As an independent contractor, it can be overwhelming to navigate the tax system and budget for your tax expenses. Unlike traditional employees, independent contractors are responsible for paying their own taxes, including self-employment tax.
So, how much should you set aside for taxes? The answer may vary depending on your income, expenses, and other factors. However, a general rule of thumb is to set aside 25-30% of your earnings for taxes.
Here`s a breakdown of the different tax expenses you should consider:
1. Self-employment tax: As an independent contractor, you`re responsible for paying both the employer and employee portions of Social Security and Medicare taxes. This amounts to 15.3% of your net earnings. You can deduct half of this amount on your tax return as a business expense.
2. Federal income tax: The amount of federal income tax you owe will depend on your taxable income bracket. The tax brackets range from 10% to 37%, with higher earners paying a higher percentage of their income as taxes.
3. State and local taxes: Depending on where you live and work, you may also owe state and local taxes. Check with your state`s tax department to determine your tax liability.
In addition to these taxes, you may also need to pay estimated quarterly taxes throughout the year. These payments are due on April 15, June 15, September 15, and January 15 of the following year. If you don`t make these payments, you could face penalties and interest charges.
To make sure you`re on track with your tax payments, keep detailed records of your income and expenses. Use a tax calculator or consult with a tax professional to estimate your tax liability and set aside enough money to cover your expenses.
In conclusion, setting aside 25-30% of your earnings for taxes is a good starting point as an independent contractor. However, you may need to adjust this percentage based on your individual tax situation. Consult with a tax professional or use a tax calculator to ensure you`re budgeting correctly and avoid any surprises come tax time.