Tax planning and preparation are important parts of your job as an independent contractor. Paying quarterly estimate taxes throughout the year is a good practice that helps eliminate a big tax burden and a possible fine at the end of the year. Quarterly payments are due on April 15, June 15, September 15, and January 15.
Here are five tax planning tips to stay on top of payments throughout the year.
It can be easy to get caught up in the daily flow of work, but if you can set aside some dedicated time each month to organize profits and expenses, your taxes will thank you. There are a few ways you can pay quarterly estimated taxes. If you’ve been working as an independent and have a good idea about how much you expect to make over the course of the year. You can simply divide that amount by four and pay that much each quarter Or, you can track your income individually each quarter and pay estimated taxes based on that number.
Just keep in mind, like W-2 tax payments, if you underestimate you will owe money in the spring and if you overestimate you will get a refund. Waiting to pay all your taxes until the spring can result in an audit notification, penalties, or interest payments. Estimating slightly higher than what you paid in the previous year is generally a good rule of thumb to help avoid underpayment. Meeting with a tax advisor is also a helpful practice to make sure you are calculating payments correctly.
Even though paying taxes as an independent contractor may seem complicated, the good news is there are a lot of resources available to you. Form 1040-ES, Estimated Tax for Individuals contains blank vouchers you can use to mail in your estimates or pay online with the Electronic Federal Tax Payment System (EFTPS). These forms will help walk you through creating quarterly estimates based on your adjusted gross income, taxable income, taxes, deductions, and credit for the year.
The IRS has a Self-Employed Tax Center that can be a great resource as well. Here, you can find information about your tax obligations, how to make quarterly payments, how to file an annual return, how to structure your business, and whaat deductions you can take. Keep links to these resources on hand so you can easily find them when quarterly taxes are due or if you have a payment question.
As a reminder, quarterly estimated taxes are due on April 15, June 15, September 15, and January 15 of each year. These dates might change a bit if one falls on a weekend, but you can get exact filing dates from the IRS website. To pay these taxes, a helpful rule of thumb is to set aside 30% of your gross income when a client pays you. This practice will help ensure you have enough cash on hand to pay what and when you need to.
In addition to paying federal taxes, you are also likely subject to state or local taxes depending on where your business is based. The taxes you are responsible for will also be determined by how your business is structured. For information about taxes in your particular state, check the U.S. Small Business Administration website for guidance.
There are many tax deductions available to independent contractors. As you approach income tax time each spring, review which deductions might be available to you. Here are a few common ones to consider: