Hi Abe, How much should I be saving for my quarterly taxes?
Abe: I am glad you asked this important question. It is often recommended for independent contractors to save between 20-30% of their Net Profit for both state and federal taxes. As a reminder, your Net Profit is the difference between your Gross Revenue and your business expenses (Gross Revenue – Business Expenses = Net Profit).
It is important to note that this is an estimated figure. In fact, that is part of why the IRS refers to the quarterly payments as “Estimated Tax Payments.” Since a self-employed individual cannot determine net profit during the year, an individual tax rate cannot be established. However, 20-30% is often thought of as the industry average toward what to save.
Some factors that could help determine what to save specifically might be how you file (single, married jointly, head of household) if you claim dependents, the ages of dependents being claimed, and your state income tax rate. Much like with W-2 withholdings, the hope of saving 20-30% of your net profit is to make your regularly scheduled quarterly payments in an effort to as much of your annual tax liability paid by the time you file.
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