1st year as sole proprietor, didn't pay qtly taxes, other tax ?'s

[Mrbeardedbigbucks]

Hey tax experts. I'm hoping someone can provide some clarity around paying & filing taxes as a sole proprietor. I know this is lengthy and not that exciting. Hopefully some of you will stick with me here. First, here's some of the information you'll need to understand our tax situation for this year:

I left my full time job in April of this year but still had about 62k gross income but made a full contribution to my 401k plan. This is the first year my wife will have sole proprietor income of roughly 8k by end of the year. We opened a Solo 401k and plan to contribute all of her income to her 401k.  This is also our first year paying for medical insurance on the ACA. I estimated our MAGI to be roughly 35k (once all contributions to 401k's and IRA's are factored in) and we're getting a significant premium tax credit. Our goal is to reduce our MAGI as much as possible to maximize premium tax credits. We will also make full contributions to Traditional IRA's. We have always filed a joint return.

My questions/concerns:

1. We neglected to pay quarterly estimated taxes for her sole proprietor income. We've set aside money for the "self employment taxes" to cover medicare and social security but due to ignorance and poor planning, we assumed we could pay that all at once when we file our taxes. Are we protected against any penalties for not paying quarterly taxes since this is our first year reporting sole proprietor income? I read about the "safe harbor" rules but it's still very unclear.

2. How do we calculate how much she can contribute to her solo 401k plan? Is it as simple as deducting her self employment taxes from her gross income and then the remainder we can contribute to her solo 401k plan?

3. Would Turbo Tax guide us through our situation or should we pay the price for a good accountant? In the past I always used turbo tax with great success because we didn't have a complex tax situation (we filed jointly, mortgage, no kids, income from dividends and interest and no state income taxes). This year, considering the sole proprietor income, ACA premiums & solo 401k, is it wise to pay the price for an accountant? I certainly don't mind spending the time to figure this out but at the same time I don't want to make any costly mistakes.

If you got this far, thank you so much for reading and I greatly appreciate your help. Please feel free to link any resources that might help me answer the above questions. I used the search function on this forum but couldn't find answers that dealt with my specific situation.

[Rural]

You're loooking for info on the penalty for underpayment of estimated tax. The paycheck for the first part of the year likely works in your favor, especially if the two of you file together. If you paid (through withholding), 90% of this year's tax, you won't face a penalty, or if you paid 100% of last year's tax (which sounds unlikely) or if you owe less than $1000.


https://www.irs.gov/taxtopics/tc306

[DoNorth]

this gives a pretty good breakdown.  My wife worked as a sole proprietor for many years around $60K-$70K; we usually  just filed like normal in March and paid then. 

https://financialpanther.com/solo-401k-contribution-limits/

[Mrbeardedbigbucks]

this gives a pretty good breakdown.  My wife worked as a sole proprietor for many years around $60K-$70K; we usually  just filed like normal in March and paid then. 

https://financialpanther.com/solo-401k-contribution-limits/

Thank you so much for that link. That was exactly what I was looking for and it answers how much we can contribute to her solo 401k. So once she gets her final income in 2018 and we know her net revenue we then multiply that number by 92.35% x 15.3% x 50%. Then subtract that number from her net revenue and we're basically contributing that full amount to her 401k.

When you say "you just filed like normal in March and paid then", so you didn't pay quarterly taxes through out the year and just paid your full tax liability when you filed or were you referring to sending a check to her solo 401k after you filed your taxes?

[Mrbeardedbigbucks]

You're loooking for info on the penalty for underpayment of estimated tax. The paycheck for the first part of the year likely works in your favor, especially if the two of you file together. If you paid (through withholding), 90% of this year's tax, you won't face a penalty, or if you paid 100% of last year's tax (which sounds unlikely) or if you owe less than $1000.


https://www.irs.gov/taxtopics/tc306

I did read that on IRS.gov but is there a quick formula to determine if we've paid 90% of this years tax without actually going to an accountant or starting a return on Turbo Tax? The only problem I see here is I reduced our withholding starting in January 2018 with anticipation of being in a lower tax bracket this year (I knew i was leaving my job in April).

I imagine other sole proprietors have made the same mistake of not paying quarterly taxes their first year as sole proprietors but i haven't come across any real life examples.

[DoNorth]

correct--yes, we just paid the entire tax burden at filing in the initial months of the following year. You should pay quarterly, but it wasn't ever an issue for us.  I used Vanguard solo 401k and served as the custodian which was relatively painless and then just rolled it back into my wife's traditional IRA this year since she's not a sole proprietor anymore.

It was all straight forward.

[CareCPA]

You're loooking for info on the penalty for underpayment of estimated tax. The paycheck for the first part of the year likely works in your favor, especially if the two of you file together. If you paid (through withholding), 90% of this year's tax, you won't face a penalty, or if you paid 100% of last year's tax (which sounds unlikely) or if you owe less than $1000.


https://www.irs.gov/taxtopics/tc306

I did read that on IRS.gov but is there a quick formula to determine if we've paid 90% of this years tax without actually going to an accountant or starting a return on Turbo Tax? The only problem I see here is I reduced our withholding starting in January 2018 with anticipation of being in a lower tax bracket this year (I knew i was leaving my job in April).

I imagine other sole proprietors have made the same mistake of not paying quarterly taxes their first year as sole proprietors but i haven't come across any real life examples.

Penalties for not paying quarterly estimates are often only 1% or 2% of the amount of tax subject to penalty.
A lot of my clients don't even bother since they can make more money by keeping that cash in their business than they save by sending in quarterly estimates.

[LightStache]

You're loooking for info on the penalty for underpayment of estimated tax. The paycheck for the first part of the year likely works in your favor, especially if the two of you file together. If you paid (through withholding), 90% of this year's tax, you won't face a penalty, or if you paid 100% of last year's tax (which sounds unlikely) or if you owe less than $1000.


https://www.irs.gov/taxtopics/tc306

I did read that on IRS.gov but is there a quick formula to determine if we've paid 90% of this years tax without actually going to an accountant or starting a return on Turbo Tax? The only problem I see here is I reduced our withholding starting in January 2018 with anticipation of being in a lower tax bracket this year (I knew i was leaving my job in April).

I imagine other sole proprietors have made the same mistake of not paying quarterly taxes their first year as sole proprietors but i haven't come across any real life examples.

Penalties for not paying quarterly estimates are often only 1% or 2% of the amount of tax subject to penalty.
A lot of my clients don't even bother since they can make more money by keeping that cash in their business than they save by sending in quarterly estimates.

OP I recommend estimating your tax liability now. Use a spreadsheet, quickbooks, or a napkin. You have until Jan 15 to make estimated payments for tax year 2018. Send in as much as you think you need to get above that 90% threshold.

I pay to 95% of expected tax due to avoid the penalty or 100% of last years, whichever is less.

[terran]

You're loooking for info on the penalty for underpayment of estimated tax. The paycheck for the first part of the year likely works in your favor, especially if the two of you file together. If you paid (through withholding), 90% of this year's tax, you won't face a penalty, or if you paid 100% of last year's tax (which sounds unlikely) or if you owe less than $1000.


https://www.irs.gov/taxtopics/tc306

I did read that on IRS.gov but is there a quick formula to determine if we've paid 90% of this years tax without actually going to an accountant or starting a return on Turbo Tax? The only problem I see here is I reduced our withholding starting in January 2018 with anticipation of being in a lower tax bracket this year (I knew i was leaving my job in April).

I imagine other sole proprietors have made the same mistake of not paying quarterly taxes their first year as sole proprietors but i haven't come across any real life examples.

Penalties for not paying quarterly estimates are often only 1% or 2% of the amount of tax subject to penalty.
A lot of my clients don't even bother since they can make more money by keeping that cash in their business than they save by sending in quarterly estimates.

OP I recommend estimating your tax liability now. Use a spreadsheet, quickbooks, or a napkin. You have until Jan 15 to make estimated payments for tax year 2018. Send in as much as you think you need to get above that 90% threshold.

I pay to 95% of expected tax due to avoid the penalty or 100% of last years, whichever is less.

Paying estimated taxes within the safe harbor doesn't necessarily mean you don't pay a penalty. You need to pay quarterly in equal installments throughout the year and/or pay in proportion to when the income was earned. Paying through withholding will, however work for the safe harbor no matter when in the year the withholding happens