|
Self Employment
Withholding Tax
Ordering
TurboTax Online Software
If you
received income where taxes weren't
withheld — such as money from
self-employment, investments or alimony
— you're generally required to pay
estimated taxes.
IRS Withholding
Calculator
Use Form 1040-ES - Estimated Tax for
Individuals to figure your estimated payments.
If you underpay your estimated amount,
you might be subject to a penalty.
What are estimated payments?
You're required to pay estimated taxes
if you receive income from which they
aren't withheld , including money from
self-employment, investments and
alimony, and your amount (after subtracting
credits and withholding) is expected to
be $1,000 or more. Here are a few good
things to know about estimated payments:
The payments are due April 15, June 16,
Sept. 15 and Jan. 15.
If you fail to pay enough on each
installment due date, you may be subject
to the penalty for underpayment of
estimated payments even if your return shows
a refund.
If you pay in as much as your liability for the previous year, you can
pay your balance due without penalty
when you file your return, regardless of
the amount. See below if your prior-year
income was high.
How much do I pay?
As part of your year-end planning,
compare your projected year-end payments with your expected liability. If your payments are expected
to be less than 90% of current-year,
you generally will have to increase your
withholding or estimated payments.
However, if your payments are made
timely and will be at least as much as
your prior-year liability, you're
probably safe from the penalty. But if
your prior-year adjusted gross income
was more than $150,000 ($75,000 if
Married Filing Separately), you'll have
to pay 110% of your prior year liability. Figure your estimated
amount
with Form 1040-ES - Estimated Tax for
Individuals.
Over-withholding withheld from your paycheck is
considered to be paid evenly throughout
the year, which means over-withholding in
November and December can make up for
earlier underpayments. If you have a
job, arrange with your employer to
withhold extra amounts from the final
paychecks of the year so you're not
subject to the penalty when you file
your return.
Underpayment of Estimated Taxes
If you do not make enough estimated payments and are subject to the penalty,
don't automatically pay it. There are
several exceptions to the penalty.
Question?
I was laid off and out
of work for a couple of months and took
a pay cut when I got my next job.... How
do I calculate how much withholding I
should add?
You can increase your withholding at
work to cover your additional amount
from your self-employment. The
calculations for figuring your
additional withholding is going to be
different than calculating your regular
withholding.
The reason is because as a self-employed
person, you are responsible for both the
employer's and the employee's portion of
FICA--the Social Security and Medicare.
As a self-employed
person, you pay the full 15.3%. On the
Form 1040, this is called the
Self-Employment Tax. On your paycheck,
you pay 7.65% in FICA, and your employer
pays the other 7.65%.
To calculate your withholding, first
calculate how many allowances to claim
based on your situation. Claim one
allowance for yourself, plus one for
each dependent you have. This will
establish a base for your withholding.
Then, project how much you expect to
earn from your side jobs as an
independent contractor. Also, project
how much you plan to spend to cover
various expenses for your side jobs.
Calculate the difference between your
earnings and expenses, to arrive at your
estimated profit for the year. Multiply
your profit by 15.3%. This is how much
you should set aside for your
Self-Employment.
Take the same profit
figure, and multiply it by your marginal
bracket. This is how much you should set
aside for your additional income fees.
Add the two numbers, and divide by the
number of paychecks for the year. This
is how much extra withholding you should
request to be taken out of your
paycheck. Put this on line 6 of your
Form W-4.
You can defer taxes on any income you
set aside in your 401k plan. You should
think about maxing out your 401k
contributions if you want to shelter as
much money as possible.
|
