAlias :: JsImport -> JsImport
-applyExtImportAlias jsImport =
-  jsImport {_importAlias = Just $ JI.getImportIdentifier jsImport ++ "_ext"}
-
-extImportToJsImport :: EI.ExtImport -> JsImport
-extImportToJsImport extImport@(EI.ExtImport extImportName extImportPath) =
-  JsImport
-    { _path = ModuleImportPath importPath,
-      _name = importName,
-      _importAlias = Just $ EI.importIdentifier extImport ++ "_ext"
-    }
-  where
-    importPath = C.makeSdkImportPath $ dropExtensionFromImportPath $ extCodeDirP </> SP.castRel extImportPath
-    extCodeDirP = fromJust $ SP.relDirToPosix C.extSrcDirInSdkRootDir
-    importName = GJI.extImportNameToJsImportName extImportName
diff --git a/waspc/src/Wasp/Generator/SdkGenerator/WebSocketGenerator.hs b/waspc/src/Wasp/Generator/SdkGenerator/WebSocketGenerator.hs
index 8feeed8e02..2603cc8700 100644
--- a/waspc/src/Wasp/Generator/SdkGenerator/WebSocketGenerator.hs
+++ b/waspc/src/Wasp/Generator/SdkGenerator/WebSocketGenerator.hs
@@ -18,7 +18,7 @@ import Wasp.Generator.FileDraft (FileDraft)
 import qualified Wasp.Generator.JsImport as GJI
 import Wasp.Generator.Monad (Generator)
 import qualified Wasp.Generator.SdkGenerator.Common as C
-import Wasp.Generator.SdkGenerator.Server.OperationsGenerator (extImportToJsImport)
+import Wasp.Generator.SdkGenerator.JsImport (extImportToJsImport)
 import qualified Wasp.Generator.WebSocket as AS.WS
 
 genWebSockets :: AppSpec -> Generator [FileDraft]
diff --git a/waspc/src/Wasp/Generator/ServerGenerator.hs b/waspc/src/Wasp/Generator/ServerGenerator.hs
index 58261acd10..3f760f739c 100644
--- a/waspc/src/Wasp/Generator/ServerGenerator.hs
+++ b/waspc/src/Wasp/Generator/ServerGenerator.hs
@@ -19,6 +19,7 @@ import Data.Maybe
   )
 import StrongPath
   ( Dir,
+    File,
     File',
     Path,
     Path',
@@ -28,6 +29,7 @@ import StrongPath
     relfile,
     (</>),
   )
+import qualified StrongPath as SP
 import Wasp.AppSpec (AppSpec)
 import qualified Wasp.AppSpec as AS
 import qualified Wasp.AppSpec.App as AS.App
@@ -57,6 +59,7 @@ import Wasp.Generator.ServerGenerator.OperationsG (genOperations)
 import Wasp.Generator.ServerGenerator.OperationsRoutesG (genOperationsRoutes)
 import Wasp.Generator.ServerGenerator.WebSocketG (depsRequiredByWebSockets, genWebSockets, mkWebSocketFnImport)
 import qualified Wasp.Node.Version as NodeVersion
+import Wasp.Project.Common (SrcTsConfigFile, waspProjectDirFromAppComponentDir)
 import Wasp.Project.Db (databaseUrlEnvVarName)
 import qualified Wasp.SemanticVersion as SV
 import Wasp.Util ((<++>))
@@ -67,7 +70,7 @@ genServer spec =
     [ genFileCopy [relfile|README.md|],
       genFileCopy [relfile|nodemon.json|],
       genRollupConfigJs spec,
-      genTsConfigJson,
+      genTsConfigJson spec,
       genPackageJson spec (npmDepsForWasp spec),
       genNpmrc,
       genGitignore
@@ -101,17 +104,21 @@ genDotEnv spec =
 dotEnvInServerRootDir :: Path' (Rel ServerRootDir) File'
 dotEnvInServerRootDir = [relfile|.env|]
 
-genTsConfigJson :: Generator FileDraft
-genTsConfigJson = do
+genTsConfigJson :: AppSpec -> Generator FileDraft
+genTsConfigJson spec = do
   return $
     C.mkTmplFdWithDstAndData
       (C.asTmplFile [relfile|tsconfig.json|])
       (C.asServerFile [relfile|tsconfig.json|])
       ( Just $
           object
-            [ "majorNodeVersion" .= show (SV.major NodeVersion.oldestWaspSupportedNodeVersion)
+            [ "majorNodeVersion" .= show (SV.major NodeVersion.oldestWaspSupportedNodeVersion),
+              "srcTsConfigPath" .= SP.fromRelFile srcTsConfigPath
             ]
       )
+  where
+    srcTsConfigPath :: Path' (Rel C.ServerRootDir) (File SrcTsConfigFile) =
+      waspProjectDirFromAppComponentDir </> AS.srcTsConfigPath spec
 
 genPackageJson :: AppSpec -> N.NpmDepsForWasp -> Generator FileDraft
 genPackageJson spec waspDependencies = do
diff --git a/waspc/src/Wasp/Project/ExternalConfig/TsConfig.hs b/waspc/src/Wasp/Project/ExternalConfig/TsConfig.hs
index 3423f9ce35..072c372042 100644
--- a/waspc/src/Wasp/Project/ExternalConfig/TsConfig.hs
+++ b/waspc/src/Wasp/Project/ExternalConfig/TsConfig.hs
@@ -7,7 +7,7 @@ import Control.Arrow (left)
 import Control.Monad.Except (ExceptT (ExceptT), runExceptT, throwError)
 import qualified Data.ByteString.Lazy.UTF8 as BS
 import Data.Either.Extra (maybeToEither)
-import StrongPath (Abs, Dir, File, Path', Rel, toFilePath)
+import StrongPath (Abs, Dir, File, Path', Rel, basename, fromRelFile, toFilePath)
 import qualified Wasp.ExternalConfig.TsConfig as T
 import Wasp.Generator.ExternalConfig.TsConfig (validateSrcTsConfig)
 import Wasp.Project.Common
@@ -15,6 +15,7 @@ import Wasp.Project.Common
     WaspProjectDir,
     findFileInWaspProjectDir,
   )
+import Wasp.Util (indent)
 import qualified Wasp.Util.IO as IOUtil
 import Wasp.Util.Json (parseJsonWithComments)
 
@@ -37,4 +38,7 @@ readTsConfigFile :: Path' Abs (File f) -> IO (Either String T.TsConfig)
 readTsConfigFile tsConfigFile = do
   tsConfigContent <- IOUtil.readFileBytes tsConfigFile
   parseResult <- parseJsonWithComments . BS.toString $ tsConfigContent
-  return $ left ("Failed to parse tsconfig file: " ++) parseResult
+  return $ left ((errorMessagePrefix ++) . indent 2) parseResult
+  where
+    errorMessagePrefix = "Failed to parse '" ++ baseTsConfigFilePath ++ "':\n"
+    baseTsConfigFilePath = fromRelFile (basename tsConfigFile)
diff --git a/waspc/src/Wasp/Util/IO.hs b/waspc/src/Wasp/Util/IO.hs
index f91aaf8e0e..079994f576 100644
--- a/waspc/src/Wasp/Util/IO.hs
+++ b/waspc/src/Wasp/Util/IO.hs
@@ -29,7 +29,7 @@ import Data.Text (Text)
 import qualified Data.Text.IO as T.IO
 import qualified Data.Text.IO as Text.IO
 import qualified Path.IO as PathIO
-import StrongPath (Abs, Dir, Dir', File, Path', Rel, basename, parseRelDir, parseRelFile, toFilePath, (</>))
+import StrongPath (Abs, Dir, File, Path', Rel, basename, parseRelDir, parseRelFile, toFilePath, (</>))
 import qualified StrongPath as SP
 import qualified StrongPath.Path as SP.Path
 import qualified System.Directory as SD
@@ -66,7 +66,7 @@ listDirectoryDeep absDirPath = do
 -- TODO: write tests.
 
 -- | Lists files and directories at top lvl of the directory.
-listDirectory :: forall d f. Path' Abs (Dir d) -> IO ([Path' (Rel d) (File f)], [Path' (Rel d) Dir'])
+listDirectory :: forall r d f. Path' Abs (Dir r) -> IO ([Path' (Rel r) (File f)], [Path' (Rel r) (Dir d)])
 listDirectory absDirPath = do
   fpRelItemPaths <- SD.listDirectory fpAbsDirPath
   relFilePaths <- filterFiles fpAbsDirPath fpRelItemPaths
@@ -76,12 +76,12 @@ listDirectory absDirPath = do
     fpAbsDirPath :: FilePath
     fpAbsDirPath = toFilePath absDirPath
 
-    filterFiles :: FilePath -> [FilePath] -> IO [Path' (Rel d) (File f)]
+    filterFiles :: FilePath -> [FilePath] -> IO [Path' (Rel r) (File f)]
     filterFiles absDir relItems =
       filterM (SD.doesFileExist . (absDir FilePath.</>)) relItems
         >>= mapM parseRelFile
 
-    filterDirs :: FilePath -> [FilePath] -> IO [Path' (Rel d) Dir']
+    filterDirs :: FilePath -> [FilePath] -> IO [Path' (Rel r) (Dir d)]
     filterDirs absDir relItems =
       filterM (SD.doesDirectoryExist . (absDir FilePath.</>)) relItems
         >>= mapM parseRelDir
diff --git a/waspc/test/AppSpec/ValidTest.hs b/waspc/test/AppSpec/ValidTest.hs
index 7de28824ab..5fbc092722 100644
--- a/waspc/test/AppSpec/ValidTest.hs
+++ b/waspc/test/AppSpec/ValidTest.hs
@@ -6,6 +6,7 @@ import qualified Data.Map as M
 import Data.Maybe (fromJust)
 import Fixtures (systemSPRoot)
 import NeatInterpolation (trimming)
+import StrongPath (relfile)
 import qualified StrongPath as SP
 import Test.Tasty.Hspec
 import qualified Util.Prisma as Util
@@ -489,7 +490,8 @@ spec_AppSpecValid = do
           AS.userDockerfileContents = Nothing,
           AS.configFiles = [],
           AS.devDatabaseUrl = Nothing,
-          AS.customViteConfigPath = Nothing
+          AS.customViteConfigPath = Nothing,
+          AS.srcTsConfigPath = [relfile|tsconfig.json|]
         }
 
     getPrismaSchemaWithConfig restOfPrismaSource =
diff --git a/waspc/test/Generator/WebAppGeneratorTest.hs b/waspc/test/Generator/WebAppGeneratorTest.hs
index 72614b05f5..fee58c56d3 100644
--- a/waspc/test/Generator/WebAppGeneratorTest.hs
+++ b/waspc/test/Generator/WebAppGeneratorTest.hs
@@ -2,6 +2,7 @@ module Generator.WebAppGeneratorTest where
 
 import qualified Data.Map as M
 import Fixtures
+import StrongPath (relfile)
 import qualified StrongPath as SP
 import System.FilePath ((</>))
 import Test.Tasty.Hspec
@@ -64,7 +65,8 @@ spec_WebAppGenerator = do
             AS.userDockerfileContents = Nothing,
             AS.configFiles = [],
             AS.devDatabaseUrl = Nothing,
-            AS.customViteConfigPath = Nothing
+            AS.customViteConfigPath = Nothing,
+            AS.srcTsConfigPath = [relfile|tsconfig.json|]
           }
 
   describe "genWebApp" $ do
diff --git a/waspc/waspc.cabal b/waspc/waspc.cabal
index 006ae96a66..1e7c95660a 100644
--- a/waspc/waspc.cabal
+++ b/waspc/waspc.cabal
@@ -319,6 +319,7 @@ library
     Wasp.Generator.SdkGenerator.CrudG
     Wasp.Generator.SdkGenerator.EmailSender.Providers
     Wasp.Generator.SdkGenerator.EnvValidation
+    Wasp.Generator.SdkGenerator.JsImport
     Wasp.Generator.SdkGenerator.Server.AuthG
     Wasp.Generator.SdkGenerator.Server.OAuthG
     Wasp.Generator.SdkGenerator.Server.CrudG