How much should I be setting aside for taxes as a 1099 worker. Is it worth it ?

[Confused20]

I’m now a 1099 employee and make great money but unsure of how things will balance out with taxes ? I will have beeen employed for 9 months from a real company and only 3 months of the year under myself. I do have a dependent. But now having to get my own health insurance as well as being shocked at tax time of how much I’ll owe I wonder is it worth it. How much should I be setting aside for taxes ?

[Critter-3]

Rule of thumb is 30% to cover fed/state/SE taxes. 

[fanfare]

@Confused20   when you work self-employed, your rate of pay (compensation) has to be adjusted up due to all the extra costs you just mentioned.

[TomD8]

"Setting aside" money for taxes isn't sufficient by itself.  You must make quarterly estimated tax payments to both federal and state (if your state has an income tax).

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

[VolvoGirl]

You pay Self Employment tax on $400 or more of net profit from self-employment in addition to any regular income tax.  You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

PAYING ESTIMATES

You may need to send in quarterly estimated payments to cover any self employment tax and increase in income.

You must make quarterly estimated tax payments for the current tax year if both of the following apply:

- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.

- 2. You expect your withholding and credits to be less than the smaller of:

    90% of the tax to be shown on your current year’s tax return, or

  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months).

Turbo Tax will calculate the 1040ES estimated payments

https://ttlc.intuit.com/community/tax-payments/help/can-turbotax-calculate-next-year-s-federal-estim...

How to make the Estimated payments

https://ttlc.intuit.com/community/tax-payments/help/how-do-i-make-estimated-tax-payments/00/25875

Here are the blank Estimates and instructions…..

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

To prepare estimates for next year you start with your current return, but be careful not to change anything.  For Online returns, if you can't get back into your return, Click on Add a State to let you back into your retun.

You can just type W4 in the search box at the top of your return , click on Find. Then Click on Jump To and it will take you to the estimated tax payments section. Say no to changing your W-4 and the next screen will start the estimated taxes section.

Or Go to….

Federal Taxes or Personal (Desktop H&B)

Other Tax Situations

Other Tax Forms

Form W-4 and Estimated Taxes - Click the Start or Update button

To just estimate the remaining quarters put in that you paid $1 for the missed quarters so it will only calculate the remaining quarters.

The 1040ES quarterly estimates are due April 15, 2021, June 15, Sept 15 and Jan 18, 2022.   Your state will also have their own estimate forms.

Or you can pay directly on the IRS website https://www.irs.gov/payments

Be sure to pick the right kind of payment and year.....2021 Estimate

[VolvoGirl]

Some general info on self employment...........

You will need to keep good records.  You may get a 1099NEC at the end of the year if someone pays you more than $600 but you need to report all your income no matter how small.  You might want to use Quicken or QuickBooks to keep track of your income and expenses.

There is also QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Online Self Employed  return....

http://quickbooks.intuit.com/self-employed

When you are self employed you are in business for yourself and the person or company that pays you is your customer or client.

To report your self employment income you will fill out schedule C in your personal 1040 tax return and pay SE self employment Tax.  You will need to use the Online Self Employed version or any Desktop program but the Desktop Home & Business version will have the most help.

Here is some IRS reading material……

IRS information on Self Employment

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

Pulication 334, Tax Guide for Small Business

http://www.irs.gov/pub/irs-pdf/p334.pdf

Publication 535 Business Expenses

http://www.irs.gov/pub/irs-pdf/p535.pdf

[Opus 17]

Is it worth it? Certainly yes, if you can charge enough for your services.   When you start to think about what you should charge for your services, you need to make a minimum of 8% more per hour to cover the self-employment tax, assuming that the state and federal income tax will be the same regardless of whether you are an employee or an employer. But that doesn’t take account of the fringe benefits that you are losing.  As a W-2 employee, you are eligible for unemployment insurance, you may be eligible for matching retirement contributions, free or partially paid for health insurance, paid sick days and vacation days, and other fringe benefits.  When you are self-employed, you need to charge enough for your services that you can cover these other costs, such as being unable to work for a week due to illness, or wanting to take a family vacation.  No one can tell you how much to charge for your services, but if you can’t charge at least 25 to 40% more than your previous gross salary, then it may not be worth doing.

Then separately, the question is how much of that income to set aside for taxes. Depending on your income and other tax situations, you will need to set aside between 20% and 30% for federal taxes, and 3% to 10% for state taxes, depending on which state you live in.