You don't need to make an estimated tax payment🍹
As an independent contractor that makes more than $600, you’ll be given a 1099-MISC to file.
If you worked for a company, your employer typically takes money out from your paycheck to set aside for your taxes owed. As a 1099 worker, you are solely responsible for handling your taxes (use our 1099 calculator to see how much you owe).
A lot of independent contractors are not prepared to take on the duty and feel overwhelmed with the task. It is natural to be a bit worried about how much money should you set aside for taxes if you are self-employed.
As a self-employed freelancer, taxes are not being withheld from the checks you receive. That’s why it’s important to set aside money during the year to avoid a nasty surprise.
Don’t worry, because we'll go over the general amount you'd want to save when doing your taxes.
A rule-of-thumb percentage to be safe is to set aside 30% of your income.
And here’s why.
Putting aside money is important because you may need it to pay estimated quarterly taxes.
If you are a 1099 worker and you expect to owe more than $1,000 in tax at the end of the year, The Internal Revenue Service requires you to make quarterly payments toward the debt. The quarterly tax payments are made up of an estimate of how much you’ll owe in taxes in April.
You’ll need to make quarterly payments equal to the amount of taxes owed in the previous year. If you miss your estimated tax payment, you can receive a penalty from the IRS. To calculate your quarterly tax payments, take last year's entire income or what you predict to earn this year, calculate 30 percent of that number, and divide it by four.
If you want an easy way to know how much you need to pay, use our quarterly tax calculator to estimate your payments.
As an independent contractor, if you made more than $400, you need to pay income tax and self-employment tax.
If you save 30% of your earnings, you’ll cover your small business and income taxes each quarter.
The self-employment tax rate is 15.3%. The rate is made up of 2.9% for Medicare or hospital insurance and 12.4% for social security or survivors, old-age, and disability insurance.
That is why we recommend that you place 30% of the money each time you are paid into a short-term savings account. To get a more accurate calculation, use our tax rate calculator above to estimate how much you should set aside for taxes..