How much should I save for taxes?

[P938LVR]

How much should someone who is an independent contractor (1099) save for taxes each year out of their gross pay? Is there a certain amount that is the norm? Thanks.

[randymarsh]

You can use the calculators at www.paycheckcity.com to get an idea, see what the deductions would be as regular employees. You can then tack on the extra 7.65% FICA tax.

Of course you'll get to deduct many things a W2 employee wouldn't, so you may end up saving a bit too much. I'd estimate around 30%.

[dandarc]

Need much more information - this is a very specific question.  I have spreadsheet built to compute this exact figure for my wife and I, and for our current situation, it comes out that I need to send in 22.6% (I round up to 23%) of my check, however you could have a very different situation than us:

1.  We live and work in a state with no state income tax - if you are in a state with a state income tax, odds are you need to hold back more for taxes than we do.
2.  I put 18.5% + 17,500 into a solo 401K - if we didn't do this, we'd need to send in significantly higher estimated taxes
3.  My wife is maxing a 457 plan through her job - if she didn't do this we'd need to send in more estimated taxes, and her withholding would be higher
4.  If my wife had filed her W-4 differently, that can change how much I need to send in

My spreadsheet assumes that we take the standard deduction - if you have high enough itemized deductions to itemize, you should probably use that figure instead.

For us, Items 2 and 3 there are extremely valuable - without those, the amount I would need to send from my check would be something like 33% - that is a big difference.

So project your income for the calendar year, factor in any deductions, apply applicable taxes (remember to include self-employment taxes), then divide the total by the income.  If you are worried about the accuracy of the projection, use a high estimate for your income and a low one for any deductions.  I've noticed that in our case, I think largely due to the 18.5% I'm putting into the Solo 401K, my percentage comes out to between 22 and 23% over a large range of incomes - your situation might be more or less sensitive to inputs than mine though.

Or you could just hold back 40-50% and almost certainly be safe, however this is probably way too much, unless you are in a high-income tax state and have a high income.  Remember too that you have to send in your estimated taxes quarterly (at least for federal) - don't just save the money for taxes, remember to send it in on time as well.

[pksr]

Agree that much more information is needed. If you are a 1099 contractor in addition to having a W2 job, then the answer could be different, and your contribution to a SEP or sole 401K (one of them is highly recommended) will influence the answer as well.

But if you want a safe rule of thumb for federal taxes, you could go with 40% of your net. The thinking is 15.3% for both the employee and employer portion of FICA plus your marginal tax rate. 40% works fairly well even at high marginal income tax rates because once you hit $117K, FICA (both ends) drops to just 2.9% since social security stops there. With a fairly complex tax situation and aggressive tax avoidance, this may have you overpaying your estimates - the best way for more precision is to build a spreadsheet like dandarc (or maybe ask for that one!). This doesn't address state income tax which may be N/A, small, or significant (let us know).

[P938LVR]

Need much more information - this is a very specific question.  I have spreadsheet built to compute this exact figure for my wife and I, and for our current situation, it comes out that I need to send in 22.6% (I round up to 23%) of my check, however you could have a very different situation than us:

1.  We live and work in a state with no state income tax - if you are in a state with a state income tax, odds are you need to hold back more for taxes than we do.
2.  I put 18.5% + 17,500 into a solo 401K - if we didn't do this, we'd need to send in significantly higher estimated taxes
3.  My wife is maxing a 457 plan through her job - if she didn't do this we'd need to send in more estimated taxes, and her withholding would be higher
4.  If my wife had filed her W-4 differently, that can change how much I need to send in

My spreadsheet assumes that we take the standard deduction - if you have high enough itemized deductions to itemize, you should probably use that figure instead.

For us, Items 2 and 3 there are extremely valuable - without those, the amount I would need to send from my check would be something like 33% - that is a big difference.

So project your income for the calendar year, factor in any deductions, apply applicable taxes (remember to include self-employment taxes), then divide the total by the income.  If you are worried about the accuracy of the projection, use a high estimate for your income and a low one for any deductions.  I've noticed that in our case, I think largely due to the 18.5% I'm putting into the Solo 401K, my percentage comes out to between 22 and 23% over a large range of incomes - your situation might be more or less sensitive to inputs than mine though.

Or you could just hold back 40-50% and almost certainly be safe, however this is probably way too much, unless you are in a high-income tax state and have a high income.  Remember too that you have to send in your estimated taxes quarterly (at least for federal) - don't just save the money for taxes, remember to send it in on time as well.

We both live and work in a state that does not have state income tax. We don't have a 401K because those aren't offered where we work. We only file a 1099 and not W-2's. We are self employed, do not have any employee's (if that matters).

According to this website, http://www.bankrate.com/finance/taxes/tax-brackets.aspx, we are in the 28% tax bracket. However, that is our gross earnings before any deductions such as repairs to equipment, etc which can be quite costly. Would we pay on the gross amount or the amount after deductions? Sorry for all of these questions but this is the first year we will have to pay like this... Thanks!

[pksr]

You should have a very stern discussion with your employer about their failure to offer a 401K - please head to the nearest mirror :-)

As a 1099 contractor, even if you haven't set up a corporation or LLC, you actually have a small business (sole proprietorship) and can set up a sole 401K or a Simplified Employee Pension (SEP) plan. The limits on contributions to a sole 401K or SEP are much higher than you typically can get at a regular W2 job. Please see here https://www.fidelity.com/learning-center/personal-finance/retirement/retirement-plan-small-business

But to answer your question, I would estimate 40% on your net - so take away your (non 401K) expenses before doing the calculation. But I am worried you may have missed an estimated tax payment deadline since this sounds like your first rodeo - please see here http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes and here http://www.irs.gov/pub/irs-pdf/f1040es.pdf for more information.

One final note - you won't know exactly how much you can contribute to a sole 401K or SEP until your fiscal (typically calendar) year closes. Making that contribution is going to cut your tax bill down a lot, but you owe tax to the government throughout the year (sorta time weighted), so if you take credit for it now it will likely have you owing a penalty.

Good luck!

[dandarc]

You need to do a profit-loss statement if you are paying for things like equipment repairs - you are running a business here.

Generally your taxable income in this scenario is revenue less expenses, but depending on the nature of what you do, figuring both of these ranges from trivial - cash in vs cash out to quite complex situations with unearned revenue (paid up-front for a multi-year gig), depreciation on capital assets (sounds like you might have some of these) and on and on.  If you're not 100% sure on how to account for your business, I'd suggest consulting an accountant.  I am lucky in this regard - I really don't have any expenses associated with my 1099 work, so my income is just the amount shown on the 1099.

Upside to both of you being 1099 is you can both have Solo 401K or Sep IRA accounts - these let you shelter a lot of your income (keep in mind, we mean net income here - revenue minus expenses).  Generally, the SEP IRA is marginally simpler to setup / maintain, but does not let you shelter as much as a Solo 401K unless you make over around 250K.

[dandarc]

Adding a link - here is a 2013 Schedule C - this is where a sole-proprieter files his/her business income.

http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

This should give you an idea of how you calculate your profit / loss from your business, and the kinds of things that you can deduct.  I'd recommend consulting a CPA if you have a lot expenses - some of the rules about some of these things are quite complex.