Do I need to file taxes quarterly as an independant contractor if I qualify for the earned income credit?

Question

I am new to filing as an independant contractor. I read I will need to file quarterly but also saw this on a site:



Who Must Pay Estimated Tax

If you had a tax liability for 2005, you may have to pay estimated tax for 2006.

General Rule
You must pay estimated tax for 2006 if both of the following apply.

You expect to owe at least $1000 in tax for 2006 after subtracting your withholding and credits.
You expect your withholding and credits to be less than the smaller of;
90% of the tax to be shown on your 2006 tax return, or
100% of the tax shown on your 2005 tax return. Your 2005 tax return must cover all 12 months.


Now does this mean that if I am able to qualify for the eic that I will not have to pay quarterly because I would be owing less than $1000 in taxes? Sorry if this is a dumb question, just so lost on how to file as an independent contractor. Hope all this makes some sort of sense.

How do I know how much to withhold from each check to pay up quarterly? I heard it is very difficult to estimate and i will get a penalty for accidentally underpaying.

Answer 1

Let's cut to the chase. What you need to do is predict what your 2006 tax return will look like. If your business is relatively steady all year, then simply take the predicted annual tax due from your predicted 2006 tax return, divide by 4, and send that in each quarter. If, because of EIC and other credits, you predict that your annual tax liability will be $1000 or less, then YOU DON'T NEED TO MAKE ANY IRS QUARTERLY PAYMENTS. Make sure you are calculating this correctly. Self-employed people not only need to be concerned with regular taxes (looking up taxes in the tax table based on your taxable income), but also on "payroll" taxes a.k.a "self-employment" taxes a.k.a. "social security & medicare" taxes. These can be significant (15.3% of profits). Make sure you factor these into your "owe $1,000 or less" formula.

The real trick is predicting your 2006 tax return. Most people use their prior year tax return and fill in their new numbers. This can backfire if the IRS significantly changes tax laws. What most people do is seek a tax professional or accountant, who is up-to-date with the new tax laws, has the new tax forms and tables, and has software that can easily provide an estimate. Others take last year's tax liability and divide by 4. May I suggest taking last year's tax liability and multiply by 110% (1.1) then divide by 4 in case your income is high enough to require the 110% method. Keep in mind that, when you pay 110% of last year's liability, you could still owe quite a bit of taxes come April 15th. Paying 110% of last year's liability just protects you from any under withholding penalties.

Hope this helps :)

Answer 2

Ok here is what you do. You take 100% of last year tax and divided it by 4 and then make a payment every 3-month starting in April. Now the last payment of the 4th quarter is due in Jan of next year. By then you should get a close ideal of how much you owed at the end of the year. So you make an est. payment close to 80% of the current year taxes.

Get it?

Now as for your EIC, don’t think too much about it. If you over pay at the end of the year then you will get it as a refund. If you under pay your estimated taxes then you will pay interest with the tax you owed so that is not good.

So just now worry about making estimated taxes for federal and state if you have state income tax.

Got it?

Good

Answer 3

Your details are sketchy but I will do my best. Have done tax returns for 36 years so I can fill in the blanks. Since you are talking EIC I assume you have children? Don't overlook the $ 1,000.00 per child credit you receive for every child age 16 and under. This also lessens your tax bite. If you are going to end up owing less that 1,000 you don't have to worry about paying estimates quarterly.

Answer 4

A quick way to estimate your tax liability is to see how your current year income compare to last year.

If they are about the same or a little more, as long as you paid the same amount of tax withholding you wouldn't be penalized. Otherwise, make up the difference in the next tax estimate, which is due Jan 15th 2007.

Best wishes.

Answer 5

You should only need to file yearly, but pay quarterly. You probably should start just to be on the safe side. Paying estimated taxes quarterly is actually a benefit even if you aren't required to since you won't have to come up with a huge chunk of change at once at tax time if you do end up owing.

Answer 6

$1. However, that only gets you, say, 50 cents. If you do not have qualifying children (and do not live with ones that someone else is claiming), your income would have to be less than $13K and your age would have to be between 25 and 65. The max is on the order of $400. If you have qualifying children (eg, your bio-kids), the amount goes up dramatically for both still qualifying and what you would get back. I find that people who try to game the system--only work enough to get EIC--are wasting my money as a taxpayer and setting themselves up for failure.