Working as an independent contractor or small business owner can bring tremendous freedom—but it can also bring headaches at tax time if you’re not careful. In addition to filing income taxes each April, you’re also required to set aside money for estimated quarterly taxes. That’s standard if you receive Form 1099s from clients versus a W-2 and expect to owe $1,000 or more in taxes for the year. You can work with a financial advisor who is also a CPA to help you figure out the right amount of taxes to set aside each year.
What Taxes Do 1099 Workers Pay?
When you work on a 1099 contract basis, the IRS considers you to be self-employed. That means that in addition to income tax, you’ll need to pay self-employment tax. As of 2022, the self-employment tax is 15.3% of the first $147,000 in net profits, plus 2.9% of anything earned over that amount. The tax itself includes both Medicare and Social Security taxes.
Ordinarily, your employer would pay half of these taxes for you. But since you’re a 1099 independent contractor, not an employee, you’re responsible for paying the full amount yourself. Rather than waiting until the end of the year to pay self-employment and income tax, the IRS requires you to make estimated quarterly tax payments when you expect to owe more than $1,000 in taxes for the year.
Estimated quarterly tax payments are generally due according to this schedule:
- Payment 1 – Due April 15 of the current year
- Payment 2 – Due June 15 of the current year
- Payment 3 – Due Sept. 15 of the current year
- Payment 4 – Due Jan. 15 of the following year
If your state assesses income tax, you’ll also need to make estimated quarterly payments to your state tax authority. The deadlines follow the same schedule as the deadlines for federal estimated quarterly taxes.
How Much Should I Save for 1099 Taxes?
The amount you should save for 1099 taxes depends on your income from self-employment and which tax bracket you expect to be in when you file your annual return. Generally, the amount you may need to set aside could range from 20% to 35% of your 1099 income, less any deductions that you’re eligible to claim.
Examples of expenses you might be able to deduct as a 1099 worker include:
- Office supplies
- Computer hardware or software
- Home office expenses
- Health insurance premiums you pay out of pocket
- Business travel expenses
- Advertising and marketing expenses
- Website expenses
It’s important to keep good records of any expenses you plan to deduct. In case the IRS decides to audit you later, you’ll have a paper trail to back up the deductions you claimed.
Using an online self-employment tax calculator can give you an idea of how much you should save for 1099 taxes. Here are a few examples of what you might need to set aside to avoid coming up short at tax time.
Example #1: Say that you live in New York state. You file single and have a monthly self-employment income of $7,000. Your total self-employment tax, federal income tax and state income tax rate is 26.63%. Based on that figure, you’d owe approximately $22,372 in taxes which breaks down to $1,864 per month.
Example #2: Now, assume that you live in Florida, which has no state income tax. You still file single and have the same monthly self-employment income of $7,000. Your total self-employment tax and federal income tax would come to 22.97%. You’d owe $19,292 in taxes or $1,607 per month.
It’s important to consider how being married and filing a joint return might affect how much you should save for 1099 taxes. While it won’t affect your self-employment tax rate, since that’s calculated based on your 1099 earnings, it can affect your federal and state income tax rate. That could result in owing more money at tax time, even if you’ve been paying the appropriate amount of estimated quarterly taxes.
How to Set Aside Money for 1099 Taxes
Once you’ve estimated how much you’ll need to save each month for 1099 taxes, the next step is creating a system for saving that money. First, it’s helpful to set up a separate bank account to hold the money that you’ll use to pay your estimated taxes. That way, you don’t have to worry about accidentally spending any of the money.
There are different approaches you can take to save for 1099 taxes. For example, you can set aside a portion of each payment you receive as they come in. Or you can make one large transfer to your 1099 bank account at the end of each month.
You might be wondering if you can’t just wait until the end of the year to pay your estimated taxes. For example, if you’re married you might want to wait and see if you’ll actually owe taxes for the year. While you could do that, you’re taking a gamble. When estimated quarterly payments are due, the IRS expects you to pay them. Failing to make those payments on time or pay enough toward your tax liability can result in penalties.
It’s possible to avoid penalties for underpaying estimated taxes, but only in limited circumstances. In order to avoid the penalty, you’d need to be able to show that:
- You owe less than $1,000 in tax after subtracting withholdings and credits.
- You paid at least 90% of the tax for the current year or 100% of the tax shown on your return for the prior year, whichever is smaller.
When you’re ready to pay your estimated taxes, you can do so online. The IRS allows you to create a taxpayer account and schedule payments directly from your bank account. If you also have to pay estimated taxes at the state level, you can check with your state tax agency to see if online payments are an option.
Remember to make note of each payment date and amount when paying estimated taxes. You’ll need this information to file your federal income tax return later.
The Bottom Line
Having to pay 1099 taxes can take some getting used to if you’re just getting started as a freelance or independent contractor. The most important things to know are how to estimate your tax liability and when to get those payments in. Understanding your obligations for paying estimated taxes can help you avoid running afoul of the IRS.
Tips for Financial Planning
- Consider talking to your financial advisor about what’s involved in paying 1099 taxes and how much you should set aside each month. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’ve filed your tax return and you find that you still owe, despite having made all of your estimated quarterly tax payments it’s important to know what to do next. Consider these tips on what to do if you owe money to the IRS.
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