As a freelancer or contractor, one of the most important things you need to keep in mind is setting aside enough money for taxes. Unlike employees, contractors are responsible for paying their own taxes, which can be a significant financial burden if not planned for correctly.
So, how much should you set aside for taxes as a contractor? The answer is not simple, as it depends on several factors. Here are a few things to consider when calculating your tax expenses:
1. Understand your tax bracket
The tax bracket you fall into will depend on your income level. For example, if you earn $50,000 as a contractor, you will fall into the 22% tax bracket. Make sure you know which bracket you fall into so you can plan accordingly.
2. Factor in self-employment tax
As a contractor, you are also responsible for paying self-employment tax, which is a combination of Social Security and Medicare taxes. This tax is in addition to your income tax, and it can be a significant expense. Currently, the self-employment tax rate is 15.3%. Make sure to factor in this expense when calculating your tax payments.
3. Deductible expenses
As a contractor, you may be able to deduct certain expenses from your income, which can reduce your taxable income and your tax liability. Business-related expenses such as professional dues, travel expenses, and office supplies are all potential deductions. Make sure to keep track of all of your expenses throughout the year so you can claim them when you file your taxes.
4. State taxes
In addition to federal taxes, you may also be responsible for paying state taxes depending on where you live and work. Make sure to research your state’s tax laws so you can budget accordingly.
Overall, it’s recommended that you set aside at least 20-30% of your income for taxes as a contractor. This may seem like a lot, but it’s better to be over-prepared than underprepared when tax season rolls around.
One final tip – make sure to pay your taxes on time, as failure to do so can result in penalties and interest charges. Your best bet is to work with a tax professional or accountant who can help you navigate the complexities of tax law and ensure that you are paying the correct amount.