For salaried workers, calculating taxes can be fairly straightforward, especially if they only work for one employer from Jan. 1 through Dec. 31. However, independent contractors don’t have it quite as easy. Income can be unpredictable throughout the year, especially if you work for multiple businesses.
At the start of every working relationship, you’ll complete a Form W-9, providing your Social Security number and contact information to the person hiring you. This makes it easy, at the end of the year, for that same hirer to complete a Form 1099, reporting all of the money he paid you during the tax year. Since contractors must pay self-employment tax, it’s important to calculate how much you’ll owe as early as possible in the year to avoid being penalized for underpaying your taxes.
Finding a W-9 Tax Calculator
If you work as a salaried employee, taxes are withheld from every paycheck and remitted to the IRS on your behalf. At tax time, your employer issues a W-2 detailing how much you made and the amount of taxes you paid in. From there, you file taxes to make sure you paid enough and if not, you’ll owe. You can complete a "paycheck check-up" to ensure that your employer is withholding the correct amount of taxes through the IRS Withholding Calculator.
However, if you’re an independent contractor, that doesn’t happen. When someone offers you $1,200 to perform a service, you receive every dollar of that $1,200. That means you are responsible for paying income taxes on that and if you wait until April 15 of the following year, you may owe interest and penalties on that amount.
Generally speaking, the IRS recommends that you pay estimated taxes in advance if you believe you’ll owe $1,000 or more at tax time. This can be complicated, especially if you’re working a primary job at which taxes are taken out of each check. The issue is that if you owe more than $1,000, you’ll owe penalties for underpayment of taxes. This is after eliminating all credits and deductions you’re entitled to in your current filing status.
Programs like the Quickbooks free self-employed tax calculator may be handy for freelancers and contractors. Once you’ve successfully filed taxes one year as an independent contractor, it may become easier to estimate how much you’ll need to pay next year.
Determining W-9 Status
For employers, the line between “employee” and “independent contractor” can be a thin one. It’s a very important one, though, as far as the IRS is concerned. The agency has been cracking down in recent years on the rampant misclassification of independent contractors since businesses realize that they can avoid paying benefits and withholding taxes while getting all the perks of having a nine-to-five on-site employee.
Independent contractors work for themselves. You, the hirer, are a “client” of that contractor, and the contractor works on a freelance basis. Even if you need the person to work on your premises 40 hours per week, the contractor needs to be in charge of what hours she works, how she performs those duties and the supplies and equipment she uses to do that work.
It’s important to follow IRS guidance when bringing on a new worker and make a clear delineation between your W-2 employees and your contractors. If you find you’ve misclassified an employee, you can use the Voluntary Classification Settlement Program to remedy the situation before the next tax season.
Estimating Quarterly Payments
If you’ve been classified a W-9 worker, it’s important to next determine whether or not you’ll owe more than $1,000 at tax time. If so, you’ll need to begin making quarterly payments when the next due date rolls around.
To help you calculate that, the IRS offers a work sheet as part of the instructions for Form 1040-ES that serves as a W-9 calculator. Here you’ll estimate the adjusted gross income you expect to make this year, minus any deductions and credits you expect to take. If, in the end, you see that the amount you’ll make exceeds $1,000, you’ll need to make estimated tax payments. Otherwise, you’re free and clear until the next tax year.
How do you estimate how much you’ll make? This can be a bit tricky, but you aren’t locked into the figure. If you’ve signed a long-term contract with a business, and they’ve committed to paying you a fixed amount for the duration of the project, it’s a bit easier, but if you’re working hourly or for multiple clients, you may have very unpredictable income.
If you have a steady flow of work, simply multiply what you’re making each month by the remaining months to determine how much you’ll make by the end of the year. As your work ebbs and flows over the following months, continue to revisit this calculation and adjust it for the actual figures.
Making Quarterly Payments
The Estimated Tax Work Sheet directs you to divide the final total by four to determine what to pay. Immediately following the work sheet is a list of four due dates with columns for entering the amount you should pay for each quarter. This can serve as a log of the payments you made – you’ll need this information when you file your taxes since it will reflect the amount you paid in during the year. Below the estimator are four payment vouchers you can then clip out and include with each payment that you send to the IRS, or you can make payments online.
Using these vouchers or the online payment portal, you’ll input your name, Social Security number, the amount you’re paying and your mailing address. Make sure you use the primary Social Security number the IRS associates with you. If you’re married and you file jointly, the primary number on your account may be your spouse’s. If you aren’t sure, call the IRS to ask which Social Security number is best to use, as a misplaced payment could result in a discrepancy when you file your taxes that slows things down.
You’ll then submit one payment for each quarter to the payment center where you would mail your tax return. Estimated payments are due in mid-April, mid-June, mid-September and mid-January.
Paying Self-Employment Taxes
As a W-9 worker, the taxes you pay are for the same purposes as your W-2 counterparts. The difference is that W-2 employees have an employer helping out with part of those payments. This means you’ll pay more in taxes, but you also have business-related deductions that payrolled employees don’t have.
The current tax rate for self-employed taxpayers is 15.3 percent, which includes 12.4 percent for Social Security and 2.9 percent for Medicare. If you earn more than $137,700, you won’t pay Social Security taxes on anything above that amount, but you’ll still pay Medicare taxes on your full yearly income. It’s important to note, though, that if you earned less than $400 in your self-employment ventures, you won’t owe those taxes at all, unless that work was for a church. Church-based employee income is taxed starting at $108.28.
If you’re a high-dollar earner, you’ll also need to be concerned about the additional Medicare tax. For single taxpayers earning $200,000 or more, there is a 0.9 percent Medicare tax on the amount earned above that. For married couples filing jointly, that threshold is $250,000 and for those who are married filing separately, the threshold is $125,000.
Tracking Tax Deductions
One way to offset the taxable portion of your income is to take deductions. If you’re self-employed or operate as a business partnership, you can claim certain business expenses. The earlier in the tax year you can start tracking this, the more likely you are to capture everything. Keep all receipts in case you’re audited.
Although there are tax preparation programs that can help, a professional tax preparer is usually better at catching deductions you might have missed. Some tax preparers will even guarantee their work or at least agree to be present at the appointment if you’re ever audited.
Pay particular attention to the list of IRS categories for business deductions, detailed on Schedule C. Those deductions include advertising, car and truck expenses, commissions and fees, contractor labor, insurance, legal fees, office expenses, supplies, travel, utilities and wages. You can deduct electronic equipment, but you’ll need to depreciate each item, taking a certain amount each tax year. If you work from home, you can also claim the portion of your house that you have set up as an office, and the IRS has come up with a simplified method for doing this that offers $5 for each square foot up to 300 square feet.
Deducting Your Health Insurance Premiums
One of the biggest deductions to offset the high W-9 tax rate is the health insurance premium tax deduction available. This deduction lets you claim 100 percent of the monthly premiums you paid for yourself, your spouse and all dependents on your taxes. To qualify, you must not be offered health insurance through your spouse’s work or another job you have. This deduction is also limited by how much you made for your business, so if you had a year where you earned no income at all, this deduction won’t help you.
This deduction goes in with your personal taxes, so you won’t include it with the business deductions you claim on your Schedule C. You’ll include it on your 1040. You may also be able to claim your medical expenses, provided they exceed 7.5 percent of your Adjusted Gross Income.
In 2020 and later, you’ll be limited to claiming medical expenses that exceed 7.5 percent of your Adjusted Gross Income. With the standard deduction having increased to $12,400 for single taxpayers in 2020, it’s also important to note that you’ll need to have enough deductions to make it worth itemizing, although medical costs and insurance premiums could be a big help in exceeding that limit.
Filing Taxes Using a 1099
You may not be completely alone when it comes to claiming your income for the year. If you earn $600 or more with a client, he’s required to send a 1099 in January, at the same time you would receive a W-2 if you were a full-time salaried employee. However, it’s important to track your earnings throughout the year, since you won’t always know when you start working with a client if you’ll earn the full $600 to qualify for a form. Some businesses neglect to send out these forms, too, even though they are required to, so tracking your own income means you’ll be covered if tax time rolls around and you never receive a form.
If you do receive a form, compare it to the information you have on file. If the numbers don’t match, double-check to make sure you logged everything correctly. If they still don’t match, contact the client and mention the discrepancy.
The problem with filing a different amount than your client reported to the IRS is that it could get you flagged for an audit. If your client refuses to send a corrected 1099, file anyway and include documentation showing proof that you were paid what you say you were. This will take the heat off you while also fulfilling your tax-filing duties.
- IRS.gov: Estimated Taxes
- SCORE: Work with Independent Contractors? How to Avoid an IRS Crackdown
- IRS.gov: Voluntary Classification Settlement Program (VCSP)
- IRS.gov: Self-Employment Tax (Social Security and Medicare Taxes)
- IRS.gov: Questions and Answers for the Additional Medicare Tax
- IRS.gov: Profit or Loss From Business
- NOLO: The Simplified Home Office Deduction
- NOLO: The Self-Employed Health Insurance Deduction: A Valuable Personal Deduction
- The Motley Fool: What Happens if I Get an Incorrect 1099?
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.