5 Things 1099 Employees Need to Know About Taxes

5 Things 1099 Employees Need to Know About Taxes5 Things 1099 Employees Need to Know About Taxes We are now in the era of the 1099 worker. Whether you head to your employers office or spend most of your time working from home, being a private contractor provides freedoms you may notlage get from traditional employment. With that freedom, however, comes great tax responsibility. Private contractors and self-employed individuals must learn how their new employment status affects their tax filing, how much they pay in taxes and when they pay. Mistakes in any of ansicht areas can cost you hundreds or thousands of dollars - which is why we reached out to tax experts to generate a list of five invaluable tax tips for freelancers and private contractors. Curt Mastio, a CPA who runs Founders CPA and teaches at Northwestern University, said that before figuring out ways to nail your taxes every year, you have to become familiar with the differences between your old W-2 work and your new life as a 1099 worker.The biggest change You are now responsible to pay estimated taxes and your social security payments. As someone employed by a company and receiving a W-2, your employer is withholding a certain amount of your paycheck each pay period and remitting that on your behalf, Mastio said. When you become self-employed , no one is doing that on your behalf.Therefore, he said, you are responsible for making quarterly income tax payments. These payments are the governments way of making sure youre paying what you should pay ahead of time. There was a time when you had to mail in your quarterly payments but thankfully, the IRS has made it possible to pay your quarterly taxes (also known as estimated taxes) through their website. In fact, you have the option of paying your quarterly taxes every month. If youre someone who struggles to budget properly and have a spend it while youve got it mindset, submitting on a monthly basis can be helpful, Mastio said.Self -employment tax has the potential to be confusing because at first glance, it seems like it would be the tax you pay for being self-employed. However, according to the United States tax code, self-employment tax encompasses your FICA payments, which are cash contributions to the nations Medicare and social security coffers. As a W-2 worker, your employer pays half of your FICA (7.65 percent) and you pay the other half. Just like your income tax, both your and your employers FICA payments are made automatically. When you become self-employed, youre on the hook for the full 15.3 percent since,in this instance, you are both the employee and the employer, Mastio said.Failure to understand this can lead to not setting aside enough cash at the end of the year to cover your self-employment tax obligations.With these two new shifts in your tax obligations, you might be wondering, How do you estimate your income and self-employment tax payments?If its your first year as a 1099 worker and you dont have a CPA doing your taxes, Chelsea Krause, an accounting expert at business financial site Merchant Maverick , says the IRS Self-Employed Individuals Tax Center is your home for understanding how much you might have to pay. The page has a link to the 1040-ES, which is a worksheet that will tell you, based on your income for the past three months, how much you need to pay for the quarter. The worksheet takes about 10-15 minutes to complete. In the event that youve filed as a 1099 worker the previous year, then Dave Du Val, an Enrolled Agent with TaxAudit.com , says the following percentages are the governments guide for how much you should save If possible, make up any shortfall in the taxes you owe by increasing estimated tax payments as soon as you are making more than you expected, Du Val said.Tax experts across the board emphasized the importance of responsible saving so that youve got enough cash stored up to meet your tax obligations each quarter and at the e nd of the year. Krause says many freelancers and private contractors entrap themselves in a pay with the next check type of mentality. As a 1099contractor, it can be easy to see your whole check as usable money and to convince yourself youll put more into your tax savings next check, Krause said. Doing this is incredibly difficult to recover from and is a very slippery slope. She and Mastio suggest opening a separate savings account into which you can deposit money youll use for your tax payments. Make it a priority and build it into your monthly budgeting. If it has been a problem in the past, simply open up a separate bank account and transfer 25-30 percent of each months earnings to this account and use that account to make your quarterly tax payments, Mastio said. You may end up over-estimating your payments, but at least you avoid the headache and panic of setting aside too little.If youve got the resources to pay for tax software or a tax professional, doing so will save yo u tax-related time, stress and energy each month, experts say. Its easy to become overwhelmed with keeping track of client appointments, doing client work and following up to make sure that you get paid, said Crystalynn Shelton, a CPA and a tax analyst at Fit Small Business . Accounting software like QuickBooks Self Employed makes it easy for you to bill your clients, accept online payments and track expenses. When you can keep track of your income, you get a better read on how much you owe in taxes. From there, you can use tax software from companies like QuickBooks to estimate your quarterly tax payments. Should the thought of DIYing your taxes intimidate you, hiring a tax pro could be your best option.The benefits, said fruchtfleisch Steber, chief tax officer at Jackson Hewitt Tax Service, are significant both for accurate tax payments and maximizing deductions. Self-employed workers have some of the richest and best tax rules if you know where to find them, Steber said. The best way to get the most from your return is to speak with a tax pro to ensure youre getting all of your deductions and credits.J.R. Duren is a personal finance reporter at HighYa.com , where he covers credit cards, credit scores, student loans and more. He is a three-time winner at the Florida Press Clubs Excellence in Journalism contest.