One of the biggest adjustments when transitioning from W-2 employment to 1099 independent contractor work is managing quarterly estimated tax payments. Here's everything you need to know.
Why Quarterly Payments?
Unlike W-2 employees who have taxes withheld from each paycheck, 1099 contractors must pay taxes throughout the year. The IRS requires these payments to avoid underpayment penalties.
2025 Due Dates
- Q1: April 15, 2025 (for income earned Jan-Mar)
- Q2: June 16, 2025 (for income earned Apr-May)
- Q3: September 15, 2025 (for income earned Jun-Aug)
- Q4: January 15, 2026 (for income earned Sep-Dec)
What Taxes Are Included?
Your quarterly payment covers three types of taxes:
- Self-Employment Tax (15.3%): This covers Social Security (12.4%) and Medicare (2.9%) taxes. You pay both the employer and employee portions.
- Federal Income Tax: Based on your tax bracket after deductions.
- State Income Tax: Varies by state; some states have no income tax.
How to Calculate Your Payment
A simplified approach:
- Estimate your quarterly net income (income minus deductible expenses)
- Calculate Self-Employment tax: Net income × 0.9235 × 0.153
- Estimate Federal tax based on your bracket
- Add state tax if applicable
- Divide annual estimate by 4 for quarterly payment
Safe Harbor Rules
To avoid penalties, you must pay either:
- 90% of your current year's tax liability, OR
- 100% of last year's tax liability (110% if AGI > $150,000)
How to Pay
You can pay quarterly taxes through:
- IRS Direct Pay: Free online payment from your bank account
- EFTPS: Electronic Federal Tax Payment System
- Credit/Debit Card: Fees apply
- Check: Mail with Form 1040-ES voucher
Pro Tip: Set aside 25-30% of each payment you receive into a separate savings account for taxes. This ensures you always have funds available for quarterly payments.