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Independent contractor tax duties

 

Dear Tax Talk,
How much income does an independent contractor need to take out of each paycheck for their income taxes? Also, how do you find out about filing quarterly taxes? I keep hearing that I need to do this but no one has told me where to go for the information. Thank you for your help. -- Lynn

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Dear Lynn,
An independent contractor is considered self-employed and files Schedules C and SE with his or her individual income tax return.

Schedule C is used to report the gross receipts and ordinary business expenses associated with that income. Obviously, the more expenses that you have, the lower your tax bill which means the lower the percentage of your income that you have to pay in taxes.

Schedule SE is used to report self-employment tax related to Schedule C. Self-employment tax is 15.3 percent of 92.35 percent of your self-employment income. One-half of your self-employment tax is a deduction used to arrive at your adjusted gross income.

In addition, as a self-employed individual you can claim deductions for health insurance and retirement savings that are also adjustments used to arrive at AGI. You also have to consider the fact that the tax rates are progressive and you may also have state income taxes as well as your itemized deductions affect the tax you pay.

With all these variables, it's impossible to tell you what percentage of your earnings you should put away for taxes. If you can't afford to hire an accountant, then your best bet is to try to pencil in a tax return to estimate your taxes. You should also review IRS Publication 505, Tax Withholding and Estimated Tax and IRS Publication 334, Tax Guide for Small Business.

Form 1040-ES is used to remit your quarterly estimated taxes to the IRS. It's like sending a payment to your credit card, except the IRS does not send you billing reminders. Payments are due on the 15th day of April, June, September and on Jan. 15 of the following year. Although estimates are due only on a somewhat quarterly basis, you can pay more often if you feel that works best for your budgeting. You can also register to pay via the Electronic Federal Tax Payment System.

 

 
-- Posted: Oct. 1, 2003
   

 

 
 

 

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