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Social Security Taxes
You should save enough from each payment to cover your Social Security taxes. For 2011, self-employed individuals must pay 6.2 percent of their earnings as the employer, and another 4.2 percent as the employee. That 4.2 percent figure is actually a reduced rate, in effect only for 2011. After that, the rate goes back up to 6.2 percent, meaning you should save a full 12.4 percent from each payment, instead of the current 10.4 percent.
When you are self-employed and receiving a 1099, you are required to pay both the employer and the employee's share of the tax that funds the Medicare program. As of 2011, that tax rate is 1.45 percent for the employer and 1.45 percent for the employee. That means you should save 2.9 percent of each payment to pay this tax.
State and Local Taxes
Chances are you will owe additional taxes to the state and local government as well, so you should set aside money to meet those tax burdens. You can contact your state revenue department and get the tax percentage you should use. Some states apply a flat tax rate to everyone regardless of income, while
others use a graduated tax that rises along with income. Also contact the municipality where you live to find out how much you should withhold from each payment you receive.
As a self-employed individual who receives a 1099, you can take advantage of a number of tax breaks and deductions. These tax breaks can lower the amount you must set aside from each paycheck to cover your taxes. For instance, if you use a part of your home exclusively to run your business, you may be able to take the home office deduction. You can also deduct the money you pay for your health insurance and your health savings account, and any money you put into a SEP-IRA or other retirement plan.
It may not be enough to put money aside from each payment you receive. If you expect to owe more than $1,000 to the IRS at the end of the year, you may be required to pay your estimated taxes on a quarterly basis instead of waiting until April 15. If you feel you will be over the $1,000 threshold, you should speak to a tax preparer and make arrangements to pay the IRS four times a year.
Category: Personal Finance