How Much Should a Contractor Set Aside for Taxes?

As an independent contractor, you are responsible for calculating and paying your own income, Social Security, and Medicare taxes. Unlike traditional employees, taxes are not withheld, requiring estimated tax payments to the Internal Revenue Service (IRS) throughout the year.

Understanding Your Tax Obligations as a Contractor

Independent contractors face federal income and self-employment taxes. Income tax applies to your net earnings, which you must account for yourself. Self-employment tax covers Social Security and Medicare contributions. As a self-employed individual, you pay both employer and employee portions, totaling 15.3% of net earnings (12.4% for Social Security up to $176,100 for 2025, and 2.9% for Medicare on all net earnings).

Independent contractors must pay estimated taxes throughout the year if they expect to owe at least $1,000. These payments help meet tax liability as income is earned, avoiding a large year-end bill.

Calculating Your Estimated Tax

Accurately calculating estimated tax begins with projecting annual gross earnings from all contractor work. Subtract eligible business expenses, which are ordinary and necessary costs. Common examples include:

Home office expenses (e.g., rent, utilities)
Business supplies
Professional development
Mileage for business travel
Business insurance premiums
Advertising
Legal and accounting fees
Contract labor costs

Subtracting expenses from gross income yields net earnings from self-employment. Calculate self-employment tax by multiplying net earnings by 92.35%, then applying the 15.3% tax rate. You can deduct half of your self-employment taxes paid when calculating adjusted gross income (AGI).

After the self-employment tax deduction, estimate your AGI by factoring in other income and above-the-line deductions. Your AGI determines income tax liability. From your AGI, subtract standard or itemized deductions and apply any tax credits, such as the Child Tax Credit or education credits. This yields your estimated federal income tax.

Combine your calculated self-employment tax and estimated income tax liability for your total estimated tax. Form 1040-ES, Estimated Tax for Individuals, provides worksheets to guide you through estimating adjusted gross income, taxable income, taxes, deductions, and credits, simplifying total estimated tax calculation.

Making Estimated Tax Payments

After calculating total estimated tax liability, make payments to the IRS. Convenient methods include online payments via IRS Direct Pay (direct bank account payments) or the Electronic Federal Tax Payment System (EFTPS), which allows scheduled payments after enrollment.

You can also mail payments with a check or money order using Form 1040-ES payment vouchers, or pay by phone or in cash through retail partners.

Estimated tax payments are typically due in four installments. The general due dates are:

April 15 (for January 1 – March 31 income)
June 15 (for April 1 – May 31 income)
September 15 (for June 1 – August 31 income)
January 15 of the following year (for September 1 – December 31 income)

If a due date falls on a weekend or holiday, the deadline shifts to the next business day.

Failing to pay enough tax by the due dates can result in underpayment penalties. Avoid penalties if you owe less than $1,000 after withholding and credits, or if you paid at least 90% of your current year’s tax. Another safe harbor is paying 100% of the prior year’s tax, or 110% if your prior year AGI exceeded $150,000.

Tracking Your Income and Expenses

Maintaining meticulous records of income and expenses is an ongoing part of managing contractor taxes. Accurate record-keeping ensures correct estimated tax calculations and allows claiming eligible deductions, reducing taxable income and overall tax liability.

Detailed records support tax return figures during an IRS inquiry or audit. You bear the burden of proof, so have documentation like receipts, invoices, and bank statements readily available.

Essential records include:

Income sources (invoices, payment receipts, Forms 1099-NEC)
Expense receipts (business purchases, mileage logs, home office documentation)

Using a separate bank account for business transactions is advisable to distinguish personal and business finances.

Tracking methods range from spreadsheets to accounting software like QuickBooks Self-Employed. Physical files and digital scanning with cloud storage are effective. Regularly updating records simplifies quarterly estimated tax calculations and streamlines year-end preparation.