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How to get Independent Contractor Quarterly Taxes Right and Avoid Fines

Independent contractors have a hard time when it comes to dealing with taxes. While the rest of the working world has deducted income from each sala

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Independent contractors have a hard time when it comes to dealing with taxes. While the rest of the working world has deducted income from each salary to cover taxes, the independent contractor is forced to invent everything on their own.

Calculation of tax benefits

Figuring out your own taxes can feel like working on a complicated math problem. When you get the problem right, you have the pleasure of forking your money. When you misunderstand the math problem, it means fines, or worse.

In this article, we look at how independent contractors can get their quarterly taxes right.

The situation

Independent contractors are disadvantaged from a tax perspective in several ways.

  • Withdrawals: People with consistent employers withheld money from every paycheck that goes directly to paying taxes. When taxes are due, the withholdings will usually have covered all or most of the money they owe to the government. This usually does not happen for independent contractors. They need to figure out what to pay independently.
  • Inconsistency: Independent contractors also do not make money with the same consistency as paid employees do. One month can be very busy, while the next can be very slow. This is especially true for independent contractors whose work has a seasonal aspect. For example, a gardener may have a lot to do in the spring and summer, but not much work in the fall and winter at all.
  • Comprehension: Finally, understanding. Just because you are good at landscaping, construction or writing does not mean that you know the ins and outs of tax law. Many independent contractors find themselves on the wrong side of tax fees for the simple reason that they did not know they were breaking the rules.

While it’s scary to be completely responsible for your own taxes, most independent contractors figure out how to do it relatively quickly.

The rules

The IRS expects any independent contractor who owes $ 1,000 or more in tax after deductions to make quarterly payments – which is responsible for annual earnings of $ 12,000 or so per year. The math gets further complicated if you also consider state taxes.

The bottom line, though, is that if you make your living as an independent contractor, chances are good that you’re expected to pay quarterly.

Develop a tax planning strategy that suits your needs

The penalty for not filing your taxes on time as an independent contractor can be severe. The IRS expects self-employed workers to pay according to a quarterly schedule, based on income estimates. This can be determined by either looking at previous years’ records or by making an educated guess about what you are going to make for the current tax year.

But this is my first year at work. How can I make an educated guess?

Yes. This is the rub. There are several ways you can make an educated guess. Talking to an accountant is probably the best first step. They will look at your current earnings for the year, ask you a few questions and then help you develop a tax planning strategy that includes deadlines and estimates for what you have to pay each quarter.

It is better to make mistakes than to pay too much. Although no one likes to pay more than they think they should, it’s better than paying too little, because:

  • The wrong payment of your quarterly tax can result in fines starting at 0.5% and limited to 25%. It picks up quickly. And if you pay too much, you get your money back on your tax return.

As you progress in your career as an independent contractor, you will probably find it easy to work out your quarterly payment schedule. Until then, it’s a good idea to take advantage of every resource you can get.

Tax Consultant

Consider the services of a consultant

The more your business grows, the more complicated your tax situation will become. This is a good problem to have, but also a situation that requires additional consideration. Business analysts can be hired on a freelance basis to look at your books and make recommendations.

Alternatively, the independent contractor with a fast-growing business might also consider taking classes to learn more about business management. It is important to understand that the independent contractor is essentially a business owner for a company that has only one employee.

To find long-term success, they need to treat their work the same way any business would. It certainly includes the understanding of tax legislation, but it also involves financial planning, marketing knowledge and more. The best way to improve your small business is to understand it, both in terms of what you do at work and based on what goes on behind the scenes.

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