Are you expecting a year-end bonus for your contract work this year? If so, think of everything you can spend that money on: holiday gifts, paying off credit card debt, a big-screen TV.
However, if you’re a contract worker, you should take your time thinking about how you’d like to spend your extra cash. Since you are considered self-employed and not an employee subject to withholding, there won’t be any taxes withheld from what you receive, which means that you will have to set aside some of what you receive to cover those taxes.
If you are a contract worker, check out the below taxes you will need to take into account for your year-end bonus.
Social Security Tax. All of your compensation, up to $160,200 for 2023, is subject to social security tax of 12.4% if you are self-employed. If your income to date already exceeds $160,200, then you won’t owe additional social security tax on this 1099 income. What if you are already of retirement age, are you still subject to social security tax? Your age doesn’t matter; you have to pay social security tax on your earned income.
Medicare Tax. There’s also a Medicare tax that you must pay on your income from self-employment, so set aside another 2.9% for Medicare tax. Unlike Social Security tax, Medicare tax is imposed on all of your earned income, with no maximum limit. It also applies even if you are 65 or older and receiving benefits under Medicare already.
Federal Income Tax. Whether you make estimated tax payments during the year or cough up the full amount plus estimated tax penalties on the tax deadline, you’ll still need to pay federal taxes on your total income which includes your bonus.
State Income Tax. If your state imposes an income tax, then you will owe state income tax right along with the federal. The percentage you owe depends on the tax rates required by state law.
If you do receive that additional bump in self-employment income at the end of the year, don’t forget you have until January 16, 2024, to make the final 4th quarter estimated tax payment for tax year 2023. You do not have to make the 4th quarter estimated tax payment due January 16, 2024, if you file your 2023 tax return by January 31, 2024, and pay the entire balance due with your return.
Additionally, your business expenses may give you some nice business deductions, which may lower your tax liability. You can use QuickBooks Self-Employed to easily track your income, expenses, and figure out your estimated taxes year round and then your information can export to TurboTax Premium at tax-time.
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