Question

Independent Contractor

Forum|Forum|2 years ago
August 30, 2023
2 replies
0 views

What percentage of my independent contractor paycheck should I be saving as a general rule of thumb for taxes?

DoninGA

Employee

The general rule is 20% of your net income after expenses should be used for taxes.

B

barbaranordlundAuthor

If my paycheck is 1000 to keep it simple, I should be saving 200 of the paycheck for taxes?

DoninGA

Employee

Yes.

If you are single then you will have federal taxes owed on your net income over $13,850.

However, you will owe self-employment taxes on any net income over $400. SE taxes of 15.3% are for both the employer and employee portion of Social Security and Medicare taxes.

See this TurboTax article for SE taxes - https://turbotax.intuit.com/tax-tips/self-employment-taxes/the-self-employment-tax/L8xXjolB4

M

Mike9241

saving the money to pay the taxes is one thing but since you would owe more than $1000 come filing time you should be paying quarterly estimate taxes form 1040-ES or using IRS website to avoid underpayment penalties. 1/4 of your annual tax bill needs to be paid in each quarter. that's generally 4/15/, 6/15, 9/15 and 1/15 of the following year. if the 15th is a weekend or federal holiday then the next business day. by now 50% of your estimated taxes should have been paid in.

the form

https://www.irs.gov/pub/irs-pdf/f1040es.pdf

the iRS website

https://www.irs.gov/payments

if you live in a state with personal income taxes, it to would likely have an estimated tax requirement.

fanfare

Employee

@barbaranordlund

IRS requires you to estimate your total tax for the year and pay as you go.
Assuning you have no W-2 withholding nor other withholding,
you can base your estimate on prior year's tax , or 90% of this year's tax, whichever is smaller.
each quarter your estimated tax paid and withheld should be at least 25% of the estimate, even if your income is uneven,
if your estimate is based on this year's tax and turns out to be wrong you may be penalized.
you can compensate by overestimating.
if your estimate is based on prior year's tax, you know that when you file by April 15, which is also the first estimated tax payment due date. How convenient.

This is the simplified method.
---
When to pay — Estimated tax payments are due four times a year:

April 15 for payment period January 1–March 31
June 15 for payment period April 1–May 31
September 15 for payment period June 1–August 31
January 15 for payment period September 1–December 31

-
If your quarterly withholding and estimates in 2023 are at least 100% / 4 = 25% ( 110% / 4 for certain high income taxpayers) of your 2022 tax, there will be no penalty on your 2023 tax return, regardless of any jump in income.
you are protected from a sudden capital gain or spike in income at year end.

For further info on uneven income and uneven payments to IRS, see Instructions for Form 2210.

T

TomD8

Employee

Don't forget to withhold for your state, if you live in a state with an income tax. I agree with @DoninGA that 20% is a good rule of thumb for federal; your state estimates should be close to your state's income tax rate.

**Answers are correct to the best of my ability but do not constitute tax or legal advice.