Estimated Taxes in First Year of Sole Proprietorship

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Caduceus
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Estimated Taxes in First Year of Sole Proprietorship

Post by Caduceus » Sun Jun 08, 2014 8:31 pm

If a sole proprietorship is first formed and first earns income only during November of the year, but earns sufficient income that that the tax is more than $1,000 (therefore one of the safe harbor rules don't apply), will there by a penalty of underpayment of estimated tax if the full amount of the tax is sent in the same month? It would seem unfair to tax the proprietor for payment of taxes that couldn't have been anticipated in the first half of the year. (Please assume that additional withholding from separate employment isn't possible.)

Can Form 2210 be filed (checking Box A?) for just the first year?

Thanks!

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BolderBoy
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Re: Estimated Taxes in First Year of Sole Proprietorship

Post by BolderBoy » Mon Jun 09, 2014 12:12 am

Caduceus wrote:If a sole proprietorship is first formed and first earns income only during November of the year, but earns sufficient income that that the tax is more than $1,000 (therefore one of the safe harbor rules don't apply), will there by a penalty of underpayment of estimated tax if the full amount of the tax is sent in the same month? It would seem unfair to tax the proprietor for payment of taxes that couldn't have been anticipated in the first half of the year. (Please assume that additional withholding from separate employment isn't possible.)
Since the tax system is "pay as you go", you should not be taxed on money you haven't yet received - so that removes tax liability for months prior to November.

Your sole prop will be subject to the quarterly filing requirements described on form 1040ES. The 4th quarter of the year runs from Sep 1 - Dec 31, so you'll need to do a tax estimation and pay any tax due by Jan 15, 2015. It is a nuisance to get started with this, but once you understand it and have it going, it doesn't take long to do each "quarter" (the second quarter runs from Apr 1 - May 31). Form 1040ES and /or its instructions contains a calculation worksheet. Form 2210 is rarely needed so long as you keep up with your quarterlies and even if needed it provides for 4 avenues of forgiveness - I've always qualified under the "unequal revenue stream" exception to any penalties when I've needed to file the form.

Many people on this forum do their taxes quarterly and can help you with niggling details. If you will be operating this sole proprietorship for a while, you may find it beneficial to enroll in the EFTPS <https://www.eftps.gov/eftps/> and your corresponding state electronic tax payment system; takes a bunch of the sting out of quarterly filing.

Welcome!

Caduceus
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Re: Estimated Taxes in First Year of Sole Proprietorship

Post by Caduceus » Wed Jun 11, 2014 7:55 am

Thank you, Boulderboy! This is all very helpful information and I'll definitely be sure to research the tips you gave me in further detail.

assumer
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Re: Estimated Taxes in First Year of Sole Proprietorship

Post by assumer » Wed Jun 11, 2014 9:31 am

Also there's a safe harbor provision in the IRS code.

What that means is that if your AGI in the previous year (before sole proprietorship) was <$150k, then you only have to pay 25% of last year's total tax burden each quarter without incurring any penalties from the IRS. If your AGI last year was >$150k, then you only have to pay 27.5% of last year's total tax burden each quarter penalty-free.

Edit:

Link 1

Link 2

IRS Link (see section 2b)

I am in the fortunate position that last year I had very low AGI, so no matter what I make this year (first year of an LLC taxed as a sole proprietorship), I am only paying 25% of a very small tax burden. However, I'll have a very large check to cut to the IRS next April which I am not looking forward to.

The following year, my estimated quarterly taxes will presumably much higher and I'll have less of a check to cut April 2016.

I may lose a very small bit of interest by only using the safe harbor rule, but as many bogleheads can attest to, the simplicity of simply paying 25% of last year's tax each quarter rather than trying to estimate it is worth a lot more in time and hassle for me.

I also signed up for automatic EFTPS withdrawal and my state's automatic withdrawal. I simply typed in the numbers I wanted withdrawn every quarter (which was 25% of my tax last year), and gave them my checking account and routing number, and it takes care of it automatically for me so I don't have to worry about forgetting.

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Epsilon Delta
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Re: Estimated Taxes in First Year of Sole Proprietorship

Post by Epsilon Delta » Wed Jun 11, 2014 1:12 pm

It's worth mentioning that a Sole Proprietorship is not a taxable entity. The Sole Proprietorship does not owe any income tax and does not file an income tax return; You owe tax and file the tax return. Any income tax, withholding, safe harbors etc. will apply to all your activity throughout the tax year. So what were you doing before starting the business, were you employed? A student? What were you doing last year (this affects the safe harbors).

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