Quarterly Payments

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I am working as an independent contractor in the 4th quarter. How much of the income I receive for this work should I set aside to pay an estimated quarterly payment and when do I make that payment?

Nancy M5

Level 4

The answer is "it depends"! Quarterly payments are based on a taxpayer's taxable income. And they are necessary if you'll owe more than $1,000 at the time you file your return and don't qualify for one of the safe harbors. Estimated Taxes: How to Determine What to Pay and When explains those safe harbors in the section "Do I need to pay estimated taxes?". Basically, the safe harbors are:

Do you expect your federal income tax withheld to be at least 90% of the total tax you'll owe?, or
Do you expect you federal income tax withheld to be at least 100% of the total tax on your prior year's return?

The other decision is what do you expect your taxable income to be for the current year? Take a look at the section "What taxes do self-employed people pay?" section of A Guide to Paying Quarterly Taxes. You will need to estimate your business income and expenses for this year and then add in all other taxable income, such as interest income, dividend income, wages, and gain on the sale of stock or cryptocurrency. You will owe income tax on that amount. Tax Bracket Calculator 2021 lists the 2022 tax brackets at the bottom of the page. You will also pay self-employment tax on your net business income which is 15.3%.

And finally, when you determine that amount you may need to make as an estimated payment look at the section "How to pay quarterly taxes" in A Guide to Paying Quarterly Taxes.

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