How do I pay taxes as an Independent Contractor who is married?

[k_coley]

My husband works full-time with an employer, and I recently became an independent contractor. We plan to file jointly in 2023 (for the year 2022), but I have been advised to pay my taxes quarterly as a freelancer in the future. How would that affect our joint tax filing/how would I/we do that?

[Joe_D-CPA-PFS-CFP · Accepted solution]

Hello k_coley!

Thanks for your question. First thing to consider is to determine if your new business will have a profit, I am assuming you started the business in 2022. If you will have a profit this year, you will have to consider the taxes on the profit from your business.

The taxes on the net income will consist of:

• Federal Income tax (12% to 37%) 
• Self-employment tax  (15.3%)
• State income tax (paid to state if applicable)

The federal tax portion will be the marginal tax rate that applies to all your taxable income, your net business income combined with all other income earned in 2022. Here is a link to the IRS website to determine your potential marginal tax rates for 2022.

The self-employment tax portion is based on the net income from the business. Here is the IRS link that explains Self-Employment tax. It is calculated as follows:

Net Income from Business (x) 92.35% = Sub-total* (x) 15.3% = Self-employment tax on business earnings

*this calculation allows for the deduction of 50% of your SE tax

After applying the applicable federal tax rate to the income add the SE tax to get the total tax due. This is generally estimated for the entire year. This amount would be paid in quarterly to the IRS through irs.gov/payments. Here is a link to the IRS Estimated tax site.

Payments are made 4/15, 6/15, 9/15 & 1/15 the following year.

To make the payments you create an account with the IRS. Link to IRS.gov

Please ask follow up questions if you need additional information.

[ES CPA]

@k_coley  Good afternoon.  Congratulations on your new status as an independent contractor.  Taxes are generally expected to paid "as you go" hence the availability of paying via quarterly estimates using IRS form 1040-ES.  Alternatively, you could adjust  your husband's withholding to cover the increase in joint tax liability resulting from your income as an independent contractor. You would have to calculate what you project to be your NET income from self employment income to calculate the tax that may be due on it.  You will have to pay both Self Employment tax (paying into social security and Medicare) as well as income tax on your net income from self employment (net earnings as an independent contractor). Here is a great article about calculating and paying  estimated tax .  There are great tools in TurboTax to help you calculate the estimates.

[k_coley]

This is where I struggle. I am not sure the best way to determine my NET income. My business is more of a consulting service; I don't sell physical goods or products. My income is solely based on if a client accepts a proposal of services from me, which the dollar amount will change from client to client. 

Any adjustments or advice for that structure?

[ES CPA]

Your net income from a service business would be the income received from the contracts less any associated expenses.  As you do not have product that is being sold; expenses would be overhead you incur in the performance of the services (training, business use internet, office rent, etc.)  Here is a link to an TurboTax article that outlines business deductions you may be able to claim on your tax return.

As you do not know exactly what income will be earned and expenses incurred until you have accepted proposals, you would most likely have to calculate your projected net income each quarter as your estimates may vary.

[Joe_D-CPA-PFS-CFP]

Hello again,

I understand it may be difficult to determine your net income in the beginning. When you have been in business for a while it will be easier to estimate your income. However, the first year you start a business you have the estimated tax safe harbor to rely on to avoid estimated tax penalties. Here is a link that describes the Estimated Tax Penalty Safe Harbor.

The IRS will not charge you an underpayment penalty if: You pay at least 90% of the tax you owe for the current year, or 100% of the tax you owed for the previous tax year, or. You owe less than $1,000 in tax after subtracting withholdings and credits. Adjusted Gross Income levels are a factor.

[k_coley]

If I am hired to provide a service *via* another company as a vendor (typically 1099 employee which is how i've been earning recently), would I have to enter income earned a different way vs. a client hiring me directly as a contractor?

What would I need to provide the client, and/or what would they need to provide me at the end of the year as an independent contractor. Would I fill out a W-9 every time I work with a new client?

I apologize, some of the clarification links provided to some of my questions are wildly confusing to a non-expert. I'm hoping for more simplified answers. I've looked at many of these resources before and not fully understood the process(es).

[Joe_D-CPA-PFS-CFP]

Yes, you would provide a W-9 to anyone that may potentially pay you $600 or more. In turn, they would provide you a 1099-NEC.