#TaxDilemmas #IndependentContractor #FreelancerTips
Hey everyone!
So here’s the deal: I’m feeling a bit lost when it comes to figuring out how much I should be saving for taxes as an independent contractor. 🤔
- Currently, I’ve got a steady W2 job pulling in $75k a year.
- On the side, I’m hustling a bit with a gig that pays about $250 a week as a 1099 contractor.
- And I’m based in Illinois, which adds another layer of complexity to the tax calculations. 🏙️
Tax season is looming, and I’m left wondering how much I should be putting aside for state, federal, and self-employment taxes. I mean, it can be super confusing trying to juggle all these different tax obligations, right? 😩
Here are some pain points I’ve been thinking about:
- **Self-employment tax:** This includes Social Security and Medicare, making this particularly higher than taxes for regular W2 income.
- **State taxes:** Each state has its own rules, and Illinois isn’t the simplest when it comes to tax calculations.
- **Estimating earnings:** Fluctuations in my 1099 income can complicate how much I might owe, making it difficult to have a set percentage to save.
As a possible solution, I’ve read that a general rule of thumb is to save around 25-30% of your 1099 income for taxes. This can provide a cushion for when tax time rolls around. Maybe even consider setting up a dedicated savings account specifically for tax savings to make it easier to track? 💰
What do you think? Anyone else in a similar boat? I’d love to hear your tips, personal experiences, or strategies for effectively saving for independent contractor taxes. Let’s chat!
Thanks in advance for your help! 🌟
When you are self-employed your are responsible for paying both the employER and employEE halves of social security and medicare taxes. So right there you are looking at around 15%. Plus income tax.
Do some reading. Make sure you make quarterly estimated tax payments if you need to in order to avoid penalties.
[https://turbotax.intuit.com/tax-tips/self-employment-taxes/the-self-employment-tax/L8xXjolB4](https://turbotax.intuit.com/tax-tips/self-employment-taxes/the-self-employment-tax/L8xXjolB4)
I put away 30% of what I make into a separate account to cover SS, MED, and Income Taxes…also ensure i’m being paid 40% more than my normal rate as a W2 employee
>75k at a W2 job
>Taking on ~$250/week side gig as a 1099.
Since your tax liability increases by a large fraction, instead of saving until April, you may need to pay as you earn. The easiest way is to add it to your regular job tax withholding.
The following assumes your side gig starts getting paid in the future around the same time as your new W-4 and IL-W-4 take effect.
1. Increase in income: $250 * 52 = $13000
2. SE tax is: $13000 * 0.9235 * 0.153 = $1837
3. SE tax deduction is: $1837 / 2 = $918
* (A tax deduction reduces “AGI” and “taxable income”)
4. 1 – 3 = $13000 – $918 = $12082 increase in AGI
5. QBI deduction = $13000 * 0.2 = $2600
* (A QBI deduction reduces “taxable income”)
6. 4 – 5 = Change in taxable income = $12082 – $2600 = $9482
7. Your W-2 job alone already puts you in 22% bracket. $9482 * 0.22 tax bracket = $2086 increase in federal income tax
8. 2 + 7 = increase in federal tax liability = $1837 + $2086 = $3923.
9. Divide $3923 by the number of W-2 paychecks for one whole year (12 for monthly, 24 for semimonthly, 26 for biweekly, 52 for weekly) and put this result in W-4 line 4c.
“Illinois has a flat 4.95 percent individual income tax rate.”
1. IL uses the federal AGI as starting point. Therefore, since AGI increased by $12082 (line 4 above), $12082 * 0.0495 = $598 increase in state income tax.
2. Do the same calculation like line 9 above to split $598 among paychecks. On IL-W-4, enter the result in “Enter the additional amount you want withheld (deducted) from each pay”
Percentages are roughly:
* Federal: $3923 / $13000 = 30.2%
* State: $598 / $13000 = 4.6%
As long as you stay in 22% bracket, these % should stay relatively the same.