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How do self-employed independent contractors pay taxes?

Location: Seattle, WA       Date: Tue Nov 29 2016      Topic: Business Tax Planning, Debt Management, Individual Tax Preparation

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Answer:
If you are self-employed or an independent contractor, you don’t have income taxes withheld from your paycheck so you need to manage your taxes on your own throughout the year. The IRS requires you to pay estimated taxes quarterly if you expect to owe more than $1,000 in federal taxes for the year. Your estimated taxes are due based on the income period and you do not have to pay estimated taxes until you actually start earning income. If you earn income between January 1st and March 31st, you must pay your quarterly taxes by April 15th; the taxes on income earned between April 1st and May 31st are due by June 15th. For income earned between June 1st and August 31st, tax payments are due by September 15th; and for income earned between September 1st through December 31st, you need to pay your taxes by January 15th of the following year.
However, many independent contractors choose not to pay quarterly taxes and use their income as working capital for the business instead. At the end of the year, these contractors pay a penalty imposed by the IRS; typically this is slightly higher than the cost to borrow working capital during the year. You should discuss the pros and cons of paying quarterly taxes or the tax penalty with your accountant throughout the year and they will help you determine which is more beneficial for your specific tax situation. If you choose to make one tax payment at the end of the year, your accountant will help you determine how much money to set aside so that you have the funds available come April. Also be sure to keep track of all of your business expenses during the year, this includes office supplies or work travel costs. As an independent contractor, you are able to deduct expenses related directly to the business, which in turn reduces your taxable income. Depending on your state and municipality, you may also need to make state or local tax payments throughout the year. Your accountant will be familiar with the local tax laws and will be able to help you determine how much and when those payments are due.
Posted on: November 29, 2016
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