Set aside 25 to 30 percent of every 1099 payment on the day it arrives. That range is what most tax preparers advise when you ask how much to set aside for 1099 taxes, and it is a starting point rather than your number. The percentage is the easy half, and it is answered everywhere. The hard half is holding that money for three months on an income that changes every month.
How much should I set aside for taxes on 1099 income
It is a range rather than a number because it covers two different taxes at once.
Self employment tax is a flat rate on your net earnings. Federal income tax is not flat. It moves with your total income, your filing status and your deductions, and a state with its own income tax pushes the top of the range higher.
Thirty percent is the safer end. Money you over set aside comes back to you. Money you under set aside is a bill in April you have already spent.
This article does not compute your liability, and a percentage off a blog is not a filing decision. The IRS publishes the rates and an accountant gives you your number. What follows is the budgeting half.
What the 15.3 percent actually is
The figure that surprises people is not income tax.
The IRS sets the self employment tax rate at 15.3 percent, made of 12.4 percent for Social Security and 2.9 percent for Medicare. In a salaried job your employer pays half of that and you never see the line. On 1099 work there is no employer, so both halves are yours.
The Social Security part applies up to an annual cap that changes every year. The Medicare part does not stop.
That is why a freelancer billing the same as a salaried friend owes more. It is not a penalty. It is the half that used to be somebody else's.
Setting aside from an income that is different every month
The share is per payment, not per month. That is the whole trick, and it is why a variable income does not make this harder than a steady one.
When $3,000 arrives, $900 of it is not yours. When $800 arrives, $240 is not yours. You never have to forecast the year, because you are only ever taking a share of a number that already landed.
Do it the day the money arrives. By the end of the month some of it is groceries.
If the variable income itself is the problem rather than the tax, budgeting on an irregular income is the piece that comes before this one.
Where the money sits for the three months it waits
Somewhere you will not spend it, and somewhere separate from your emergency fund.
A second checking or savings account is enough. The requirement is not interest, it is friction. Money sitting beside your grocery money gets spent as grocery money, slowly, in a way nobody notices until the quarter closes.
Do not keep it where your card can reach it, and do not count it in any figure you think of as savings. It is not savings. It is somebody else's money you are holding.
The mechanic is a sinking fund, a pot filled a bit at a time for a known cost on a known date, and a tax bill is the cleanest example of one.
The four dates, and the months they actually cover
Estimated tax is due four times a year, and the quarters are not quarters.
The IRS payment periods are uneven. January through March is due on 15 April. April and May, two months only, is due on 15 June. June through August is due on 15 September. September through December is due on 15 January of the next year. A due date landing on a weekend or a holiday moves to the next working day.
The two month period catches people, because it arrives eight weeks after the last rather than thirteen. Set aside per payment and you will not notice. Set aside monthly and you will.
When the money is not there
A slow month arrives and the set aside is the difference between paying rent and not.
Take from it only as a last resort, and only with a plan to put it back, because the amount owed does not shrink when you borrow. All you have done is move a shortfall into April, where it is bigger. Write down what you took. This never fails on the arithmetic. It fails because nobody remembers the month they borrowed.
If it is August and nothing is set aside at all, the year is not lost. Raise the share on everything that arrives from here. Whatever the shortfall turns out to be, it is smaller than the one where the next four payments also arrive untouched.
The IRS has options for a bill you cannot pay in full, and a return filed on time with a partial payment beats an unfiled one. That is a conversation to have with them or with an accountant, not with a budgeting blog.
Doing this in Cashrou
Cashrou plans one pay period at a time, which is what makes a tax reserve behave.
Enter the set aside as an expense against each payment you receive and it stops being money you might get around to moving. It is claimed the moment the payment lands, so what the app shows as left over really is.
It handles irregular income, so a payment that is a different size every time does not break the plan. Point a goal at the account holding the reserve and Cashrou reads that balance, so the number you see in October is the real one.
What a monthly budget cannot tell you is whether this particular payment has already given up its share. That is the difference, and over four quarters it is the whole thing.
