If you earn income as a contractor, you may not have any withholding deductions for taxes, and will receive a 1099-MISC if your income exceeds $600 annually per company. You may also be sent a 1099 if you receive income from dividends, interest payments, debt cancellation and real estate sales. In addition to just wanting to know how much you will owe, you may be required to make quarterly deposits so that your tax liability is paid during the course of the year. If you are so required, failure to make payments may result in additional penalties and interest
Assemble your information. You will need your prior year’s tax return. your most current pay stub if you also have income as a W-2 employee, the amount you have earned so far this year as a 1099 employee, and IRS Form 1040-ES with instructions. This form is available for download or viewing at the IRS website. Read the instructions for IRS Form 1040-ES before you begin.
Compute your total estimated income for the year. Take the year-to-date income from your pay stub and divide it by the number of months that have already passed this year. Multiply that number by 12 to find an estimated annual income. Repeat the process with your year-to-date 1099 earnings. Add the two numbers together to arrive at your total estimated income for the year.
Use your prior year’s tax return to estimate your itemized deductions. If you do not itemize, enter the applicable standard deduction. For 2012, it is $11,900 for married couples filing a joint return, $8,700 for those who qualify as the head of household, and $5,950 for single filers or if you are married but filing separate returns.
Multiply the number of dependents, including yourself that you can claim by the standard exemption, which is $3,800 for 2012. Subtract this amount.
Compute your tax by using the Tax Rate Schedule included with the Form 1040-ES package. This information is also available online (see Resources). If you are subject to alternative minimum tax, include this amount also.
Estimate your credits by reviewing your prior year’s return. On the 2011 Form 1040, you can find these amounts on lines 47 through 53. Subtract your credits.
If you are self-employed and file a Schedule SE, include your liability for self-employment taxes. Multiply your estimated gross income from self employment by 0.9235 to arrive at your net income. Multiply your net income by the current rate, which is 13.3 percent for 2012 if your income is less than $110,100, which is the limit for Social Security taxes. If greater, multiply by 2.9 percent, since Medicare taxes do not have a limit. Add that number to $11,450.40, which represents $110,100 times the 6.2 percent employee portion of Social Security and 4.2 percent employer portion of Social Security. Add this number to your estimated income tax.
Estimate any additional credits, such as earned income, additional child tax, and making work pay credits, by referring to your prior year’s return. On the 2011 Form 1040, these credits appear on lines 63 through 71 as “Payments.” While the most benefit you can realize from the credits in Step 6 is to reduce your tax liability to zero, credits on lines 63 through 71 can actually increase your refund as well as reduce your tax liability. Deduct your credits to arrive at your estimated tax liability.
Use any current pay stubs to estimate how much will be withheld from salary. For example, if you receive a weekly paycheck and $20 is deducted each week, multiply 52 weeks per year times $20 and deduct $1,040. Subtract this from your estimated tax liability to determine how much more you may owe.