Money Matters

How much to set aside for taxes as an Independent Contractor?

I just landed a plum year-long freelance assignment - good for extra money but no taxes will be taken out. The co. will pay me biweekly and I'll be responsible for the taxes. Is there a certain percentage I should plan to set aside? I went to the IRS website and ... let's just say it's a bit confusing. Thanks!

Re: How much to set aside for taxes as an Independent Contractor?

  • I set aside 30% to be on the safe side. Once you get your first check you can try to plug all your info into irs.gov and see how your with holdings stand up against what it says you will owe.
  • It really depends on your tax bracket and your deductions.  Do you have a lot of deductions (mortgage interest, property taxes, etc.)?

    Can you go off last year's return and estimate from there? 

  • image dbsk8dance*:
    I set aside 30% to be on the safe side. Once you get your first check you can try to plug all your info into irs.gov and see how your with holdings stand up against what it says you will owe.

    All of this. I pay double taxes and have to put money aside. I also put a bit more away than I may need.

  • Did a little looking for you and here's what I found...

    "That's because as a self-employed person, you are responsible for both the employer's and the employee's portion of FICA--the Social Security and Medicare taxes. On your paycheck, you pay 7.65% in FICA taxes, and your employer pays the other 7.65%. As a self-employed person, you pay the full 15.3%. On the Form 1040, this is called the Self-Employment Tax."

    Steps for "withholding"

    "First, calculate how many allowances to claim based on your situation. Claim one allowance for yourself, plus one for each dependent you have. This will establish a base for your withholding.

    Next, project how much you expect to earn from your side jobs as an indepedent contractor. Also, project how much you plan to spend to cover various expenses for your side jobs. Calculate the difference between your earnings and expenses, to arrive at your estimated profit for the year. Now, multiply your profit by 15.3%. This is how much you should set aside for your Self-Employment Tax. Take the same profit figure, and multiply it by your marginal tax bracket. (If you are in the 25% tax bracket, multiply your profit by 0.25.) This is how much you should set aside for your additional income tax."

    I googled this info so if you need more follow the trnd and google whatever you need to ask. I have to do the same myself as an independent contractor, so this was helpful to myself as well.Wink

  • We save at least 30%, I don't know exactly how much we ended up paying out this year--it was less than 30% for sure, but that's a safe number so you're not surprised.  Also, pay quarterly so you can avoid penalties, it will be easy to figure, since you have the job for a whole year.
  • I might set aside as much as 40%, depending on what your spouse makes and what state you're in.  I've owed that much in the past.
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  • Do you prepare your own taxes in TurboTax or H&RBlock At Home?  If you do, you can create a dummy return using last year's information, and estimate the changes for your 2011 additional income and get an idea what the S-E tax + additional ordinary tax will be.  You could play with a few what-if scenarios that way.
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  • I would set aside somewhere between 30 - 40 %.  That is usually where I have ended up.  It does depend alot on your household income/tax bracket. 
  • put away about a 1/3 for taxes and prepay them quarterly. that way when you file in april either you'll get a minisule refund OR you'll have to pay out a bit more. paying self employment taxes sucks .. seeing the total amt you have to pay is enough to make anyone sick to their stomachs. my dad paid quarterly, so when april came around and he DID have to pay, it wasn't as large of a # had he not prepaid them quarterly.

     

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  • My accountant friend suggests 40% - 25% for Fed & 15% for both halves of the self employment taxes (SS & Medicare).  Plus you have to set aside for state taxes as well.

     

    You may not actually be IN the 25% bracket for Fed taxes, but at least you have it set aside when you have to pay.

  • I found this all very confusing.  Even though, really, it should be pretty simple.  I just figured out what our marginal federal and state tax rates will be, plus 15% payroll tax (actually 13% this year only).  Almost all of my income will be in this tax bracket, as DH's income blows through the standard deduction and most of the lower brackets (as I can see from past tax years), and I don't expect to hit the ~$100K payroll tax cap.  So for me, it's 25%+9%+13%=47% to withhold myself.  And it'll be 49% next year.  Ouch!  Good thing we're rich... 

    We should end up slightly overpaying this way, but I'd rather give the government a small loan and miss out on 1% interest in the bank than hire an accountant or pay fees for underestimating.  Don't forget that you need to send checks to the IRS and your state government every quarter.  And possibly a local government too, if you have local income tax.  

  • We pay quarterly estimated taxes on DH's freelance work. We set aside 50% for taxes (just in case) and send in 35% for Fed, 9% State. This all depends on your tax bracket and unfortunately my accountant said taxes on freelance/contract work is higher.
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