(Newly) Sole Proprietor Wife - W2 Husband

[cconard11]

Thank in advance for any responses that may come of this.  Appreciate your time!

My wife is currently in the process of starting her own business as a sole proprietor (officially begins on 10/01/2022).  I am continuing my career as a W2 salaried employee.  I have a few questions regarding how to plan for 2023...

1.) Does my wife need to pay quarterly in her first year of business? (Lots of contradictory info out there on this one)

2.) "Do you expect to owe more than $1000 in taxes?" is a question on the IRS site.  Does 'owe' refer to total tax liability for us, or what we think we would have to pay into the IRS after completing our return? (We expect her to do about the same income as she has been doing as a W2 employee for the last decade once she is out on her own performing the same job independently.  In the past, we have typically been refunded all of the federal taxes that she has paid in over the year.)

3.) IF our income remains the same as it has been for several years, would adjusting my withholding (if necessary) allow us to avoid paying quarterly?  My withholding (typically) is enough to cover our final tax liability.

Sorry if this is confusing.  Certainly not a tax professional so articulating these scenarios is not in my comfort zone!

[VolvoGirl]

#2  1,000 total tax liability for you together on a joint return.  

#3 yes you can increase your job withholding to cover her self employment tax.  And she will be able to deduct all her expenses to reduce the Net Profit that she is taxed on.  

The first year you don't need to pay estimates as long as you pay in (by withholding) as much as your tax was last year.  But if you will have a big income you should send in estimates so you don't owe too much next April on your tax return.  And if you end up owing too much tax on your return you may also have a penalty.

For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year if both of the following apply:

- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.

- 2. You expect your withholding and credits to be less than the smaller of:

    90% of the tax to be shown on your current year’s tax return, or

  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months).

Turbo Tax will calculate the 1040ES estimated payments

https://ttlc.intuit.com/community/tax-payments/help/can-turbotax-calculate-next-year-s-federal-estim...

To prepare estimates for next year you start with your current return, but be careful not to change anything.  For Online returns, if you can't get back into your return, Click on Add a State to let you back into your retun.

You can just type W4 in the search box at the top of your return , click on Find. Then Click on Jump To and it will take you to the estimated tax payments section. Say no to changing your W-4 and the next screen will start the estimated taxes section.

Or Go to….

Federal Taxes or Personal (Desktop H&B)

Other Tax Situations

Other Tax Forms

Form W-4 and Estimated Taxes - Click the Start or Update button

Or Here are the blank Estimates and instructions…..

http://www.irs.gov/pub/irs-pdf/f1040es.pdf

The 1040ES quarterly estimates are due April 18, June 15, Sept 15 and Jan 17, 2023.  Your state will also have their own estimate forms.

Or you can pay directly on the IRS website https://www.irs.gov/payments

Be sure to pick the right kind of payment and year.....2022 Estimate

[Critter-3]

1.) Does my wife need to pay quarterly in her first year of business? (Lots of contradictory info out there on this one)  Maybe ... see other answers. 

2.) "Do you expect to owe more than $1000 in taxes?" is a question on the IRS site.  Does 'owe' refer to total tax liability for us, or what we think we would have to pay into the IRS after completing our return? (We expect her to do about the same income as she has been doing as a W2 employee for the last decade once she is out on her own performing the same job independently.  In the past, we have typically been refunded all of the federal taxes that she has paid in over the year.)  Net balance due of $1000  AFTER all the credits and withholding payments have been taken into consideration.

3.) IF our income remains the same as it has been for several years, would adjusting my withholding (if necessary) allow us to avoid paying quarterly?  My withholding (typically) is enough to cover our final tax liability.  Prepayments of taxes can be done thru withholding or estimates or any combination of them both.  On a joint return the payments from all sources are combined. 

PAYING ESTIMATES
For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% for 2017  SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year (or next year) if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits. 
 
- 2. You expect your withholding and credits to be less than the smaller of: 
    90% of the tax to be shown on your current year’s tax return, or 
  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

To prepare estimates for next year, You can just type W4 in the search box at the top of your return , click on Find. Then Click on Jump To and it will take you to the estimated tax payments section. Say no to changing your W-4 and the next screen will start the estimated taxes section.

OR Go to….
Federal Taxes or Personal (H&B version)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button

How does my side job affect my taxes?

You’re considered self-employed—even if it’s just something you do on the side, like drive for Uber, babysit, or blog.

Your taxes are handled differently than when you’re an employee of a company.

As a self-employed individual you:

• will pay self-employment tax (because income tax and Social Security aren’t deducted from your pay)
• will get a 1099-NEC or 1099-K (unless you only accept cash or personal checks)
• file a Schedule C, Form 1040 (this is how you report business expense or loss of income)
• can deduct money you spent on work-related expenses (like mileage, home office expenses, and cell phone use)
• can estimate the taxes that are due and make quarterly estimated tax payments during the year

Get started by entering your income from self-employment. We’ll handle the rest, from creating the forms you need to reviewing work-related expenses that can help reduce your taxes.

[Opus 17]

Most of the time, we need to talk about your tax liability, the net amount the IRS keeps after all payments, withholding, taxes, credits, and refunds.    (For example, if your W-2 job has $10,000 of withholding, your wife's job has $2000 of withholding and you get a $2000 refund, your tax liability was $10,000.). 

However, for purposes of the penalty for underpayment, the $1000 refers to a tax payment owed with your tax return to pay off your tax liability for the year.  See below.

The tax system is pay-as-you-go, and estimated payments are always required by law.  However, you might not be penalized for not making those estimated payments.  You will not be penalized as long as you meet one of these three tests:

1. You owe less than $1000 additional payment when you file your return.

2. Your total payments into the system (via withholding or estimated payments) is at least 90% of your current year tax liability.

3. Your total payments into the system (via withholding or estimated payments) is at least 100% of your prior year tax liability (or 110% for higher earning taxpayers).

Yes you can increase your withholding on your W-2 job to cover the other taxes.  The IRS doesn't care how the money comes in, as long as they get it.

[Mike9241]

there is a substantial difference between w-2 wages and earning the same amount as self-employed. with a w-2 social security and medicare are deducted from the paychecks. with self-employment net income there is no withholding for these taxes so you and she will owe these as additional taxes. her social security wages are subtracted from the social security wage SE income base of $147,000 to determmine the maximum SE income subject to social security taxes of 12.4% approx ) but there is no limit on Medicare taxes. which would be about 2.9%  may want to review schedule SE

 https://www.irs.gov/pub/irs-pdf/f1040sse.pdf  substitute $147,000 for the amount on line 7

There will be no federal penalties for not paying in enough taxes during the year if withholding
1) And timely estimated tax payments equal or exceed 90% of your 2022 tax
or
2) And timely estimated tax payments equal or exceed 100% of your 2021 tax (110% if your 2021 adjusted gross income was more than $150K)
or
3) the balance due after subtracting taxes withheld from 90% of your 2022 tax is less than $1,000
or
4) your total taxes are less than $1,000

state laws differ

with uncertainties, I would recommend you adjust your federal withholding (including your spouse's)  to be 100% of your 2021 tax (110% if your 2021 AGI was over $150K)

meeting a safe harbor criteria avoids penalties but you may owe a lot for 2022 come 4/15/2023. some taxpayers don't like this and will pay in more than required. this is up to you.