According to this page, independent contractors are supposed to pay quarterly estimated taxes.
My question is: What if someone is both an independent contractor providing services to one company and is an employee of another company, meaning he gets income both as wages and as an independent contractor. Does he pay estimated taxes on his whole income? Just the independent contractor portion? None of it? Or what?
I would have guessed the middle option–but if that’s the case, I am not sure how things like the standard deduction and personal allowances would work. I assume you don’t just take these out of both the independent contractor income and the wage income…
You are not a tax professional or if you are, we are not in a relationship which constitutes you as being permitted to provide professional tax advice.
I have been in such a situation. There are formulas to compute what the estimated tax is, and financial advisers can give you guidance. Even the IRS gives some help (but not much).
You try to compute what your total tax will be, all things considered, and make advance payments accordingly. Overpayment is always allowed, and some look upon it as money in the bank (with no interest).
It’s always safer to overpay than underpay. Even if you follow every federal guideline, if you underpay, you are hit with a penalty. If you overpay, the worst that can happen is you lose interest on the excess and you get a refund months later. So you try to balance out your liabilities with your gains. It can be tricky, and the government has no sympathy for you no matter what.
This is not true. You must pay estimated tax if
(i) you expect to owe more than $1000 after withholding
AND (ii) you expect your withholding to be less than 90% of your total tax bill
AND (iii) you expect your withholding to be less than 100% of your previous year’s total tax bill. (or 110% of your previous year’s total tax bill if your income exceeds $150,000).
So if you end up underpaying by less than $1000 or by less than 10% or you pay as much in withholding and estimated payments as the previous year, there would be no penalty even if you underpay.
However your estimated tax and withholding must also match up quarter. So if you have large contractor income in the first quarter you’d probably have to pay some then. There is even an out here though. You’re allowed to apportion your withholding equally across quarters even if it wasn’t withheld that way. So if you find in December that you’ve underpaid your estimated tax, you could have your entire December paycheck withheld and you’d get to count some of that as if it had been paid earlier.
And it’s a lot more complicated than this “simple” explanation.
I would use the term “1099 employee” or similar, since not everyone who gets one is an independent contractor, but the tax implications are similar. Often it’s a case of a shady employer who doesn’t want to pay payroll taxes.
The situation in OP is over-complicating things, I think, but the middle option would be the closest. You pay estimated taxes on the total taxes you think you’ll owe, minus taxes withheld at your other job. It doesn’t affect your standard deduction. And even if you don’t itemize, the 1099 can be at an advantage because you can deduct on Schedule C your expenses, while the same for a W-2 employee can only be deducted by the amount over 2% of gross income AND over the standard deduction ceiling.
Personal allowances? You mean on W-4? Similar situation, you can claim zero or six, etc., it just affects your paying or getting a refund, and a penalty if you put it too high. On the W-4, you can elect to add a flat amount as well, which is equivalent to estimated taxes. With two jobs, things can get complicated, but that’s true about two W-2 jobs as well. You can be underwithheld even though you select what you think is a low enough allowance.
Oh, personal exemption. I can’t see how those would be affected by this situation at all, unless the supplemental income is high enough to phase it out. The 1040 treats all income as pooled. Technically, if say W-2 income was $40,000, and 1099 was $500, you could deduct expenses in excess of $500, but if you do that too many years in a row the IRS might not like it (e.g. may consider the job a hobby, although I don’t know if they treat true self employment and 1099 employee differently in this case).
Since posting the OP I’ve taken a closer look at the actual forms involved and learned a little as a result. The bolded portion above is the information I was missing which was making me wonder how personal exemptions and standard deductions are handled.
One way to avoid the penalty on underwithholding is to pay 100% of last year’s tax towards the current year. So look at what’s being withheld on a W-2 for the entirely family and subtract that last year’s total tax. (Not the tax refund/due - the total tax.) If there’s any difference, it needs to be paid in estimated taxes to avoid the penalty.
Now, it’s likely that you will owe something like 30-40% total tax on the self-employment (1099) income. Put that in savings as you earn the money - at least once a month. Only make enough estimated payments to meet last year’s tax obligation.
When the return is finished for the year, expect a balance due, and pay it from the savings account before 4/15
You’ll also take your new total tax and use that to generate estimated payments for the new year. Since the first estimated payment is also due 4/15, pay that out of savings, too.
I think it’s a waste of time to attempt to do anything else.
As others have stated, estimated tax payments are not a requirement just for independent contractors, they are a requirement of any taxpayer (and spouse if joint return) whose federal withholding and federal tax credits for the current year will not exceed the lesser of either 1. 90% of current year total tax or 2. 100% of the prior year’s total tax (110% of prior year tax if prior year AGI was over $150,000). Total tax means the sum of federal income taxes, self-employment taxes, household employment taxes, and any other special taxes calculated on your Form 1040.
Almost everyone chooses option 2, known as the “safe-harbor” method when calculating how much to pay in estimates. As you can see, this means that for the 1st year of a new self-employment job, there may not be any estimated payments made, which may be fine. You will owe the tax (both income and self-employment) calculated on that income and any other income when you file your return, but will not owe any underpayment penalties for failure to make estimated payments as long as you have withholdings/credits for the current year equal at least to the prior year. If you switch from a W-2 job to a 1099 job, you may be short on withholdings and need to pay estimates right away that add up at least to the amount of prior year withholding.
Sometimes the safe-harbor method is not always practical to use, however. For someone who expects their income from their 1099 job to fluctuate wildly from year to year, they sometimes do not want to pay current year estimates based on a prior year tax that they feel will be much higher than the current year. In these cases, you need to seek help of a professional to calculate the appropriate estimated payments that will cover you under option 1. above. Other times, you may expect self-employment income to be much higher than in the previous year. In those cases, you are not required to pay estimates more than what would be required from option 2. above, but may not want to pay a large tax bill the following April. You can increase the estimates in that scenario as much as you would like to help cover the additional income.
The 1099 job I’m thinking of is just a one time thing, not expected to continue past December. So I guess Safe Harbor is probably the thing to do here, which is good, since it’s basically just filling out some additional forms at normal tax-form-filling-out-time, right?
i think you are still a little confused. If this new 1099 job will just be for a few months, what you just need to do is look at your 2012 tax return that you filed this year. Look at line 61 on page 2 of the form. That is you 2012 total tax. If that number is greater than 1,000 bucks(if it is less than 1,000 you are not required to pay estimates regardless of other factors) , determine how much federal income tax withholding you (and your spouse if applicable) have had so far this year in 2013. Also add in any future federal tax withholdings for the remainder of the year for you and a spouse’s w-2 job if applicable. If the 2013 withholdings you added up in those steps are less than the total tax amount on line 61 of your 2012 form 1040, make a 4th quarter federal estimated tax payment for the difference. The 4th qtr payment should be filed with the Form 1040-ES 4th qtr voucher and is due on January 15th, 2014. You may also need to look into making a state estimated tax payment depending on what state you live in and its tax laws.
If you do end up making a 4th qtr federal estimated payment, when it comes time to file your 2013 tax return, Form 1040, enter the amount paid with the voucher on line 63 on page 2 of Form 1040 as part of the calculation of your 2013 refund or balance due.
Also, some friendly advice. Even though this job sounds like it will only last a few months, make sure to document every expense you pay personally related to the job and track any vehicle mileage for any travel related to the job that is not simply commuting mileage to and from your normal workplace. That will help when completing your 2013 tax return to have that info.
Also, based on the info provided, I have no idea what type of job this will be, but you may want to verify that your new employer is classifying you correctly as an independent contractor instead of an employee. It is more favorable to them to have you as an independent contractor as they avoid paying 1/2 of your payroll taxes that way. Conversely, independent contractors usually end up paying more payroll taxes than they would have as an employee. The classification between IC and employee is supposed to be determined by the amount of control your employer has over your daily activities on the job. If they direct what work for you to perform and when to do it on a daily basis, you likely should be considered an employee.
Okay, thanks for continuing to offer explanations. Let me try to get clear. You said:
Current year total tax, I expect, will be $6037. (This includes SE tax etc etc.) Prior year’s total tax was $2171. Federal withholding and tax credits for current year, I expect, will total $4000.
Does $4000 exceed either $5433 or $2171? Yes.
So estimated payments are required.
Now you then said:
The bolded portion is what has confused me. What do you mean when you say there may not be any estimated payments made in the first year? Under what circumstances? You said “as you can see” but actually I’m not quite getting how it is implied that there may not be any estimated payments made in the first year. That will probably clear up my previous confusion.
You also said:
I’ll do this because everyone always says to. However I don’t expect expenses to reach even $100. Very possibly, related expenses will be zero. (And the job pays $14,400.) If my expectation is correct, is there some reason it’s still important to keep track of expenses?
They tell me what they need me to produce, I produce it over the course of a couple of weeks, I send it to them. That’s how it’s described in the contract anyway. Nothing in there intimates any scheduling of work time or direction of tasks more specific than “here’s the project we need done by two weeks from now.”
This is where you got confused. I said if the withholdings do NOT exceed the Lesser of: 1 or 2., estimates are required. Since your current year withholdings already exceed prior year tax, you do not need to make any estimated payments.
This does not mean you may not owe tax when it comes time to file your taxes for 2013. What it means is that you are guaranteed to NOT owe any underpayment of tax penalties.
Heh, no problem Frylock. This stuff can be quite confusing.
Even though it appears you are not required to make any estimated payments, you can still make them if you want to reduce or eliminate any tax you may owe come next April 15th tax deadline. If it was me, I would not make any payments and just make sure to have set aside the 2,000 to 2,500 you expect to owe when you file your tax return based off the numbers you provided. I do not like to make interest free loans to the government
