Dear Tax Talk,
I have a full-time job, but I also did some contract work last fall and got a check ($5,700). I know I need to pay taxes on that income, but I am not sure if I need to pay estimated taxes right now or if I can wait until I file my tax return in February. Should I just increase my withholding on my part-time job until then? Does it make sense to increase withholding or pay estimated tax?
Since you have a full-time job that withholds taxes, at the end of the year your employer reports your income and withholding on a Form W-2. When you do "contract work," this type of income is not subject to withholding and in January you will receive a Form 1099 reporting the amount of income you received.
When you receive income that is not subject to withholding, you may be required to make estimated tax payments or alternatively you can adjust the taxes withheld by your employer. The contract work will not only be subject to income tax, but also self-employment tax, so this must also be factored in to your calculations. If you do not pay enough tax through either withholding or estimated tax by the due date of each payment, the IRS may charge you a penalty. You can increase your withholding on your W-2 income, but keep in mind that it's too late to do this for the 2013 tax year.
Estimated tax payments are not required if you had no tax liability for 2012, you were a U.S. citizen or resident alien for the whole year and your 2012 tax year covered a 12-month period. If that is not the case, then you have to look at other factors.
The general rule is that estimated tax payments are required if both of the following apply:
- You will owe at least $1,000 in tax for 2013 after subtracting your withholding and refundable tax credits;
- Your withholding plus your refundable credits are less than the smaller of:
a) 90 percent of the tax shown on your 2013 return, or
b) 100 percent of your 2012 tax. However, if your 2012 adjusted gross income was more than $150,000, you must have 110 percent of your 2012 tax paid in. Also, there are special rules for income from fishing and farming.
Estimated tax payments are paid on Form 1040-ES.
If you have any business-related expenses for the contract work, you can deduct them from the income. You can report the income and related expenses on Form 1040 Schedule C.
Ask the adviser
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
More From Bankrate.com