I currently work as a full-time employee for a company, but I recently learned that one of our clients wants to pick me up as an independent contractor.
The transition will be well worth it:
Personal Income: $37,000 → $83,000
Household Income: $65,000 → $111,000
But, I have no experience being self-employed. So, I just have a few Tax 101 questions.
Exactly how much should I set aside for paying taxes? I don't mind setting aside the maximum amount, but I'm not certain I know where that maximum is. from what I can see, this is what I'll need to set aside:
- Federal: With the tax reform, it looks like it's a $24,000 deduction for filing married joint, and 12% for anything under $90k. So... 111k - 24k = $87k. And 12% of that would be $10500.
- Oregon has something called a "Tax Liability Subtraction". Is that a standard deduction? If so it's $6500 for married joint. Therefore taxable income is $104.5k. The first $17k calls for $1054, and the balance is at a 9% tax, or $7875. Totaling $8929.
- Medicare & Social Security appear to ignore deductions, correct? And, since I'm self employed, it appears that it's 15.3%, right? If so, then this appears to be $17000
This comes out to $36,429, or 33% of our household income. Is that too low of a maximum estimate? Would it be safe to go any lower?
Since my wife accounts for 25% of our household income, can I expect to be able to safely reduce that $36.5k to ~$27.5k ($2275/mo), to determine how much of MY income I need to set aside?
How exactly can I withhold my taxes? I was just planning on saving the money in a savings account till tax season the following year, but then I saw the IRS recommends quarterly estimated tax payments OR withholding. The verbiage on withholding is confusing:
If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax.
Emphasis mine. This verbiage makes it sound like I still need to make incremental payments to some form of withholding account. Can I just open a new savings account, and throw 33% of my personal income (or however much) in there till I get my tax paperwork the following January?
- Do you recommend Quickbooks? I've never used it before, but I have used other Intuit services like Turbotax and Mint. My job won't require me to travel much, but it's not out of the question. I also don't expect much business expense except for a small chunk for setting up my home office appropriately.