Paying Estimated Taxes

Contractors and consultants don't have taxes withheld from their paychecks, but they have to pay estimated taxes every quarter.

Now that you're an independent contractor, you won't have any taxes withheld from your pay—and your take-home pay will be substantially higher than that of an employee who earns a similar amount. However, self-employed workers still have to pay taxes, just like everyone else. 

Independent contractors have to pay tax on their estimated annual incomes in four payments, spread out over each year. These payments are called estimated taxes and are used to pay income taxes and self-employment taxes (Social Security and Medicare taxes).

Because of this estimated tax requirement, self-employed people need to budget their money carefully. If you don't set aside enough of your earnings to pay your estimated taxes, you could face a huge tax bill on April 15—and possibly penalties for not paying enough estimated taxes—and have a tough time coming up with the money to cover it.

Who Must Pay Estimated Taxes?
If, like the vast majority of self-employed people, you are a sole proprietor (that is, you own your own business), you have to pay estimated taxes if you expect to owe at least $1,000 in federal tax for the year.

However, if you didn't have to pay any taxes last year—for example, because your business didn't make a profit or because you weren't working—you don't have to pay any estimated tax this year, no matter what you earn. This rule applies only if you were a U.S. citizen or resident for the year and your tax return for the previous year covered the whole 12 months.

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