Taxes while working for an hourly paying job?

Question

My nephew has recently started a software consulting job on an hourly basis. This project is for about 2 years. Since this is an hourly paid job, the employer will not be withholding any taxes. So he has to pay the taxes to the government directly. So I have the following question
1. Does he have to write a check to the govt. (Federal and state seperately) with approximate amounts (about 40 percent) for that month. OR
2. Does he have to wait for the tax season and then send the taxes once at the end of the year?

I was told that the second option may have penalties. Is it true? Any feedback from people who know more about this will be greatly appreciated.

Thanks
Ram

Answer 1

I think that your terms need to be re-defined. Simply because someone has an hourly job doesn't mean that their boss doesn't withhold state and federal taxes.

What effects your nephew in is the fact that he is an independent contractor and paid on a 1099.

He has two options,
#1 Don't mail in anything in and SAVE SOME MONEY for tax season and pay a very small fee for not sending in the money quartely (apporx. 1% of taxable withholdings)

#2 Each quarter (3 months) mail separate payments to the IRS and State for his estimated withholdings (it does NOT have to be exact.) As long as he gives them SOMETHING each quarter he can avoid the penalty. I would suggest sending in 30% each quarter to the federal govt.

He needs to follow a Schedule C on his tax forms.

Also tell him to keep a log of his mileage on his car and receipts for work supplies, as these are tax deductible on a Schedule C.

Answer 2

Hourly job or salaried job doesn't change whether the employer withholds taxes. From your description, sounds like he's working as an independent contractor, not uncommon in the software industry. If that's the case, then yes, he need to file quarterly estimated tax forms and payments with the IRS (form 1040-ES) to avoid penalties he'll incur if he waits until the end of the year to pay. The amount he'll send quarterly will be his estimated amount of income taxes on the money he earned that quarter, plus 15.3% of his net earnings for self-employment tax - this is for social security and medicare.

This is for federal. If he's in a state that has an income tax, then he must file quarterly there too to avoid penalties. Some municipalities have an income tax - if he has one, then probably must file there quarterly also.

Answer 3

Just make sure that you get a correct W-2 from each of your employers next February, and add them up for the (line 7?) "Wages and Tips". If you have 1099 income (no taxes w/h by the person paying you) you will find how and where to enter them, also. The IRS spares no expense making instructions. Just go through the forms step by step. You can save a tree by reading rules online at www.irs.gov or get paper copies (libraries, etc, or order direct.) ... and yes, bonuses are income. If you are claiming Single-0 on your W-4 you will be close at tax time, even with the different jobs at different rates, if that is what you were worried about.