That's a really good point I hadn't thought about. In this case, my client hasn't made any 2025 estimated payments yet - they were planning to rely entirely on the credit elect. If we amend now to get most of it refunded, would you recommend they start making quarterly payments right away to cover 2025 tax liability?

Yes, I would definitely recommend they start making quarterly estimated payments immediately. Since they're eliminating most of their credit elect cushion, they'll need to ensure they're meeting safe harbor requirements to avoid underpayment penalties. They should calculate their projected 2025 tax liability and make sure they're paying either 90% of that amount or 100% of their 2024 tax liability (110% if their AGI was over $150,000) through quarterly installments. The next deadline is September 16, 2024, so they still have time to adjust their payment strategy. I usually advise clients in this situation to slightly overpay estimates to provide a buffer, especially if they're close to the threshold where penalties might apply.

Filed one in May for a credit elect change and it took exactly 19 weeks to process. Got the refund direct deposited about a week after that. So roughly 5 months total from submission to money in account. This was a paper-filed amendment though, might be faster if you can e-file.

Thanks for mentioning this. I had no idea about quarterly payments. How do you actually make these payments? Do you just guess how much you'll make each quarter?

You make quarterly estimated tax payments using Form 1040-ES. You can pay online through the IRS website, by mail with a payment voucher, or through the IRS2Go app. As for how much to pay, you essentially estimate your annual income, calculate the tax on it, and divide by four for equal quarterly payments. If your income fluctuates throughout the year, you can make adjustments to each quarterly payment. Many self-employed people set aside about 25-30% of their cash income for taxes (including both income tax and self-employment tax) as a general rule of thumb, though your exact rate will depend on your total income and deductions.

Yes it could raise questions, but the alternative is worse. If you've received a 1099, the IRS already knows about that income. Not filing when they're expecting a return is a bigger red flag than filing for the first time. The audit risk is honestly pretty low for average income individuals. The IRS audits less than 0.5% of individual returns, and they're typically focused on high-income earners, people claiming unusual deductions, or returns with obvious errors. Just filing accurately now is your best protection.

Does the Roth option for Solo 401k have income limitations like the regular Roth IRA? I've been avoiding looking into this because I thought I'd be over the income limits.

There are no income limitations for Roth contributions to a Solo 401k! This is one of the biggest advantages compared to Roth IRAs. You can make Roth contributions to the employee portion regardless of your income level. This is actually a great "backdoor" way for high-income earners to get money into a Roth account. Even if your S Corp starts doing really well and your income increases substantially in the future, you can still contribute to the Roth portion of your Solo 401k.

This is a really important point. The "reasonable compensation" requirement for S Corps needs to be balanced against maximizing the Section 199A deduction. With the pass-through deduction, you get a 20% deduction on your qualified business income (QBI), which is essentially your profit MINUS your salary. So there's a tradeoff - higher salary means more retirement contributions but less QBI deduction.

Yeh exactly! My accountant had me model different scenarios. If I paid myself $65k instead of $50k, I could put more in retirement but lost like $3k in QBI deduction. Gotta run the numbers both ways.

Thanks for this explanation! I do track inventory since I need to know how many pieces I have available to sell through my online shop. So if I understand correctly, since the seamstress is literally creating my inventory items, it would be more accurate to put this under Cost of Labor in Part III? Would this change anything about needing to issue a 1099-NEC to her at the end of the year?

Yes, since she's creating your inventory items and you're tracking inventory, Cost of Labor in Part III is the more accurate classification. This properly ties the expense to your product creation rather than treating it as a general business expense. Regarding the 1099-NEC requirement, that doesn't change at all. You still need to issue a 1099-NEC to any contractor you paid $600+ during the year, regardless of where you classify the expense on your Schedule C. The 1099 requirement is about who received the money, not how you categorize the expense on your tax return.

Speaking from experience, definitely get that W-9! I didn't get one from my contractor and then couldn't issue a 1099 properly, which flagged my return. Ended up paying penalties because of it. Such a simple thing but caused so much headache.

Thats a really good point I hadn't considered. Did you end up getting special business insurance for your vehicle or is there some kind of rider they add to a personal policy?

I ended up getting what they call a "business use endorsement" added to my personal auto policy. It increased my premium by about 15%, but it properly covers me when I'm driving for business purposes. Some insurance companies offer specific business auto policies, but those are usually more appropriate for companies with multiple vehicles or employees driving for the business. For a sole proprietor like me who uses the same vehicle for both business and personal use, the endorsement was the more cost-effective option. Definitely worth calling your insurance agent to discuss your specific situation.

Is it better then to start using it for business immediately after purchase? Or does that create other issues? My accountant has me totally confused about this whole topic.