If you are employed in the traditional sense your employer is responsible for withholding. Your income taxes and paying them through payroll taxes.
However, when you work for yourself payroll taxes are not withheld from your earnings. In return, the Internal Revenue Service requires you to pay income taxes on all income and self-employment taxes.
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If you earn income as an independent contractor, since taxes are not withheld from your earnings it is essential that you set aside portions of your earnings to cover your tax liability. In this article, we will discuss
Related To How Much to Save for Taxes Self Employed:
You must pay self-employment tax if you earn $ 400 or more from your own business activities. For fiscal year 2010 you will be subject to the 15.3 percent tax on all self-employment earnings $ 106,800 as of 2011 that rate decreases to 13.3 percent. Profits exceeding $ 106,800 are taxed at 2.9 percent in both years. To cover the amount you need to save to cover your self-employment tax bill. Multiply your net earnings from self-employment by 0.153 each month, setting the reserve funds for your year-end tax bill.
Income tax and estimated payments
In addition to self-employment taxesyou must claim income taxes on your own-account earnings. Instead of paying this tax bill at the end of the year. The IRS requires you to pay income taxes on the money while earning using the estimated tax payments. Using appropriate tax tables for your earnings you need to estimate your year-end earnings and present quarterly payments based on those projections. For example if you earn $ 50,000 a year through self-employment income. Your projected tax is $ 8,681.25 ($ 4,681.25 base + 0.25 * [50,000-34,000]). Every three months you must pay a quarter of that total or $ 2,170.25 in estimated payments.
This is a rough illustration so speak to a tax accountant if you need specific calculations.
If you don’t pay enough estimated income taxes during the year, you may face a penalty for underpayment. To avoid underpayment penalties, your estimated tax payments must be at least 90 percent of your total actual tax bill, or be 100 percent of the prior year’s closing tax. For example, if you paid taxes totaling $ 4,000 last year, you must pay an average of $ 1,000 in estimated payments each quarter to avoid penalties.
If you are employed in a full or part time job in addition to your activities as an independent contractor, you can use payroll withholding to pay your self-employment tax burden. FICA overpayment and payroll tax income taxes are credited to your entire tax bill. Submit a new W-4 form to your employer to withhold additional income taxes each pay period. Depending on your self-employment income, you may be able to adjust your income full-time to account for all income taxes and avoid the need to pay estimated taxes.
Any worker who made more than $ 600 a year had a better plan to pay taxes. If you were an employee, your company would keep part of your Social Security and Medicare tax payment. When you’re self-employed, you have a 100% responsibility to make sure Uncle Sam gets his share of the self-employment tax income. It is up to you to figure out what you should reserve and then be forced to save that money until tax time. Given this, almost no one is good at saving money. In fact, 70% of your fellow citizens could not cover an unexpected cost of $ 500 tomorrow. So don’t feel so bad, you’re certainly not alone.
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