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Paying your Taxes as an Independent Contractor
written by Steven Bristol on October 29th, 2008
Another great article from our trusty accountant.
If you have started to receive freelance or independent contractor income in 2008, please read on this is very important information for you to understand. At first it seems great all the income without taxes so what is the catch? You must pay into the IRS your own estimated income and self employment taxes on a quarterly schedule in advance of April 15, 2009. The first installment should have been paid on April 15, 2008 covering self employment income minus expenses for January- March 2008 then the next is due June 16, 2008, September 15, 2008 and finally the last installment on January 15, 2009.
What happens if you haven’t paid? Ignorance of the law will not stop the penalties from accruing since January 31, 2008, however if you kept your day job there may be a way to reduce those charges. First, ask your employer to withhold extra income tax out of your normal paycheck for the remaining pay periods of the 2008 calendar year. You accomplish this task through completing a new W-4 form for your current employer stating the extra income tax you would like withheld to cover your self-employment earnings.
How do you figure the possible extra income tax needed to be withheld? Use this form (IRS TAX FORM) or you can make an appointment with your tax preparer to help you.
If you did not keep the day job, then definitely have a CPA figure your estimated tax and pay it in ASAP. Plus file your tax return early in 2009, if you meet the General Rule below, because the penalties continue until all 2008 taxes are paid in full.
Text Direct from IRS web site www.irs.gov retrieved 10/27/2008
Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, and rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
Who Must Pay Estimated Tax
If you had a tax liability for 2007, you may have to pay estimated tax for 2008.
General Rule
You must pay estimated tax for 2008 if both of the following apply.
- You expect to owe at least $1000 in tax for 2008 after subtracting your withholding and credits.
- You expect your withholding and credits to be less than the smaller of;
- 90% of the tax to be shown on your 2008 tax return, or
- 100% of the taxes shown on your 2007 tax return.
- Your 2007 tax return must cover all 12 months.
So make sure to mark your 2009 Calendar Folks!
Download this file and import these dates into your Google or iCal
3 Responses to “Paying your Taxes as an Independent Contractor ”
Sorry, comments are closed for this article.
Oh how I love the self employment tax! It’s one of the only downsides to being a freelancer. The way I deal with it, is I “withhold” my estimated taxes on each check I receive and put it in a separate account until I have to write up a quarterly tax payment. It’s the least painful way of doing it. Of course, it still hurts!
Thank you for this! Any rough estimates on how much you should withhold from each check? I think I remember reading 30% somewhere – ouch!
@KevinCrawford
Our accountant gave me this response in regards to your question/comment:
Thirty percent is the minimum to pay in on the net profits(income minus expenses). Which is derived from the lowest marginal tax rate of 15% plus the 15.3% self employment taxes. So, the amount of total income from all sources determines what the marginal tax rate will be but the 15.3% is constant. If the person works as an employee plus receives income as an independent contractor then all of the excess income taxes withheld at their job can apply towards any taxes owed on the self employment income.
Hope this helps!