Independent Contractors and Taxes: How to Decide Between Paying Quarterly or Annually

An independent contractor generally receives a 1099 tax form for any work payments. However, some companies do not provide this tax form. As long as you keep track of how much you were paid, you won’t need it to file annual taxes. You do not need to provide these forms when you file quarterly since those payments are estimated. Here is an introduction to independent contractors and taxes so you can make decisions that best fit your lifestyle and needs.

Paying Taxes and Tax Forms

When you file your annual taxes, you enter your income in one or two places. If you have 1099 documents from your clients, you will enter that information in one place. If you do not have a 1099, you still need to report that income. Most tax programs have a separate area to enter this amount. You don’t have to enter income separately if you have more than one client who did not give you a 1099. Simply add the amounts and enter one amount. Be sure to report all income, whether you receive a 1099 or not.

Estimating Tax Payments

The Internal Revenue Service requires that you estimate your yearly tax burden and pay it in quarterly amounts. For example, if your tax burden for a year is an average of $4,000, you’d pay $1,000 each quarter. Once you file your annual taxes, you enter the pre-paid tax amounts to see if you owe additional taxes or will get a refund.

The IRS requires you to pay quarterly taxes. But, many who have a smaller tax burden elect to pay their taxes annually. If you do this, the IRS will fine you for “underpayments.” The fine is minimal, so many gig workers do this to keep any money they can in their own pockets.

If you estimate high, you’ll have to wait for the IRS to get that money back. If you underpay, even with quarterly payments, you will still have to pay the underpayment fine.

Pros and Cons of Paying Estimated Tax Payments

The biggest pro of paying quarterly estimated taxes is that you won’t have to come up with a large payment at the end of the year. If you don’t pay quarterly, you’ll have to save up throughout the year. This would be to make sure you have enough to pay taxes when it comes to April 15.

The cons of paying ahead include overpaying and not having that money at your disposal. You also risk underpaying and still getting slapped with a fine even though you filed quarterly.

Paying annually means you’ll have to pay the fine. You’ll also have to be sure to save up enough to cover your tax obligation in April. Another advantage of paying annually is that you’ll have all of the documentation that affects your taxable income at hand. Thus, if you had a surprise expense that is deductible, your tax obligation could be less. That would be money that could stay in your pocket if you paid annually. If you paid quarterly, you would have to wait for the IRS to return that money to you.

There are a lot of ways to approach independent contractors and taxes. Be sure to keep track of your income, estimate your payments, and make the best decision for your situation. If needed, consider consulting a tax service or professional.

About the Author: Cheryl Bowman has been writing on various topics since 2007. She writes on many topics, including pets and food. Her specialties are legal and automotive as she worked in both industries. Cheryl’s legal specialties are bankruptcy and family law. She also writes about criminal law and civil cases such as personal injury and real estate. You can find Cheryl on Writer Access.