How do I determine what to pay in taxes if my employer doesn't withhold payroll taxes?

By Amy Fontinelle AAA
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. 

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