If you're a 1099 worker instead of a W-2 one, taxes aren't automatically taken out of your paycheck. Instead, you are solely responsible for quarterly tax payments — so, how much of your paycheck should you save for taxes? It's important to make this a part of your monthly budget; waiting until it's time to make a quarterly payment can easily backfire if you're not prepared.
You're probably aware by now that these quarterly taxes apply to workers like freelancers, contractors, and sole proprietors — as mentioned, people who receive a 1099 instead of a W-2 at tax time. Their counterparts, payroll employees, have taxes taken out of every paycheck; this is why, when April rolls around, there's a good chance W-2 workers will be receiving a refund, while 1099 workers won't.
As a freelancer, on the other hand, the government still wants its cut of your income as you receive it; that's why you're required to make payments four times a year. This means that every time you receive a check for your time or services that you provided, a portion of it should be set aside for your next quarterly tax payment — but how much? One ballpark figure used by many is 25 to 30 percent of your total income, and there are a couple ways you can do it.
One option is to save 25 to 30 percent of every paycheck you receive. A second option is to do it by setting aside 25 to 30 percent of your total monthly income. Finally, you can take last year's entire income (or what you project to earn this year, which would help you determine your estimated taxes), calculate 25 to 30 percent of that number, and divide it by four — that's what you would want to set aside each quarter.
If you want to be on the safer side, you can stay on the higher end of this range, closer to 30 percent. It's better to have too much money saved up, instead of not enough. Remember that you won't receive a 1099 from any client who paid you less than $600 that tax year (but you should still be tracking this income!). And on a final note, make it a habit of recording any possible deductibles. This can help soften the blow of paying taxes as a self-employed person. (For example, if you work from home, you may be able to deduct a portion of your rent, some of your gas, and certain supplies/purchases.)
Images: Getty Images