Even if they only work for one customer, independent contractors are considered self-employed. As a result, rather than depending on an employer to withhold payroll taxes for them, such people must pay their own payroll taxes and make quarterly anticipated tax payments to the IRS in order to avoid penalties and interest.
Tax software tools may surely assist independent contractors in calculating their projected tax payments. Those who want to learn more about the estimating process may utilize IRS form 1040ES, together with the associated instructions and estimated tax worksheet.
- To avoid fines and interest, self-employed persons must pay their own payroll taxes and make quarterly anticipated tax payments to the IRS.
- Independent contractors may utilize tax software tools to compute their anticipated tax payments, or they can use the standard IRS form 1040ES, together with the associated instructions and estimated tax worksheet.
- Independent contractors may calculate their expected tax payments by making quarterly estimated tax payments comprising either 100% of their prior year’s tax obligation or 90% of their current year’s projected tax liabilities.
Those who choose the do-it-yourself route must be aware of their adjusted gross income for the preceding tax year. Then they must calculate their entire income for the current tax year. This amount must include investment income as well as other sources of taxable income in addition to self-employment earnings. Individuals must then calculate the sum of their deductions, exemptions, and credits. They must account for both the self-employment tax (the extra Social Security and Medicare taxes they must pay in place of an employer paying on their behalf) and the self-employment tax deductions.
Armed with the above information, independent contractors may calculate their projected tax obligations in one of two ways:
1) They may make quarterly anticipated tax payments reaching 100% of their tax due for the prior year.
2) They may make quarterly estimated tax payments reaching 90% of the projected tax burden for the current year.
The first technique is best for those who can confidently forecast their yearly income based on prior trends. This strategy ensures that a person will not be penalized or charged interest for underpaying their taxes. However, in certain cases, this might result in a person paying much more tax than they really owe for the year. In this case, a taxpayer must wait until the following April to get their money back in the form of a tax refund. This is troublesome since such people are basically losing interest on the money they payed if they had stored those assets in an interest-bearing investment.
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