How Much Should I Set Aside For Taxes: 1099 Self-Employed Edition

8

Min Read

Maria Malyk

If you are a freelancer / independent contractor wondering "How much should I set aside for taxes?" (1099-NEC / 1099 MISC tax forms), read on to see what you need to do to figure out what you owe in taxes -- as well as how to optimize this process so that it doesn't take up too much of your valuable time, effort, and nerves.

While the W-2 employees get to wait for their refund from the IRS after they file taxes in April, 1099 independent contractors are required to pay taxes -- and not just at the end of the year, but four times per year, once for each "quarter".

This is because W-2 employees have tax estimates withdrawn automatically throughout the year from their paycheck with their employer, whereas self-employed workers deal with multiple employers and clients, many of whom pay for their goods/services in full, pre-taxed. It is, thus, up to the independent contractor to calculate and pay the taxes they owe from the untaxed earnings to the IRS.

A general rule of thumb is to set aside 30-35% of your income for your taxes. In this article, we'll talk about all the taxes you'll need to pay and why you should save this percentage amount from the money you make.

Note: Those who think this sounds intimidating and labor-intensive can greatly improve the whole experience by signing up for Bonsai Tax. Our expense tracking app will help track money coming in and out of your business, sort deductions, file taxes, and estimate the quarterly taxes every ninety days, based on the income. Claim a 14 day free trial here.

Which Taxes Are 1099 Freelancers Responsible For?

1099 workers are expected to pay income tax on both federal and state level, as well as self-employment tax. Let's break down each of these.

Income Tax

This is an annual tax levied by the government on personal income.

Residents of all fifty U.S. states are subject to federal income tax, with a new tax bracket breakdown set by the IRS each year.

Most but not all U.S. states tax income. In 2021, eight American states have no income tax, ten have flat income tax, and the rest have graduated income tax.

Self-Employment Tax

1099 workers additionally pay self-employment tax (SE) to the IRS. The self-employment tax serves as a Social Security and Medicare tax for individuals working for themselves.

You need to pay SE taxes on 92.35% of your net earnings from being self-employed.

The SE tax rate for 2021 is set at 15.3% (12.4% for Social Security + 2.9% for Medicaid).

To quickly see how much money you'll owe, use our free 1099 tax calculator to figure out your total.

When Do Freelancers Pay Their Taxes?

Unlike W-2 workers whose taxes are automatically withheld with every paycheck, 1099 workers must set aside quarterly taxes to be paid to the IRS throughout the year.

Are Quarterly Estimated Tax Payments Mandatory?

Yes, paying quarterly taxes is obligatory for self-employed workers who will owe $1000 or more in taxes for the year.

The Pay-As-You-Go System

U.S. taxes are "pay-as-you-go": your estimated taxes are either withheld from every paycheck you receive from an employer -- or, if you are self-employed, you are responsible for withholding those sums yourself and paying them in full each quarter.

If the independent taxpayer fails to set aside and pay estimated quarterly tax in its entirety or misses the deadline, they may get fined, typically 3% of the tax owed (though, if they use the Bonsai Tax quarterly estimated tax payments calculator, they will be spared both, the fine and the stress...)

Quarterly Tax Due Dates For 2021 Tax Year

  • January 1 to March 31 -- April 15, 2021
  • April 1 to May 31  -- June 15, 2021
  • June 1 to August 31  -- September 15, 2021
  • September 1 to December 31 -- January 18, 2022 (however, if you file your 2021 taxes by January 31, 2022, and pay the entire balance due with your tax return, you don't need to pay this fourth installment).

You can pay estimated taxes through the IRS' app, online portal, or by filling out Form 1040-ES and mailing to the IRS, postmarked before or on the due date. If the deadline falls on a weekend or legal holiday, the estimated taxes payment is due the following business day.

Calculating The Estimated Quarterly Tax Payments For The Current Year

Your estimated quarterly taxes are supposed to be set aside and paid in four installments, equal ones if you can help it (if your income varies significantly from one quarter to the next, you will likely have to attach IRS form 2210 with your annual return). More frequent installments can be made, as long as they are equally distributed among the four quarters (e.g. 12 annual payments, once a month/three times per quarter).

Projecting An Income Estimate For The Tax Year

Independent contractors with steady incomes can estimate their current year's projected income on the basis of last year's earnings.

Those freelancers whose incomes fluctuate significantly from one quarter to the next may be better off calculating each quarter's individual tax payment on the basis of that quarter's income and expense deductions.

Identifying Your Marginal Tax Bracket

Once you have an idea of how much 1099 income you will make over the year, you can look up the tax bracket you belong to, which will determine the percentage of your income you need to save/put aside for estimated taxes each quarter.

Each year's federal income tax rate is different from the previous year's percentage. For example, for unmarried taxpayers in 2021, it goes as follows:

  • $0 - 9,950 -- 10%
  • $9,951 - 40,525  -- 12%
  • $40,526 - 86,375 -- 22%
  • $86,376 - 164,925 -- 24%
  • $164,926 - 209,425 -- 32%
  • $209,426 - 523,600 -- 35%
  • $523,601+ -- 37%

Keep in mind that the tax system is progressive, meaning that your income is not taxed at a single tax rate in its entirety, but at different rates for its different gradations. However much income you earn, it will be taxed as follows in 2021:

  • the first $9,950 is taxed at 10%
  • the next $30,574 is taxed at 12%
  • the next $45,849 is taxed at 22%
  • the next $78,549 is taxed at 32%  
  • the next $314,174 is taxed at 35%
  • any income past that is taxed at 37%

Doing The Math For The Quarterly Tax Payments

Determining the estimated tax payments to set aside for taxes each quarter takes the following three steps:

  1. Calculate Total Taxable Income. Take the projected income estimate you figured out earlier and subtract expected tax deductions you plan to claim for qualifying business expenses: this leaves you with your Adjusted Gross Income (AGI). Multiply the AGI by the tax rate attached to the income tax bracket that applies to your earnings: the resulting number is your income tax.
  2. Calculate The Self-Employment Tax. Take your total income (before tax deductions) and multiply it by 92.35% to solve for your taxable income for the SE tax. Take this result and multiply it by 15.3% to get what you owe in self-employment taxes.
  3. Calculate The Total Quarterly Payment To Set Aside For Taxes. Now, it's time to put it all together and break it up into quarterly payments. Add up the income tax and the SE tax: this is your total estimated taxes. Divide that number by 4: you now have your quarterly tax payment.

It Is Better To Overestimate Than To Underestimate A Quarterly Tax Payment

It is always advisable to err on the side of paying more when you pay your taxes. Whatever you overpay will be refunded to you eventually, whereas paying less will bring on tax underpayment penalties (and you will still need to pay the remainder of what you owe...)

With Bonsai Tax, You Will Always Know How Much Money To Set Aside For Taxes (And More!)

No business -- be it a large corporation or a one-person operation -- benefits from attracting the negative attention of the IRS.

Healthy Tax Record-keeping Is Essential

Running a "tight ship" on one's taxes may seem like a very daunting task for the already overextended 1099 worker. First of all, it does not have to be -- and second of all, noncompliance with the tax system will result in other daunting and costly consequences.  

Mis-reporting income and tax deductions can lead to an IRS audit. Not paying on schedule incurs fines. Messy tax record-keeping leads to errors and misestimations on quarterly and end-of-the-year tax filing which, in turn, result in larger-than-expected sums of money owed to the IRS .

It is, therefore, imperative for every self-employed freelancer / independent contractor to either:

  • become very well-versed in taxes and become one's own fastidious accountant,
  • hire a professional accountant, or
  • utilize the help of a simple-to-use digital tax-tracking/sorting/calculating/filing tool

The last option will put you in charge of your taxes at all times while taking the majority of the accounting burden off your shoulders, allowing you to focus on your primary work and clients. Our expense tracker will help you avoid paying 1099 taxes. For a 1099 worker, that tool is Bonsai Tax (as well as its freelancer-oriented all-in-one workflow product suite).

Bonsai Tax Calculates Your Quarterly Income Tax And Self-Employment Tax (And Then Some)

The Bonsai Tax app is the happy medium between going it alone and hiring an accountant. The former is time- and effort-consuming, the latter is expensive. Adapting a digital, cloud-based tax tool, designed specifically for the 1099 contractors' needs, into your business-operating toolkit will do away with most of the labor, while not costing an arm and a leg.

The Bonsai Tax system records your income, scans and imports expense receipts, sorting them into deduction categories to write off at the end of the tax year, generates expense reports to keep you aware of your spending, provides quarterly estimates of how much money you owe in taxes, and fills out the majority of your tax return, come April tax time -- all the while safely storing your data in a cloud-based online account.  

The Bonsai Tax software not only helps with tasks, it guides you through the tax record-keeping and filing chores, making you more mindful of doing taxes, while getting  more comfortable with the process. Try it for free and experience the Bonsai peace of mind for yourself!

Maria Malyk
Maria is a freelance copywriter and language translator, with a PhD in sociology of culture and cognition and a background in academic, legal and financial writing. A digital nomad, Maria also keeps a travel blog while working on a guidebook for solo travelers on a budget.

Join 150,000+ freelancers using Bonsai's free contracts & invoices.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Discover the integrated all-in-one software suite Bonsai.

Oops! Something went wrong while submitting the form.