24 Sep How much should you budget for taxes as a freelancer?
One of the hardest parts of the gig economy is calculating how much you’ll owe in taxes at the end of the year.
But that’s now easier with the Internal Revenue Service’s new Tax Withholding Estimator tool. The Tax Withholding Estimator tool gives employees who also receive self-employment income a way to accurately estimate the right amount of tax to set aside for April.
The new tool offers self-employed individuals, workers, retirees, and other taxpayers an easier way to calculate the amount of income tax they need to have saved from either wages or pension payments.
Tax Withholding Estimator
How to use Tax Withholding Estimator
To use the Tax Withholding Estimator, taxpayers simply enter any self-employment income in addition to wages or pensions. The new estimator makes it easier to enter wages and withholding for each job held as well as any jobs held by a spouse, pensions and other sources of income.
Then, the taxpayer will be alerted to any several special tax benefits they may qualify for.
Special tax benefits include the self-employment health insurance deduction or the deduction for contributions to a Simplified Employee Pension (SEP), Savings Incentive Match Plans for Employees (SIMPLE) or other qualified retirement plan.
Next, the estimator automatically calculates the self-employment tax and the self-employment tax deduction and incorporates these numbers into its overall tax liability estimate.
At the end of the process, the tool will make specific withholding recommendations for each job and spouse’s job, including incorporating any self-employment income entered into the estimator.
Replaced Withholding Calculator
A mobile-friendly online tool, the Tax Withholding Estimator replaced the Withholding Calculator, which since 2001 had offered workers an online method for checking their withholding. The old calculator lacked features geared to self-employed individuals; the new estimator made changes to address this important group.
With only a third of the year remaining, the IRS encourages these taxpayers — and others — to use the estimator to take a Paycheck Checkup as soon as possible to make sure they are having the right amount of tax withheld and avoid a surprise when they file next year.
If you need help understanding your tax liabilities from your freelance work, contact DVF to speak with a member of our tax team.