5 Steps to Estimate Quarterly Income Tax for 1099 Contractors
Being a self-employed 1099 contractor or freelancer has its perks. You can work flexible hours and enjoy deductions unavailable to those who get a W-2 instead of 1099s. But with its advantages come responsibilities. Among these are paying quarterly estimated taxes.
People in business for themselves usually need to make estimated tax payments, and this includes contractors and freelancers. You will need to pay not only income tax, but also other taxes, the most notable of which is self-employment tax.
Should you neglect to pay your quarterly estimated taxes, you will face penalties and interest. Long story short, if you are working the gig economy, you need to learn how to estimate quarterly income tax for 1099 contractors. Even if you only have a part-time gig and a full-time job, it’s unlikely your employer is withholding enough tax to cover your side business.
Following are the 5 steps to estimate quarterly income tax for 1099 Contractors.
1. Determine if You Are Likely to Owe Quarterly Estimated Taxes
Anyone who does not have an employer withdrawing enough income taxes to cover all their taxable income is subject to paying quarterly estimated taxes. If you are a freelancer or a contractor, you will likely have to pay if
- You will owe the IRS $1,000 or more on your annual tax return
- Tax credits and the amount your employer (if you have one) withholds for taxes will not cover at least 90% of your tax liability. (The amount is 66.66% if you are a fisherman or a farmer.)
- Tax credits and the amount your employer (if you have one) withheld for taxes last year did not cover at least 100% of last year’s tax liability.
Most contractors and freelancers structure their businesses as sole proprietorships, limited liability companies (LLC), partnerships or S corporations. If you use any of these business structures, your earnings are part of your personal income for tax purposes. As already noted, you will need to pay not only income tax but also self-employment tax. C-corporations have their own rules which we will not address today, because the earnings of a C-corporation are not considered to be personal income.
Note that if you have rental, Airbnb or investment income, you also may need to pay quarterly estimated taxes, but this guide focuses on 1099 contractors.
2. Be Aware of the Type of Taxes You May Have to Pay as a 1099 Contractor
You will need to pay taxes on your total income for the year minus deductions for which you are eligible. You will want to keep careful records of all your purchases and expenditures, because many may be deductible for your business. Once you know your taxable income, you can consult the IRS tax table for the current year to check your 1099 tax rate. If you neglect to pay independent contractor quarterly taxes, what you owe may come as a shock at the end of the year.
Sadly, in addition to income tax, you must also pay self-employment tax if you are a 1099 freelancer. Because you are self-employed, you will have to pay the portion of FICA (Federal Insurance Contributions Act) you would pay if you were an employee in addition to the part your employer would pay. If you make over $400 during the year, you will need to pay self-employment tax.
The self-employment tax rate is 15.3% of your net business income, and it includes
- Social security: 12.4%
- Medicare: 2.9%
State and Local Taxes
Depending on where you live, you may also have to pay state and municipal taxes. You probably already know whether or not you have to pay state taxes, but if not, you can find the link to your state’s tax authority at this State Tax Authorities website. Most states do not allow cities to tax people on their income, but as of 2019, 16 states allowed municipalities to levy their own income taxes. Some counties also tax income.
3. Calculate Your Quarterly Estimated Taxes
Once you have determined that it is likely or even possible you will have to pay quarterly estimated tax, you will need to calculate them. Here it is in a nutshell:
- Project your yearly income.
- Subtract expected deductions.
- Determine your income tax and self-employment tax. Self-employment tax is 15.3% and you can determine your tax bracket by consulting the IRS tax table.
- Divide by four to determine your quarterly federal estimated tax liability.
There is more than one way to calculate your quarterly estimated taxes, so you know how much to put aside. However, you estimate, be aware of new legislation that changes the landscape a bit in 2020. Recent legislation extended certain tax benefits that had expired at the end of 2017 through 2020 including the tuition and fees deduction and the deduction for mortgage insurance premiums.
Calculating your quarterly estimated taxes sounds harder than it is, because there are tools and methods to help you. Following are the main ones.
Use the IRS Estimated Tax Worksheet to Estimate Your Quarterly Taxes
The IRS is nothing if not thorough, and they provide the means to estimate quarterly income tax for 1099 contractors. You can use the Form 1040-ES Estimated Tax Worksheet. You may also want to read Publication 505, Tax Withholding and Estimated Tax and Form 1040-ES, Estimated Tax for Individuals explain what you need to know. (See Form 1120-W for estimated tax for corporations.) You will need Form 1040-ES to file your estimated taxes at any rate.
Form 1040-ES provides you with
- The Estimated Tax Worksheet for the current year
- The Instructions for the current year’s Estimated Tax Worksheet
- The current year’s Tax Rate Schedules
You will also need your tax return and instructions so you can figure out your income, deductions and credits.
See an Online Tax Calculator for a Quick Estimate
There are several online tax calculators that enable you to estimate your taxes for the year which you can then divide by four. Other calculators perform the entire quarterly estimated tax breakdown.
- Nerdwallet provides a fast, free annual federal income tax calculator. Once you have your annual tax liability, you can determine what you need to pay by dividing by four.
- Calculator.net provides a more detailed annual federal income tax calculator. Once again, just divide the final figure by four.
Let Tax Software Do the Work
If you usually use tax software or an online tax service such as those offered by TurboTax or H&R Block, estimation should be easy. Tax software will estimate your freelancer quarterly taxes for you based on the previous year (assuming you used the software the previous year) and any new information you input. You can then complete Form 1040-ES within the software as you do with your other tax forms.
Use the Safe Harbor Rule
The Safe Harbor Rule provides that the IRS will not penalize you for underpaying your quarterly estimated taxes if your payments are over 90% of your tax bill from the prior year. To calculate how much to set aside under the Safe Harbor Rule, take 100% of the amount of taxes you paid last year and divide by four, and you have your quarterly payment.
Of course, if you end up owing more taxes at the end of the year, you still must pay them. Therefore, some people set aside 30% of their expected income each quarter.
4. File and Pay Your Quarterly Estimated Taxes
You can file your Form 1040-ES through tax software, directly online with the IRS or by mailing it along with your payment. Your Form 1040-ES not only enables you to calculate your estimated taxed, but also tells you where to mail your form and payment according to where you live. Or you could just hire an accountant to take care of your quarterly tax filings.
You can pay in a variety of ways as detailed in Form 1040-ES including
- Pay by check or money order, mailing the payment with the appropriate quarterly voucher included in Form 1040-ES with your completed form.
- Pay directly at IRS.gov/Payments.
- Pay by Phone calling one of the debit or credit card service providers or the Electronic Federal Tax Payment System (EFTPS) (See Form 1040-ES for more details.)
- Pay by mobile device by downloading the IRS2Go app.
- Pay by cash in a limited amount through IRS selected retail partners. To make a cash payment, you must first be registered online at http://www.officialpayments.com/fed.
5. File Your 1099 Contractor Quarterly Estimated Tax by these Deadlines
The deadlines for filing quarterly estimated taxes are
- April 15
- June 15
- September 15
- January 15
If your tax year doesn’t begin on January 1 or if you are a farmer or a fisherman, see Chapter 2 of Publication 505.
Some of the filing dates for quarterly estimated taxes were extended for tax year 2019 due to the Covid-19 pandemic, so you may want to doublecheck with the IRS website before paying in case there are any extensions for tax year 2020. Please note that state, municipal and county taxes are not necessarily due on the same dates as federal taxes.
Let Taxhub help
Taxes are more complicated when you work for yourself as a 1099 freelancer or contractor than when you are an employee. Learning how to estimate quarterly income tax for 1099 contractors and keeping organized enough to do it are just part of that. Taxhub enables you to consult online with a CPA throughout the year to keep you on track. We even offer free five-minute consultations with a CPA if you have a quick question or two. Watch a demo to find out more about how Taxhub can help you through the tax morass of being a 1099 contractor.