Sole proprietorship income and tax penalty impact

[ksal21]

Hi all.  My wife works full-time for a private employer, while I work part-time as a private consultant.  We file jointly.  In 2022, I received a consulting fee in a lump sum on Dec. 16 covering the 12 month period starting Dec 1.  We also had interest and dividend income. 

I didn't even expect to still be consulting 2023 (otherwise retired) but, in mid-November, my client asked me to extend and sweetened their offer.  Given the last-minute decision to continue, I certainly wasn't making estimated tax payments through 2022, but the IRS is assessing a payment penalty as if I was essentially failing to make tax payments. 

TT says if we annualize our income, we may be able to reduce the penalty.  Given that the consulting fee represents roughly 37% of our 2022 adjusted gross income, is it worth the effort?  

I realize such decisions are subjective, but I'm hoping others who may have faced similar circumstances might be able to shed some light on whether they chose to annualize their income under similar circumstances as ours.

Thanks in advance!

Ken

[VolvoGirl · Accepted solution]

Yes try it.

You might be able to eliminate it or at least reduce it.  You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you.  It's form 2210.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

If you have the desktop program you can switch to Forms Mode (click forms in the upper right (left for Mac)) and open the 2210 form.  If the 2210 doesn't show up in the left column, click on Open Forms at the top of the left column.  Type 2210 in the search box and open the 2210 form.  Check box C to let the IRS calculate it.

[ksal21]

Alas, after going through the drawn-out process, TT indicated we’d still have the same penalty.  Ah well!  Thanks again!