Not necessarily true -- by using entities and a management fee, you can have earned income, as well as numerous other advantages such as tax-advantaged health care payouts. But don't take my word for it as I am not a CPA -- see e.g. Green Trader Tax's Web site. https://www.lightspeed.com/active-trading-blog/entities-provide-tax-benefits-traders/
A lot of the replies seem to be aimed at the thread starter as if he's located in the U.S. Hopefully that's the case and he doesn't reply back to say he's from another country after a few pages of replies because that's happen before here at ET.
good point and something to be considered. In the old days IRA's were maxed out at 2k and legal expenses were very high. Now with the internet you may be able to entitize cheap and pay yourself enough to make a Roth well worthwhile.
Keep in mind that as long as you pay more in estimated taxes + withholdings this year than you did last year you won't be penalized regardless of the total amount of your underpayment. From the IRS publication " Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller." All you need to do is make an estimated tax payment on Jan 15th of 2016 to cover the 2015 tax year that puts you $1 over your total taxes for the 2014 tax year, for example, and you won't be penalized even if you owe $1M in taxes you didn't do withholdings for.
I think you have to pay that amount spread over the 4 estimated tax quarters, rather than all on Jan 15th of 2016. Otherwise, you will be subject to penalties.
That could very well be, but I couldn't find where it says that. Maybe there's a subclause somewhere that says the income has to be proportionally deducted/estimated? Anyone know where that verbiage is? To be honest I've evenly spread it out and never gotten the penalty but never tried to do it all on Jan 15th. Even evenly spreading it out may avoid the OPs problem of paying more in Q1 than warranted though.
It is Form 2210: https://www.irs.gov/pub/irs-pdf/f2210.pdf If you look at that and read the instructions, you'll see that if you attempt to pay everything at the end of the year, they will still charge you interest for the first 3 quarters in which you did not pay anything.
at anyrate, the idea is to stay square with the IRS on an estimated quaterly basis (1st payment due Apri 15, last one due Jan 15) but is not that simple, especially when you are in a deep drawdown and the IRS tells you you owe for all that money you made last quarter. That's money I may need later in the year, and if I end up owing a big penalty that means I miraculously had a very good year after all (but it sure looked bleak there for quite a while.)
If you are worried about drawdowns, then you should factor that in on your estimated payments. Don't pay as much (or none at all), and then just accept the fact that you may be paying a penalty come tax time. But in that case, it is a good problem to have - i.e., you have made a bigger profit than expected.