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 may need to take out your own taxes from the money you earn.
Here’s a general rule-of-thumb from the IRS 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 should be able to balance up in April. It is recommended to talk with your tax accountant.
You may need to diligently track and collect earnings (in the form of paystubs, or invoices) and business type (if you do different types of labor).Tracking expenses may help lower how much you owe. Common expenses include anything that is “ordinary and necessary for your business.” Common examples may include:
It's a safe rule of thumb to put aside 30% of each paycheck so it's available to pay quarterly taxes when the time comes. However, it is recommended to talk with your tax accountant when you have questions.
Here are the forms used to calculate and file quarterly taxes:
Schedule C: Use record 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 deadlines:
There are two ways to send in payment:
If payments aren’t made quarterly when due, penalties may be assessed. Typically, these penalties are around 6-8% penalty on the amount 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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