Calculating Estimated Payments Is Easier Than You Think

businessman thinkingOne tax-related issue that a large number of people deal with when they’re first starting out as freelance employees or 1099 independent contractors is the concept of estimated payments. For those unfamiliar, in a normal work environment your employer is taking taxes out of your check every week to send to the federal government. The employer usually takes a significantly larger amount of money than you actually owe out of each check, which is why some people get large refunds when income tax season rolls around. When you’re a freelance employee or independent contractor, no employer is taking taxes out of your check because you are your own boss. Instead of paying every time you receive income, the IRS only requires that you pay four times per year. These are called quarterly income tax payments.

The problem that many people run into has to do with accurately figuring out how much they owe at any one time. The income of a freelance employee can fluctuate wildly – some months will certainly be better than others. Many people get overwhelmed when trying to calculate these totals, especially since you can incur severe penalties if you don’t send 90% of the total balance due by your January payment. In reality, the process of calculating how much you owe is surprisingly simple.

Watch this video on all the different applications of a 1099 misc tax form:

If you’ve been freelancing for a few years, all you need to do is send one quarter of the amount of money in tax that you owed the previous year with each quarterly payment. If you owed $10,000 in taxes in 2013, for example, you can divide that number by four and send $2,500 with each quarterly income tax payment.

If you’ve only been freelancing for a year, the process of calculating how much money you’ll owe is still simple. Figure out the average amount of money that you make per week and multiply that number by 52. The number you arrive at will be the total amount of money that you expect to make during that calendar year. Don’t worry if your income continues to fluctuate throughout the year – even if you’re off by several hundred or even several thousand dollars, you’ll still come close to the 90% requirement by the time you make your fourth and final estimated tax payment in January.

  • If you need advice on how to hire a 1099 contract employee, take a look at our Landlord’s Tax Guide, and we’ll show you how.

Next, go online and look at the income tax bracket breakdowns for the year in question. Based on your income, you’ll be able to use those numbers to find out the total amount of money you’ll need to send when all four payments are combined. Once you have that total, divide that number by four to arrive at the total amount of money you’re supposed to pay with each quarterly payment.

If your income fluctuates wildly, you can also calculate each payment as it happens. Figure out the total amount of money that you made since your last payment using payment receipts or invoices. Using your tax bracket as a guide, multiply that number by the percentage of your income that you are required to pay for taxes. The number you arrive at is the total amount of money you’re supposed to pay for that single payment. Repeat that process every few months during the year as additional payments become due.

Thanks for reading our informative article on calculating estimated payments!

Remember Huddleston Tax CPAs is a greater Seattle area and Bellevue CPA firm give us a call at 425-483-6600!

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