Many people are used to thinking of April 15th as “tax day” here in the U.S., but the truth is that many individuals and small business owners file taxes throughout the year! Freelancers, contractors, and other self-employed individuals typically pay quarterly tax filings on estimated income. So that means you may have not one, but four tax days every year. However daunting this may seem, when you apply proper planning and calculation, you can roll through each tax filing with ease.
Quarterly taxes (or estimated taxes) is how the self-employed population contributes to things like Social Security, Medicare, and pays income tax to the IRS. These payments are usually broken down as such:
- Income tax: You’ll pay income tax like anyone else. Plus…
- Self-employment tax: Around 15.3% of your income goes to Social Security and Medicare, as one lump payment. Salaried employees typically have this payment split with their employer, but if you are in business for yourself, you pay the whole thing.
It’s recommended to set aside 25-30% of your income for taxes if you’re self-employed. Don’t wait until the last second and be hit with a huge tax bill!
If you expect to owe more than $1,000 to the IRS from your self-employed income, you should be filing quarterly. If you expect to owe less than this, you can simply account for the small amount of self-employed income on your yearly return. If you’re not sure which one of these categories you fall into, make sure to reach out to a qualified tax accountant in Fort Collins, or your local area. The last thing you want to do is file incorrectly, or put yourself at risk for an audit or fines.
Calculate your tax payments by estimating your yearly income, minus your business expenses- this is your taxable income. Then using the current tax rates, calculate both your income tax and self-employment tax. Add these together, then divide by four. This should be your quarterly tax payment.
Need help understanding self-employment quarterly tax filings? Reach out to us at S.J. Wick & Associates today!