In addition to my regular salaried income from my primary employer, I earned additional income in 2022 as a consultant / contractor. These payments were received in Q2 and Q3 from a foreign entity, the Asian Development Bank, based in the Philippines. As such, I will definitely NOT receive any 1099s nor income forms. I'm a California resident. How do I estimate the amount I owe the IRS and the state of California? Should I use Schedule C or Schedule SE for the IRS? Do I have to submit/file those forms now, later, never, or can I just make payments? Can I make all payments at once (for both quarters) or am I required to wait until next quarter to pay taxes on Q3 earnings? Do I really have to pay 15.3% to the IRS and another 15.3% to the state (equaling 30.6% total)?
Thank you for your answers!
Since you have various questions, I will tackle one at a time. Let's start with estimating taxes to the IRS.
Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when the return is filed.
Since you also have W2 income, you may want to consider adjusting your paycheck withholdings by using a W-4 form (this form is completed by you and provided to your employer to make changes to your federal withholdings on your paychecks). The changes on your paystubs could then cover the tax from the consulting income, eliminating the need to make separate estimated payments. Basically, you would be paying the "estimated payments" thru your paychecks instead of making separate estimate payments.
In order to do this, you would need to calculate your total tax liability for the year (you will need your paystubs and also estimated net income from consulting business activity). You can use the Turbo Tax withholding calculator at no charge: https://turbotax.intuit.com/tax-tools/calculators/w4/ . This can be used to calculate your tax liability to then determine the estimated tax payments. To calculate your total tax liability, you will want to take into account all sources of income: W2, investments, withholdings, business earnings, etc. Since you are also entering your paystub information, including your federal tax withholdings to date, the withholding tool will provide you with the estimated tax liability due (after accounting for federal withholdings on your paystubs). You will need to have your most recent paystub available. Once you have determined the remaining tax liability for the year, you can take this amount and divide it by the number of pay periods remaining in the year. For example, if the tax liability (after including your current withholdings) was $2,000 and your had 10 pay periods remaining, you could have any additional $200 withheld from each paycheck. In order to have this deducted from your paycheck, you would complete a W-4 form and add this as an "extra" withholding from your paycheck on Step 4, Line (c) Extra Withholding of the W-4 form.
Turbo Tax can also assist you with with W-4 and Estimated payments. You can go through the section "W-4 and Estimated Taxes" to figure your customized 1040-ES quarterly tax payments for 2022. There is also a place in that interview to enter what you have already paid for 2022 (if applicable), and it will let you include any expected income changes or any other changes you have for 2022.
- Log in, and then here's how to open your return back up:
- At the Tax Home or in the section "Your Tax Returns & Documents" for tax year 2021, look for a link "Add a State."
- Click on "Add a State." (you don't really add one; that's just to get the return to open back up.)
- Once the return is open, click in the left menu column on Federal.
- Then at the top choose tab "Other Tax Situations".
- It may ask you if have 3-4 uncommon situations. If so, answer those.
- Once you get past those, you may then see a screen "Your uncommon Tax Situations"
- Scroll way down to the last category "Other Tax Forms" and click "Show More."
- Find topic "Form W-4 and Estimated Taxes" and click Start or Update.
- It will first ask you if you want to change your W-4 withholdings. If you need to do that, click "Yes" to go through the W-4 interview.
- If you don't need the W-4 (withholding) interview, you can click "No" and go to the 2022 estimated taxes interview.
- You may get a screen that says "Review your Estimates for 2022?" and asks "Do you want to review your income or deductions". Say YES (or Review Now), so you can get to the additional questions.
- You will go through a lot of screens asking about expected income and deductions.
- Finally, you will come to a screen that says "Enter Payments You Expect to Make."
- There are some boxes there that say "Enter estimated tax payments you've already made for 2022."
- Next screen will ask "which method" to use to calculate your 2022 estimated payments.
- Next screen will ask if you want to print vouchers.
- If you want to pay them electronically instead of mailing the vouchers and checks, we can tell you how to use IRS Direct Pay or the Treasury's EFTPS website.
NOTE: When you open your return back up, do not make any changes in the return itself since it's already been filed. It's OK to go through the estimated taxes interview that I describe below, but do not make changes in the original return--just in case you later have to amend it, which must start out exactly as originally filed.
Although you will not receive 1099 forms, you would still report this income any and related business expenses on the Schedule C and the net income from this will flow to your 1040.
If you prefer to make estimated payments instead of W4 adjustments, you can pay directly online. If you do not have an IRS account, you may want to considering setting one up: https://www.irs.gov/payments/your-online-account You can then easily make and track your IRS estimated payments. Yes, you can make the estimated payments all at once and before the estimated payment date. Keep in mind that if your estimated payment are late, or you wait until the end of the year, you may be subject to underpayment of tax penalties.
For information related to CA FTB estimated tax calculations and payments, please refer to: https://www.ftb.ca.gov/pay/estimated-tax-payments.html#How-to-calculate
The 15.3% is a Federal "self-employment" tax. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). Yes, this must be paid and this is in addition to income tax. Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. However, you figure self-employment tax (SE tax) yourself using Schedule SE (Form 1040 or 1040-SR). Also, you can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. Wage earners cannot deduct Social Security and Medicare taxes.
CA FTB does not have a separate self-employment tax. However, you would pay income tax on the net earnings. The tax rate would depend on the tax bracket for the additional income.
Here are the tax rates for your review:
Federal Marginal Rates for Single filers and Married Jointly: For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).
The other rates are:
35%, for incomes over $215,950 ($431,900 for married couples filing jointly);
32% for incomes over $170,050 ($340,100 for married couples filing jointly);
24% for incomes over $89,075 ($178,150 for married couples filing jointly);
22% for incomes over $41,775 ($83,550 for married couples filing jointly);
12% for incomes over $10,275 ($20,550 for married couples filing jointly).
The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).
CA State tax rates: https://www.nerdwallet.com/article/taxes/california-state-tax
**Mark the post that answers your question by clicking on "Mark as Best Answer"