A:

Your employer may not withhold payroll taxes in several situations; the most common one is if you are considered an independent contractor. Independent contractors are considered self-employed, even if they only work for a single client. Self-employed individuals must pay their own payroll taxes as well as make quarterly estimated tax payments to the IRS to avoid penalties and interest.

The easiest way to figure out your estimated tax payments is to use tax software. But if you want to do it yourself or you want to understand how the estimation process works, use IRS form 1040ES and the accompanying instructions and estimated tax worksheet. First, you’ll need to know your adjusted gross income for the previous tax year. Next, you’ll want to estimate your total income for the current tax year (don’t forget about investment income and other sources of taxable income besides self-employment). You’ll also need to estimate your total deductions, exemptions, credits and factor in both the self-employment tax (the additional Social Security and Medicare taxes you pay because no employer is paying them on your behalf) and the tax deduction for the self-employment tax. Using all of this information, you can calculate your estimated taxable income.

You can then determine your estimated tax payments in one of two ways. One method will probably make the most sense for your situation depending on how steady your income is and how well you can predict your annual income. You can either make quarterly estimated tax payments totaling 100% of your previous year’s tax liability, or you can make quarterly estimated tax payments totaling 90% of the current year’s estimated tax liability. The 100% method guarantees that you won’t owe any penalties or interest for underpaying your taxes. However, in some situations it can mean paying much more tax than you’ll actually owe for the year and having to wait until the following April to get the money back with your tax refund. No one wants to give Uncle Sam and interest-free loan, but doing so is especially problematic if it will strain your finances.

RELATED FAQS
  1. Why does the IRS withhold income taxes from employee paychecks?

    In the midst of WWII, the U.S. government ran into trouble funding the war effort. The problem did not originate from citizens ... Read Full Answer >>
  2. If an employee is paid by commission, who is responsible for withholding taxes?

    It depends. An individual who receives commissions can be treated in the same manner as an individual who receives straight ... Read Full Answer >>
  3. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  4. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>
  5. Are credit card rewards taxable?

    Credit card rewards are taxable in the United States some of the time. The Internal Revenue Service (IRS) classifies credit ... Read Full Answer >>
  6. What is the Social Security tax rate?

    The Social Security tax rate is 12.4% as of 2015. Of that amount, the employee is responsible for half, or 6.2%, and the ... Read Full Answer >>
Related Articles
  1. Taxes

    Small Business Tax Obligations: Payroll Taxes

    Don't leave it up to your accountant - owners are ultimately responsible for fulfilling tax obligations.
  2. Taxes

    When You Should Change Your Withholding Tax

    When there are major changes in your life, you should adjust your withholding to ensure you aren't paying too much in taxes.
  3. Retirement

    The 3 Most Common 401k Rollover Mistakes

    No one is born knowing the tax rules for 401(k)s and IRAs, but only dummies, scaredy cats and suckers don't buckle down to learn them.
  4. Taxes

    Top Reasons to File Separately When Married

    Most of the time, it makes sense for couples to file their taxes jointly. Except for these possible exceptions...
  5. Taxes

    What IRS Form 1023 Is Used For

    To be treated as a tax-exempt organization, start by filling out this form.
  6. Taxes

    Late with Your Taxes? Grab IRS Form 4868

    Fill out this form to get a few more months to file your tax return. But remember, April 15 is still the payment due date if you owe taxes.
  7. Taxes

    What IRS Form 8949 Is For

    Selling a painting or that lake property? Disposing of your fossil fuel stocks? You need to know about this IRS form.
  8. Economics

    The Problem With Today’s Headline Economic Data

    Headwinds have kept the U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest GDP revisions prove it.
  9. Economics

    The Top 9 Things to Know About Hillary Clinton's Economic View

    Find out where former secretary of state and Democratic presidential candidate Hillary Clinton stands on the economy, jobs, trade and education.
  10. Professionals

    Holding Out for Capital Gains Could Be a Mistake

    Holding stocks for the sole purpose of avoiding short-term capital gains taxes may be a mistake, especially if all the signs say get out.
RELATED TERMS
  1. Payroll Tax

    Tax an employer withholds and/or pays on behalf of their employees ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Guideline Premium And Corridor Test (GPT)

    A test used to determine whether an insurance product can be ...
  5. Cash Value Accumulation Test (CVAT)

    A test method used to determine whether a financial product can ...
  6. Section 7702

    The section of the United States Internal Revenue Code that defines ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!