Estimated Tax Payments for 1099 Independent Contractors

If you’re self-employed and receive income through an independent contractor, you may be wondering what kind of taxes you should be paying. As an independent contractor, it can be hard to know for sure what your tax obligations are. That’s why we’ve put together this blog post to give you an overview of the estimated taxes you may owe as an independent contractor. In addition, this post also covers how to report your income and pay your taxes. If you’re self-employed and have any questions or concerns about taxes.

What is a 1099 tax form and what makes it so important in the times today? To be precise,the 1099 form is mainly applied to the Sharing-economy workers, freelancers and Independent contractors. So, what is the importance of the 1099 tax forms and what lies within? Let us find out more.

The 1099 Forms: All About It

The 1099 form is a document that records the types of income that is received during the year. This is the income that needs to be reported in your tax returns. Within these forms are recorded the income from sources other than wages, salaries and tips. It is required by the businesses to issue a 1099 form from every non-incorporated contractor who has paid more than $600 within a calendar year. This is also recommended for attorneys, irrespective of the amount. Likewise the 1099 form needs to be issued in case the total reimbursement exceeds $600, for the time when the employees need to reimburse for their expenditure and the company policy does not require receipts.

What Makes 1099 Forms so Important?

The most important aspect of the 1099 forms is that the IRS also holds a copy of it. Every form comprises the taxpayers employee identification and the Social Security Number. Hence, once you receive the form, you simply have to address it. Also you become responsible for the forms and you need to get in touch with the IRS soon enough, in case you are yet to receive the forms. In case one fails to file accurately, it can result in penalties from the first day of delayed payments. So, you see, this form is quite important all the way through.

Read More-: How to Print 1096/1099 Forms in Sage 50

The Requirements for the Process of Reporting

The 1099 MISC forms reports comprises income that surpasses the amount of $600 that has been generated from independent contracting services, dividends, Interests, and government payments, among others. This requires the entity that offers the payment to you to fill out the required 1099 forms. Also bear in mind that there are different types of forms for every income type that has been earned. It is mandatory that the forms are sent out by 31st January. 

There are also cases where the relevant businesses send out the required 1099 forms to the subcontractors as and when the payment reaches beyond $600 within the year. Hence, it is required for the companies to issue the forms to the individuals, LLCs and partnerships.

Estimated Tax Payments for 1099 Independent Contractors : Guide

To start with there are scenarios where one might be working in a shared economy as a 1099 contractor or, for instance, renting your home at Airbnb. Hence, you will be more likely to pay the tax on your income. However, the main question arises as to how much one needs to save in order to cover the estimated tax payments? Well, read on to find out more.

In the case of an independent contractor, one is responsible for the payment of self-employment taxes, along with the income taxes. As in the case of the W2 employees, in this case one does not have an employer who is withholding any taxes from the paycheck. Hence, you owe the IRS the money at the end of the financial year. But, much like everyone else, the IRS hates to wait for the money to arrive. Hence, the scheme of quarterly estimated tax payments in advance is expected. While it might sound tricky to start with, however, it is simple to calculate the same with just a few clicks on the way. While you are at it, you need to bear in mind that every payment made will proceed towards the taxes at the end of the year. So, you need to consider your quarterly tax payments as the money that goes down your year-end tax bill.

1099: For the Contractors and Freelancers

To understand the concept, one has to know that most sharing economy workers fall under the 1099 contractors for tax purposes. Likewise these people also fall under the category of independent contractors or freelancers. According to the IRS, the 1099 contractors are considered self-employed, hence, if the income made exceeds more than $400 then you are entitled to the self-employment tax. So  what is a self-employment Tax? Let us find out more.

The Self Employment Taxes

Simply put, the Self Employment taxes comprise of the Medicare and the Social Security taxes as well. This amounts to somewhere around 15.3% of the total profit of your income as a contractor; however this does not include your total taxable income. Once you file your annual tax return, you can calculate the net profit on schedule C within the form 1040, and profit or losses from the businesses, like sole Proprietorship. However in the case of a W-2 employee, it is required that your employer pay half this amount, while you pay the other half. But this does not apply to the independent contractor who needs to pay the entire amount.

As in the case of the Independent contractors, you need to bear in mind that this is the case of self-employment taxes and need to assess the net profits likewise instead of the taxable income. In order to calculate the net profit one can do so by subtracting the deductions from the gross earnings. The income tax bracket determines the amount you save for income tax. For instance, in case your earnings are about $15000 as a 1099 contractor, hence you need to file as a single, non-married individual. In this case you will keep aside 30-35% of the income for the taxes. Also, placing the money aside is vital as you might need to place aside the estimated taxes quarterly.

Overall, the estimated taxes payments comprise both the Self employment taxes and the Income Taxes.

To Calculate the Estimated Tax Payments

One of the simplest ways to calculate the estimated taxes, one needs to apply the ‘safe harbor rules’. So, what is this all about? Well to start with this rule has been designed to protect the individual from the IRS penalties for underpaying the taxes. Generally in the case of underpaying of the taxes can result in fines and interest. But, the good news is that one can easily avoid these unwanted expenses, by following the ‘Safe harbor rule’. According to the IRS, one is well-protected as long as the current year’s estimated payments equals 100% or more of the previous year’s tax bills. Hence, the Safe harbor rule can be applied to understand the estimated tax payments and steer clear of the unwanted penalties.

In order to estimate the taxes under the safe harbor rule,

• You need to start by taking 100% of the taxes that are paid on the previous year’s returns. 
• Next you need to divide the previous year’s total taxes by Four. 
• The Total is the Quarterly Obligation under the rule. 
• As long as this resulting total can be covered safely from your payments, you are safe from the penalties

There are cases when you might owe the additional taxes in case you earn more than the previous year. However, the IRS will not take any action in case of any underpayments. The other great way to avoid owing the year-end taxes is to annualize the estimated 1099 income and deductions. But, you need to bear in mind that forecasting the income for a complete 12 months might be difficult. However, using your businesses quarterly earnings can be used to calculate the estimated tax payments as well. The best part is that in case you overpay, the excess amount will be returned by the IRS. So, you see, you are in safe hands.

The Local Tax Regulations: All About it

One needs to also calculate the local taxes. According to your location, you might have to pay state, county and City taxes. For this, you need to refer to your local tax office in order to determine the local obligations. Overall, the total tax bills can amount to about 40% of your income. This might sound like a big deal, but the federal, state and local taxes can add up real quick.

Read Also-: How to Print 1099 and 1096 Forms in Sage 100

Conclusion

So, there you have it people, these are some of the most important facts related to the Estimated Tax Payments for 1099 Independent Contractors. In case of any queries you can easily reach out 1800 964 3096 to a team of experts and we will be more than happy to help you out.

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