Estimate Payroll Taxes
Regular employees don’t have to worry about how to estimate payroll taxes because the employer handles all that for them. But freelancers and independent contractors must figure out how much taxes they will owe every year, and budget to pay both the employer’s and employee’s shares of the taxes. Figuring out how to estimate payroll taxes might seem overwhelming to someone new to the world of self-employment, but once a freelancer learns where to look and how to calculate taxes, estimating payroll taxes gets a lot easier.
- Read Publication 505.
- The IRS publishes Publication 505 to help people determine if they should pay an estimated tax and, if so, how much. It also addresses special rules like those that pertain to resident aliens and other unusual situations.
- The IRS wants people to pay estimated taxes every quarter, but in some situations that is unnecessary. Publication 505 explains the rules regarding estimated tax payments.
- Publication 505 also has the necessary worksheets to help people estimate tax payments.
- File 1040-ES quarterly.
- The IRS has a form, 1040-ES, that independent contractors should file quarterly. 1040-ES helps independent contractors estimate payroll taxes on themselves. This estimation may not exactly equal an independent contractor’s tax liability at the end of the year, but it should come fairly close.
- Estimate state income tax.
- While some states, like Florida, do not have a state income tax, most states require that workers pay some sort of state income tax. To estimate a state income tax rate, contact the state’s Department of Revenue.
- Many software programs (like Turbo Tax) have the option of helping people file state income taxes, but don’t wait until the end of the year to do so. Make estimated payments just the same as with the federal government.
- Consult an attorney or an accountant about the tax advantages to incorporating. This may lessen tax liability as well as other types of liability.
- Consider using accounting software like Quickbooks Pro or Quicken to help estimate payroll taxes.
- Spend time with an accountant familiar with independent contractors. An accountant can help set up a system that works to budget for, calculate and file taxes. He can also show an independent contractor ways to save money and to use the tax law to her advantage.
- Resist the urge to file less than quarterly. Remember that estimated taxes may change at the year’s end, but the IRS still wants to see payments every quarter.
- The IRS has precise rules for what type of employment constitutes an independent contractor (or 1099) situation. Don’t let an employer cut corners on taxes by making an employee 1099 when he should function as a taxed employee.
- Don’t cheat. While loopholes exist and the IRS knows that people will take advantage of them, lying about income is another matter entirely. If the IRS catches someone lying on his taxes, it can bring charges of tax fraud. While people do make honest mistakes and the IRS allows for this, tax fraud is a serious matter and has serious financial and criminal consequences.
- Work out Gross Pay
- Calculate Payroll Taxes
- Fill Out Form 8824
- Determine Payroll Taxes
- Start Freelancing
- Start a Freelance Copywriting Business
- Be a Good Employee
- Know if Your Boss Is Filing Taxes on Your Income