Independent Contractors – How to estimate taxes?

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  • #3310993 Reply
    Mattheus
    Participant

    Hello All,

    I wanted to get a second opinion from some seasoned accountants in tax. I am doing a side hustle for a real estate company. I am not an employee for that company, but an independent contractor with a W9. The concern is paying taxes as an independent contractor. I'm keeping a spreadsheet of all the income I earned along with the expenses I incurred (licensing costs, gas, membership dues to be eligible to do the work). Independent contractors need to pay all of FICA (15.3%) on the profit they earned, correct? Additionally, they need to pay the income taxes on that profit in addition to the other income they have earned (in my case a W-2)

    Once I break even and start to earn a profit, I will start reserving a percentage of the profit and submit the payment quarterly. Is this the correct way to handle this? I tried researching online, but they are not specific enough.

    Thanks!

    #3311008 Reply
    Ninja Albert
    Participant

    Hi

    I am no tax preparer or even a CPA yet….. But I think I found a nice link that may help you understand, I am also an agent too, and I do it the way you said, ( think that's how my tax preparer does it)

    look at IRS.gov — https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

    #3311938 Reply

    You will likely receive a 1099-K, which will show the gross amount you were paid out. From that, your expenses will be deducted on Schedule C, and arrive at your profit, which you'll pay income tax on, as well as self-employment tax (15.3%, as you said).

    I'm a CPA, but not your CPA, so talk to your CPA about your unique situation, as I don't have all of the relevant facts. This is for general informational and entertainment purposes only. 🙂

    #3311950 Reply
    Doina
    Guest

    It is correct, once you make a net profit from your Schedule C is subject to self employment tax of 15,3%. You get an adjustment to income of 7.65% for employer part of expense and QBI of 20% as a deduction.

    If you expect to have a huge net income, ask for a tax projections for federal and state based on your total income estimates from all sources.

    Usually, the tax estimates payments are splitted equally into 4 quarters. If you want to use your method, pay estimates when you earn, your tax accountant will have to complete Schedule AI from Form 2210.

    Best of luck!

    #3312025 Reply
    Recked
    Participant

    You will likely be exempt from any underpayment of estimate tax penalty your first year, as your W2 withholding will cover your tax from the previous year, but you will owe when you file. (This penalty historically has cost my clients only about $100 per $10k in tax owed.)

    You are correct about the estimates being “required”.
    You are also correct about the 15.3% SE tax, on top of the income tax on profit earn.

    If you have access to tax software at your job, its very easy to generate a dummy return. I do my own taxes numerous times from the point my software releases in Nov, to the time I actually file in March-ish. I use the prior year estimates for the safe haven, and then typically make true-up payments by December 31st for internal cash flow/net worth calculations. My final tax return is typically within +- $100 on both the fed and state, as there is not much income or expense activity in the last few weeks of Decemeber, and most passive income items are spotted thru Nov and estimated pretty close from Dec.

    I typically advise clients to save back 30% of profit to cover taxes, but most come in around the 20-22% range typically, but as previously mentioned there are far too many variables that can impact the numbers.

    Good luck with your side hustle.

    FYI- Mileage will give you a much better deduction than gas/fuel alone. If you are not tracking mileage, you should work on that asap. I keep an online calendar for appointments etc, and use google maps to back into my daily mileage, typically on a weekly basis based on my calendar. The miles really add up if you are pretty active in business use of the vehicle.

    Memento Mori - Kingston NY CPA & EA (SUNY Albany 2002)

    FAR-93 11/9/17 (10wks, 250 hrs, Roger 1800+ MCQs, Gleim TB 600+MCQs, SIMs)
    AUD-88 12/7/17 (3 wks, 85 hrs, Roger 1000 MCQs no SIMs hail mary)
    REG-96 1/18/18 (6 wks, 110 hrs, 1400 MCQs, no SIMs)
    BEC-91 2/16/18 (4wks, 90 hrs, 1240 MCQs)

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