If you’re self-employed or earn income as an independent contractor, then you have to handle your own taxes. What does this mean exactly? When you begin earning money as an independent contractor, you essentially become a business-of-one. And just how a company will withhold money from an employee's paycheck to send to the IRS, you need to take out your own taxes from the money you earn.
Here’s a general rule-of-thumb for determining if you should be paying taxes quarterly:
If you expect to owe more than $1,000 in taxes for the year for your freelance or contracting work (which amounts to around $3,000 or more in profit) then you may need to pay quarterly taxes.
If you’ve been paying quarterly taxes and by the end of the year it turns out you’ve overpaid, then you’ll get a refund! Conversely, if you’ve underpaid you’ll be able to balance up in April.
You’ll need to diligently track and collect earnings (in the form of paystubs, or invoices) and business type (if you do different types of labor). In order to lower how much you owe, it’s important to also track expenses. Common expenses include anything that is “ordinary and necessary for your business.” Common examples include:
As a safe rule of thumb, put aside 30% of each paycheck so you’ll be able to afford quarterly taxes when the time comes.
Here are the forms you’ll need in order to calculate and file your quarterly taxes:
Schedule C: Is where you can record your 1099 income plus any related expenses. This profit is then subject to self-employment taxes, federal income tax, and state income tax. The Schedule C isn’t required for paying quarterly but it’s helpful to have.
1040-ES: Is the worksheet for calculating quarterly taxes.
Here are the 2016 deadlines:
You have two ways to send in your payment:
If you don’t pay quarterly when you should, you could face a penalty. Typically, you’ll pay a 6-8% penalty on the amount you underpaid. So if you made $10,000, owe $2,000 in taxes, and didn’t pay quarterly taxes, you might be subject to a penalty of 6% of the $2,000 underpayment, which is $120 -- yikes!
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