How to Figure What Percentage of Taxes to Pay on Contract Jobs

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People working as independent contractors receive a gross wage and have to pay their own federal, state and local taxes. The federal tax due includes income and FICA tax. States also tax wages, as well as some local governments. To understand how to pay the right amount of taxes for a contract job, you'll need to know your tax rate.

Determine if your wages are taxable. The Internal Revenue Service does not require businesses to submit reports for contract work if the wages earned are less than $600. However, a taxpayer is required to report all of their income on their tax return.

Figure your Social Security and Medicare taxes. Know the Social Security and Medicare wage limits for the current year. For example, in 2012 the Social Security wage limit was $110,100. Add up your earned income to date, plus any contract-work earnings. If the total is less than the limit, multiply it by 0.0765, or 7.65%. The resulting amount will reduce your federal gross income.

Understand the federal withholding allowance. The amount changes each year, but the amount equals the exemption allowance on the IRS's Form 1040. Additional exemptions can be used to reduce taxable income. The withholding allowance's purpose is to make the tax paid by the individual equal to the tax due on the 1040. The current year's withholding amounts are found in IRS Publication 15.

Add your current earnings to the amount expected from the contract job. Subtract your withholding allowance. Use the annual payroll period table on page 37 of Publication 15 to figure your tax due. Subtract any taxes you have paid from the amount due. This gives you the amount you owe for the contract job.

Calculate your state taxes. The Tax Foundation (see Resources) lists the standard deduction and personal exemptions by state. Using your total year-to-date income, find your state and wage bracket. Calculate the state income tax due. Subtract the amount you have already paid, if any. You then have the amount to pay the state for the contract job.

Some municipalities tax individuals on wages earned when working in that city. Check your city hall for local tax information.

Tips

  • For the current year, individuals can pay 100% of the previous year's tax amount, in lieu of paying the actual amount due. This may result in taxes being due when you file your Form 1040 for the current year.

Warnings

  • When using the federal withholding allowance, track your current year-to-date income and tax due based on the percentage tables. The withholding allowance can distort the actual tax that will be due at the end of the year.

References

About the Author

Pennee Struckman has been actively writing in business for 20 years. She has been published in "Real Estate Experts" magazine and the books "Dawn of Silence," "Best Poems of 1997" and "Best Poems of 1998." Struckman holds a B.S. in business, Suma Cum Laude, from Columbia College. She majored in accounting and minored in computer science.

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