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For freelancers and contractors who receive nonemployee payments, the prudent practice is to set aside a portion of each payment and make quarterly estimated tax payments if amounts are significant. Unlike wages subject to employer withholding, contract payments usually arrive with no tax withheld, which means the recipient must plan to cover both income tax and self-employment tax (which covers Social Security and Medicare contributions that employers would otherwise share). A simple habit is to transfer a fixed percentage of each invoice — for example, a conservative 20–30% depending on net margins — into a separate savings account labeled for taxes. This prevents mixing operating cash with funds reserved for tax obligations and reduces the chance of spending money earmarked for future tax bills.
Quarterly estimated payments are the formal channel to remit taxes during the year when withholding is insufficient. Compute estimates from projected net profit (gross receipts minus legitimate business expenses) and apply a conservative tax rate to determine quarterly amounts. Keep meticulous records of deductible business expenses — receipts, invoices, mileage logs, bank statements — so you report net income correctly and avoid overpaying. If income fluctuates, recalculate mid-year and adjust payments to reflect updated projections; many taxpayers underpay in the first half and catch up later once earnings rise. Also consider whether increasing withholding on a spouse’s W-4 (if married) or arranging voluntary withholding from other pay sources could be simpler than quarterly payments in certain situations.
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