As an independent contractor, you are obligated to submit quarterly tax estimates. Although the phrase “quarterly estimate” can make many feel anxious, this process doesn’t have to be complicated or overwhelming. Here is what you need to know:
1) Your taxes are NOT deducted from your paycheck.
If you have ever been a W2 employee, you have experienced your tax payments being withheld from your paycheck. This is NOT the case as an independent contractor. As you can imagine, the government doesn’t want to wait until April to receive what you owe. Therefore, quarterly estimates are the process in which independent contractors submit their tax payments. This occurs 4 times per year.
Best Practice: Work with your CPA to determine how much you should be saving from each paycheck to cover taxes owed. Set-up an auto transfer process to move these dollars into a separate bank account. This will make life much less painful when it comes time to pay your quarterly estimates.
2) You need an ESTIMATE of what you owe.
Provide your CPA with your gross pay per month, the state you live in and the state you work in. Your CPA will help determine how much you should save from each paycheck to cover taxes. Keep in mind, this is an ESTIMATE. The exact amount owed will be calculated when you complete your annual return.
3) Know the due dates.
The dates quarterly estimates are due do NOT align with traditional calendar quarters. Here are the upcoming deadlines:
- January 15th
- April 15th
- June 15th
- September 15th
Best Practice: Are you new to the independent contractor status? Work with your CPA to determine when your first quarterly estimate is due.
4) Keep in mind there could be a penalty if you don’t pay on time.
Warning: it’s a myth that independent contractors can pay all taxes owed in one lump sum at the end of the year. You have to meet the 4 deadlines outlined above to avoid penalty & interest fees.
5) Know the process to submit your quarterly estimates.
As the deadline nears, send your CPA an updated pay stub. Your CPA will confirm what you should pay for the quarter. Your CPA should also provide instructions on how to make that payment. Likely, you will be able to easily do so online (however, your CPA can provide a voucher if a payment needs to be mailed).
6) Reduce Your Taxable Income
One of the advantages of being an independent contractor is there are many ways to reduce your taxable income. This includes deducting business expenses, health insurance premiums, a 20% pass through deduction (QBI), and retirement contributions. It’s possible to deduct a significant amount of money in a year… especially if you are maximizing your retirement contribution and able to apply the QBI deduction. You can find more information here: Top 5 Ways to Slash Your Tax Bill. Work with your CPA throughout the year to apply as many deductions as possible.
Have questions? At FDI, we never charge for education and second opinions. Call any time or make an appointment.
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Financial Designs, Inc.
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Overland Park, KS 66210
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