The IRS will charge you penalties if you do this wrong, so this question I received should be at the top of your list of ones to know the correct answer to.

“Hi Russ, One question I have as I try to figure out my net income, what percentage of my gross should I be setting aside for income taxes each month? Is 20% enough? Thanks, Tanya”

The standard rule the IRS uses is that you should send in 100% of last year’s tax, or 90% of this year’s tax estimate, whichever is less. Basically, if you are doing better this year, then send in what you owed last year. If you are doing worse this year, then send in what you think you’ll owe this year.  You have to send this in 4 times throughout the year since your estimates will change as you go along.

Things to consider…You will have both self-employment tax and income tax on the same money earned, so you have to estimate your tax by using the actual tax return forms to be sure your calculations are correct.

Self employment taxes are calculated as 15.3% of your net profit and are equivalent to the social security and medicare you pay as an employee with one exception.  Employees only pay 7.65%, the other half comes from the employer.  When you are self employed, you pay the whole thing although the IRS does allow you to deduct half of the tax due from your taxable income.  Like I said, it’s complicated.  We offer a service and a free calculator to help clients estimate their self employment tax throughout the year and avoid those penalties.  Give us a call so we can help you figure this out.