"How much should I set aside for taxes as a 1099 contractor?" is a critical issue for independent contractors and freelancers. Putting aside the correct amounts as you go will help you avoid costly mistakes and difficulties in meeting your tax obligations.
Having enough funds to pay your estimated quarterly tax payments is a requirement if you receive Form 1099s from your clients and expect to pay more than $1,000 in taxes for the year. Tax and accounting professionals often recommend that 1099 contractors or freelancers set aside between 20-35% of their income for taxes.
Which Taxes Do 1099 Contractors Pay?
1099 contractors pay self-employment tax plus local, state, and federal income tax. Local and state taxes differ depending on your area. For example, businesses in Jacksonville, Florida are not subject to local or state income tax.
Calculating your taxes as an independent contractor is made easier by working with a small business accounting agency. Outsourcing your accounting tasks reduces the likelihood of making costly mistakes, missing deadlines, or missing out on deductions or credits that could potentially reduce your tax bill.
Important note: Workers who are hired on a 1099 contract basis are considered self-employed by the IRS. That means that you need to pay both self-employment tax and income tax.
Self-Employment Tax
The self-employment tax rate is 15.3% of the first $168,600 of the contractor’s net profits (page 1 of the linked PDF). This includes wages, tips, and net earnings. Self-employment taxes cover your Medicare taxes and Social Security taxes.
While the 12.4% Social Security tax only applies up to the threshold mentioned, the 2.9% Medicare tax applies to all of your income, without limits. You must also pay an additional 0.9% Medicare tax if your income exceeds the threshold amount that corresponds to your filing status:
The amount you pay in self-employment tax depends if you're an employee or an independent contractor. As an independent contractor, you're liable to pay self-employment taxes in full. This is different from salaried employees whose employers cover half the amount. Instead of waiting until the end of the year to pay the full amount of self-employment and income tax, the IRS requires independent contractors to make quarterly estimated tax payments.
Estimated taxes are subject to the following schedule:
Payment 1 – Due by April 15 (current year)
Payment 2 – Due by June 15 (current year)
Payment 3 – Due by September 15 (current year)
Payment 4 – Due by January 15 (following year)
Some states, such as Florida, don't charge a personal income tax. However, if your state assesses income tax, you must also make quarterly estimated tax payments to the state. The schedule for state taxes has the same deadlines as for federal estimated quarterly taxes.
Not sure how to calculate self-employed quarterly tax? Many small business owners outsource their accounting tasks to professionals to free up time and energy to focus on growing their businesses.
Income Taxes and Rates
Residents in all U.S. states must pay federal income tax. On top of federal income taxes, residents in most states are liable to pay state income tax too. When setting aside funds for paying taxes each year, check if the tax rate has changed and if the changes affect you.
Federal Income Tax Brackets 2024
The federal income tax brackets for 2024 are the following:
State Income Tax
There are only seven states with no state individual income tax, including Florida. Residents in states that charge income taxes will need to check their home state's income tax bracket to calculate how much to set aside.
If you live in a state with no personal income tax requirements, you may still be subject to other state taxes. This includes sales taxes. For example, Florida’s sales tax is 6% for most items. Businesses must charge and collect this tax from their customers and pay it to the Florida Department of Revenue.
How Much to Set Aside for Taxes in Total
1099 contractors should set aside 20-35% of their income to pay taxes. However, it's best to consult with an accountant as each case is unique. The amount you will owe depends on your tax liability from self-employment, your tax bracket, and any deductions and credits for which you qualify.
How to Set Aside 1099 Income for Taxes
It's easy to set aside 1099 income for taxes. However, this will require some planning on your part. Setting up a separate bank account to hold money you're reserving for estimated taxes is an effective way to ensure you don't dip into your savings accidentally.
Individuals take different approaches to savings. You could set aside part of each payment you receive as soon as the funds come in. Alternatively, you could make one transfer every month to your assigned 1099 bank account.
Following a disciplined savings routine will ensure you can pay quarterly taxes without any financial hardship or penalties for underpayment.
Can I Wait Until the End of the Year to Pay Quarterly Taxes?
Waiting until the end of the year to pay quarterly taxes can result in penalties from the IRS. This is because the IRS expects you to pay estimated quarterly payments when they're due, not as a lump sum. Not making payments on time or not paying enough to cover your tax liability puts you at risk of penalties.
How to Calculate and File Your Quarterly Tax Payments
It’s easy to calculate and file your federal quarterly tax payments. Whether you have to file quarterly tax payments in your state will depend on whether you live in a state that charges personal income tax.
How to Calculate Federal Quarterly Estimated Tax Payments
Use Form 1040-ES to calculate and file your quarterly tax payments. To complete this form, you must:
Determine your estimated adjusted gross income (AGI).
Add up any deductions or credits for which you qualify.
Subtract this amount from your AGI to arrive at your taxable income.
Calculate the amount of taxes due.
Some people use the previous year's information as a starting point to calculate their current year's income, deductions, and credits. You can also use the previous year's federal income tax return as a guide. Remember, you need to calculate your income as accurately as you possibly can to avoid penalties for underpayment. Take into account any recent changes to your situation as well as changes to the relevant tax laws.
How to Calculate State Quarterly Estimated Tax Payments
Each state has different rules regarding how to pay estimated taxes, so it's best to check your own state's website for information on how to calculate and file your quarterly estimated tax payments.
Deductions 1099 Contractors Can Claim
There are several tax deductions for independent contractors that you can use to reduce your quarterly and annual taxes. Examples of business expenses you may be able to deduct as a 1099 worker include:
Office supplies
Computer hardware or software
Other home office expenses
Health insurance premiums
Business travel expenses
Advertising and marketing expenses
Website expenses
Remember to keep meticulous records of expenses you intend to deduct. Having all your records on hand will help you justify everything you claim if the IRS ever audits your business.
Err on the Side of Caution When Saving for 1099 Taxes
Self-employed individuals or independent contractors who file their own taxes should err on the side of caution when deciding how much to set aside for their 1099 taxes. It's better to receive a refund for overpayment than to face penalties for underestimating the amount due.
An alternative is to entrust the calculation and payment of your estimated quarterly taxes to a tax professional. This can help you prevent penalties for late or inadequate payments and free up more of your time for focusing on your business.
