1099 Independent Contractor

[AT45]

Hello! 

I have started a new side gig as a remote independent contractor. I will get paid monthly for the previous month's work, and my first paycheck is next week! I also work a started 9-5 where I receive a W-2.

As a 1099 Independent contractor, how do taxes work? I have been seeing conflicting reports; some saying I have to file quarterly and others say I have to file with my normal taxes? Is it whatever I prefer? I would prefer to just file with my other taxes. My plan is to take out 30% of each paycheck and set aside solely for taxes. Is this the right course of action? 

Thanks! 

[SwapnaM]

No, it is highly recommended to pay quarterly taxes on your self-employed income as there are no tax withholdings on the same. This will help you avoid a surprise tax bill when you file your return. You can also avoid interest or a penalty for paying too little tax during the year. 

Taxes are pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.

There are two ways to pay tax:

•  increase withholding from your pay- w2
•  Making quarterly estimated tax payments during the year.

https://www.irs.gov/payments/pay-as-you-go-so-you-wont-owe-a-guide-to-withholding-estimated-taxes-an... 

https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes 

@AT45 Thanks for the question!!

[AT45]

Thank you for the response! 

My income would fluctuate monthly, sometimes greatly. So there is really no way for me to estimate exactly how much taxes I would owe. Especially this year being my first year, i have nothing to go off from. What is a good general rule of thumb as a perfect to pay quarterly to the IRS? I also want to make sure I have enough set aside to pay State taxes as well.  

[SwapnaM]

@AT45 You can use Tax Caster or https://www.irs.gov/pub/irs-pdf/f1040es.pdf worksheet to estimate what your total taxes would be for the year. 

You can also calculate your 2024 estimated taxes and generate the payment vouchers by doing this:

https://ttlc.intuit.com/turbotax-support/en-us/help-article/estimated-taxes/turbotax-calculate-next-... 

Generating accurate quarterly estimated tax payment calculations can be difficult, which is why the IRS implemented a Safe Harbor provision that helps businesses and freelancers avoid underpayment penalties. The Safe Harbor rule provides a cushion for people who paid at least 90% of their bill for the previous tax year. So, if you paid 90% of your final bill in estimated taxes and made your payments on time, you would be exempt from paying a tax penalty.

[AT45]

Is the only benefit to paying quarterly is that so you don't have such a huge expense once during tax season? My plan was to put 30% into a high interest saving account and let it gain interest while I wait for tax season. 

[DoninGA]

@AT45 The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. You can do this either through withholding or by making estimated tax payments. If you didn't pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.

Go to this IRS website for Underpayment of Estimated Tax by Individuals Penalty - https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty

[SwapnaM]

@AT45  The IRS has raised its penalty interest rate for individuals, to 8% per year. https://www.irs.gov/newsroom/interest-rates-remain-the-same-for-the-second-quarter-of-2024 If your High -yielding savings account will earn more than that, it may work out in the end for you.