If you're a consultant, you probably have several clients you bill -- and don't receive a payroll check unless you also have a salaried position. While no money is deducted from your client's payments, it does not excuse you from paying taxes on it. Because freelancers, consultants and other independent contractors don't have payroll taxes withheld from their checks, they can have a larger tax liability at the end of the year.
Consultant Tax Basics
If you're self-employed, you have to pay self-employment taxes, which is how you pay your Social Security and Medicare. Employers pay a portion of Social Security and Medicare, but self-employed people have to pay the full amount themselves -- 10.4 percent of your total earnings for Social Security and 2.9 percent for Medicare, as of 2012. The rest of your income taxes are based on your tax bracket. For example, if you're single and make $50,000 per year, as of 2012, you're in the 25 percent tax bracket and must pay 25 percent of your taxable income in taxes.
Quarterly Tax Filings
While most people only file taxes once per year, income taxes are actually paid on a rolling basis. This is why employers deduct payroll taxes from paychecks. If, however, there's no payroll tax deducted from your paycheck, you'll generally need to file quarterly tax estimates if you expect to owe more than $1,000 in taxes. Tax estimates are paid in four equal amounts based upon your estimate of your annual tax liability. Quarterly estimates are due on January 15, April 15, July 15 and October 15. If the due date falls on a weekend, the tax estimate is due on the business day immediately after the due date.
Consultants often have business expenses that they can deduct from their total tax liability. The costs associated with an office or home office -- including rent and utility bills -- are deductible Travel time for business that does not include travel from home to a work site is also deductible at the IRS standard mileage deduction rate -- 55.5 cents per mile as of 2012. Educational expenses, office supplies and other expenses necessary to perform your job are also generally deductible.
To file quarterly taxes, you'll need to fill out a Form 1040-ES. Your clients should send you a 1099-MISC indicating how much they paid you if it exceeded $600, but even if you don't receive these forms, you'll still have to pay taxes on the money you earned. If you're a salaried worker, as well as a consultant with your own clients, you don't need to complete estimated taxes, but will need to complete Form 1040 at the end of the year. Consultants who make more than $400 in a year working independently must attach Schedule C to their 1040s. On Schedule C, you must list your business income, as well as your business expenses. After you fill in your income and all your expenses, you calculate your net income or loss. You then transfer your net income or loss from Schedule C to the income section of your Form 1040.
- IRS: Topic 554 - Self-Employment Tax
- Forbes: 2012 Federal Income Tax Brackets
- IRS: Estimated Taxes
- IRS: Publication 505, Tax Withholding and Estimated Taxes
- IRS: Self-Employment Tax
- IRS: Estimated Tax for 2012
- IRS: Deducting Business Expenses
- IRS: IRS Announces 2012 Standard Mileage Rates, Most Rates Are Same as in July
- Creatas/Creatas/Getty Images
- Can 1099 Employees Deduct Car Expenses on a Tax Return?
- Negative Tax Consequences for the Self-Employed
- What Is the Difference Between Payroll Tax & Income Tax?
- What Is a 1099 Form & Why Does Unemployment Ask If You Filed One on Your Taxes?
- Can I Still Collect Unemployment Benefits If I Got Money Back on My Tax Return?
- Can I Claim FICA Deductions on Personal Income Tax?