As a contractor, it can be confusing to understand how much you need to pay in taxes. Unlike employees who have taxes withheld from their paychecks, contractors are responsible for paying their own taxes. In this article, we will discuss how much contractors should expect to pay in taxes and how to calculate their tax obligations.
The first step in understanding how much you need to pay in taxes as a contractor is to determine your taxable income. This includes all the money earned from your contracts minus any deductible expenses, such as supplies, equipment, and home office expenses.
Once you have determined your taxable income, you need to calculate your self-employment tax. This tax consists of two parts: social security and Medicare tax. The social security tax rate is 12.4% on the first $142,800 of your income. The Medicare tax rate is 2.9% on all your income. If your income is above $200,000 for single filers or $250,000 for joint filers, you may also be subject to an additional 0.9% Medicare tax.
In addition to self-employment tax, you also need to pay federal income tax. The amount you owe depends on your taxable income and your tax bracket. The tax brackets for 2021 are as follows:
– 10% on taxable income up to $9,950
– 12% on taxable income between $9,951 and $40,525
– 22% on taxable income between $40,526 and $86,375
– 24% on taxable income between $86,376 and $164,925
– 32% on taxable income between $164,926 and $209,425
– 35% on taxable income between $209,426 and $523,600
– 37% on taxable income over $523,600
As a contractor, you may also be subject to state and local taxes. The amount you owe depends on the state and local tax rates where you live and work.
It`s important to note that contractors are required to make estimated tax payments throughout the year. These payments are due on April 15, June 15, September 15, and January 15 of the following year. The estimated tax payments should be based on your projected income for the year and the taxes you owe.
In summary, contractors should expect to pay self-employment tax consisting of social security and Medicare taxes, federal income tax, and possibly state and local taxes. The amount you owe depends on your taxable income and tax bracket. To avoid penalties and interest, be sure to make estimated tax payments throughout the year.
