Paying Estimated Taxes as an Independent Contractor

Picture this. You’re a graphic designer who is an independent contractor. You had a great year, and business was booming. But when you’re filing your taxes for the April deadline you realize that you completely forgot about paying estimated taxes!

This scenario is more common than you think. When you’re self-employed, you already have a lot on your mind as you’re in charge of everything. So setting aside some money to make quarterly payments could slip your mind.

If you’ve done this before, don’t panic. The IRS won’t immediately put you in jail. They’ll just charge you some penalties (and interest). The good news is that you can keep this from happening again by reading this blog.  

What are estimated taxes?

The US tax system collects taxes as you earn your income. So, if you don’t have an employer doing this for you, you’ll need to pay taxes throughout the year. Any kind of income that isn’t withheld is taxed quarterly. This can include:

• 1099 income
• Income from dividends
• Capital gains
• Retirement benefits
• Some forms of unemployment compensation

The estimated quarterly tax deadlines are usually April 15, June 15, September 15 and January 15. While these dates may slightly change by a day or two, the months are always the same. Form 1040-ES is the only form you’ll need for quarterly taxes, and you only need to file it once in April.

How can independent contractors calculate estimated taxes?

The easiest way to calculate estimated tax is to use an estimated tax calculator. All you’ll need to use one is just your estimated income, your self-employment deductions, the state you live in and your filing status.

Self-employed individuals only have to pay estimated taxes if their tax liability is estimated to exceed $1,000. This estimate has to include both income taxes and SE tax. You can use your previous year’s bank statements and 1099 forms to help you with this.

Your income tax liability will depend on your tax bracket, filing status and your AGI (Adjusted Gross Income). The independent contractor tax rate is 15.3% which includes both Social Security and Medicare taxes.

To avoid any underpayment penalties, you can always follow the IRS’ “safe harbor rules”. What this means is that if your AGI as a single filer is under $150,000, you should pay either 90% of your current year’s estimated tax or 100% of your previous year’s tax to be safe.

If your AGI is over $150,000, then you should pay 110% of your previous year’s tax to avoid being penalized. To be extra careful, you can pay a little more than these estimates as a safety blanket.

But like we said before, independent contractors are usually very busy. FlyFin is an award-winning app that can easily find deductions for you with A.I. and help you calculate your estimated taxes. Even your tax filing needs are taken care of by expert CPAs who offer unlimited support.

What if my 1099 income isn’t the same throughout the year?  

Uneven income is not new in independent contractor work. If your 1099 income tends to fluctuate every year, the bad news is that you’ll have to do a lot more math. You can always get a CPA to help you if you’re struggling.

The most common method of paying estimated taxes with uneven income is using the safe harbor rules we mentioned earlier. But there is another way – the annualized income installment method.

With this method, you only pay taxes on your actual income. For each quarter, you calculate your earned income and “annualize” it to see what it would look like for the rest of the year. You then only have to pay estimated taxes on that income amount.

Paying estimated taxes as an independent contractor doesn’t have to be challenging. As long as you plan ahead and make sure you have enough income set aside to cover your quarterly tax payments, you won’t have any surprises during tax time.