About to start being an Independent Contractor - Any advice on estimating taxes?
I agree with your strategy of using a conservative estimate to overpay taxes and get a refund next year. As a self-employed individual you are responsible for paying self-employment tax (which means paying Social Security and Medicare tax for yourself as both: employee and an employer.) Current Social Security Rate is 6.2% and Medicare is 1.45%, so your Self-employment tax is 15.3% (7.65%X2) Assuming you are single, your effective tax rate will be over 10% (portion of your income under $ 9,075), but less than 15% ($9,075-$36,900), so to adopt a conservative approach, let's use the 15% number.  Given Self-employment and Federal Income tax rate estimates, very conservative approach, your estimated tax can be 30% (Self-employment tax plus income tax) Should you expect much higher compensation, you might move to the 25% tax bracket and adjust this amount to 40%. "It's likely you don't have to make estimated tax payments if this is your first year of contracting (extra income), and your existing salary is already having taxes withheld. If you look at the 1040-ES: General Rule In most cases, you must pay estimated tax for 2014 if both  of the   following apply. This is easier to understand if you look at the worksheet.  Look at line 14b/14c and the associated instructions.  14b is your required annual payment based on last year's tax.  14c is the lesser of that number and 14a, so 14b is your ""worst case"".  14c is the amount of tax you need to prepay (withholding counts as prepayment). I'm going to apply this to your situation based on my understanding, because it's not easy to parse:" One possibility that I use: I set up an LLC and get paid through that entity. Then I set up a payroll service through Bank of America and set up direct deposit so that it is free.  I pay myself at 70% of my hourly rate based on the number of hours I work, and the payroll service does all the calculations for me and sets up the payments to the IRS.  Typically money is left over in my business account. When tax time rolls around, I have a W2 from my LLC and a 1099 from the company I work for. I put the W2 into my personal income, and for the business  I enter the revenue on the 1099 and the payroll expenses from paying myself; the left over in the business account is taxed as ordinary income. Maybe it's overkill, but setting up the LLC makes it possible to (a) set up a solo 401(k) and put up to $51k away tax-free, and (b) I can write off business expenses more easily.
"I'm mostly guessing based on existing documentation, and have no direct experience, so take this with a pinch of salt. My best understanding is that you need to file Form 843. The instructions for the form say that it can be used to request: A refund or abatement of a penalty or addition to tax due to    reasonable cause or other reason (other than erroneous written    advice provided by the IRS) allowed under the law. The ""reasonable cause"" here is a good-faith confusion about what Line 79 of the form was referring to. In Form 843, the IRC Section Code you should enter is 6654 (estimated tax). For more, see the IRC Section 6654 (note, however, that if you already received a CP14 notice from the IRS, you should cross-check that this section code is listed on the notice under the part that covers the estimated tax penalty). If your request is accepted, the IRS should issue you Notice 746, item 17 Penalty Removed: You can get more general information about the tax collection process, and how to challenge it, from the pages linked from Understanding your CP14 Notice" "Whether you contribute to an IRA (Traditional or Roth) and whether you contribute to a 401k (Traditional or Roth) are independent. IRAs have one contribution limit, and 401ks have another contribution limits, and these limits are independent. I see no reason why you wouldn't maximize the amount of money in tax-advantaged accounts, if you can afford to. In your first year of work, especially if you only work for part of the year, you're likely in a lower tax bracket than in the future, so Roth is better than Traditional. Another thing to note is that the money in the Roth IRA can be part of your ""safety net"" -- contributions to a Roth IRA (but not earnings) can be withdrawn at any time without tax or penalty. So if there is an emergency you can withdraw it, and it wouldn't be any worse than in a taxable account. And if you don't need it, then it will enjoy the tax benefits of being in the IRA." Work under UK umbrella company.  By this you are thinking of creating a new legal entity in UK, then its not a very great idea. There will be lot of paperwork, additional taxes in UK and not much benefit.  Ask UK company to remit money to Indian savings bank account   Ask UK company to remit money to Indian business bank account Both are same from tax point of view. Opening a business bank account needs some more paper work and can be avoided.  Note as an independent contractor you are still liable to pay taxes in India. Please pay periodically and in advance and do not wait till year end. You can claim some benefits as work related expenses [for example a laptop / mobile purchase, certain other expenses] and reduce from the total income the UK company is paying &gt; Tax rates do make a difference between whether to invest here or in Ireland.   Not actual investment, but if you have the discretion to chanel profits to a lower taxed jurisdiction (necessarily a loophole that can be closed), then you may structure transactions accordingly.  &gt; he money that American businesses profit overseas stays overseas instead of being repatriated because the taxes are too high to justify paying them before reinvesting the money in the economy.   That is an issue that is also independent of tax rates.  Providing incentives to bring money back is unlikely to finance any new investment though.  There are loopholes that allow using foreign assets (cash especially) to fund foreign loans that can finance any desired investment.  Still, even if repatriation is used for stock buybacks and dividends that would be more money flowing into the US, though not really money flowing to people who spend a high portion of flows (rich investors).  But just because there are reasonable arguments for tax reform encouraging repatriation and HQ locations as at least not being harful, does not support also including the genuinely directly harmful effects of cuts to tax rates. "I assume your employer does standard withholding?  Then what you need to do is figure what bracket that puts you in after you've done all your normal deductions.  Let's say it's 25%.  Then multiply your freelance income after business expenses, and that's your estimated tax, approximately.  (Unless the income causes you to jump a bracket.) To that you have to add approximately 12-13% Social Security/Medicare for income between the $90K and $118,500.  Filling out Form 1040SSE will give you a better estimate. But there is a ""safe harbor"" provision, in that if what you pay in estimated tax (and withholding) this year is at least as much as you owed last year, there's no penalty.  I've always done mine this way, dividing last year's tax by 4, since my income is quite variable, and I've never been able to make sense of the worksheets on the 1040-ES." It's going to depend entirely on your tax situation, its complexity, and your willingness/interest in dealing with tax filings.  Personally I find that not only do I not enjoy dealing with figuring out my taxes, but I don't know even a fraction of the possible deductions available and all the clever ways to leverage them.  Plus the tax code is changing constantly and staying on top of that is not something I'm ever going to attempt. I am of the philosophy that it is my duty to pay only the absolute minimum tax legally required, and to utilize every possible exemption, deduction, credit, etc. that is available to me.  Plus my business activities are a bit on the non-traditional side so it requires some unorthodox thinking at times.  For me, a trained professional is the only way to go.  What it costs me, I way more than make up in savings on my tax bill.  I also go out of my way to never get a refund because if I get one, it just means I gave the government a free loan. The last time I computed my own taxes (used TurboTax if memory serves) was I think in the late 90s. As others have said, make sure you can and do file your taxes on a cash basis (not accrual). It sounds like it's very unlikely the company is going to issue you a 1099 for invoices they never paid you. So you just file last year's taxes based on your income, which is the money you actually received. If they do pay you later, in the new year, you'll include that income on next year's tax return, and you would expect a 1099 at that time. Side note: not getting paid is unfortunately common for consultants and contractors. Take the first unpaid invoice and sue them in small claims court. After you win (and collect!), tell them you'll sue them for each unpaid invoice in turn until they pay you in full. (You might need to break up the lawsuits like that to remain under the small claims limit.) I'm assuming you're in the United States for this. I highly recommend getting a CPA to help you navigate the tax implications. Likely, you'll pay taxes as a sole proprietor, on top of any other income you made. Hopefully you kept good records because you'll be essentially paying for the profits, but you'll need to show the revenue and expenditures that you had. If you have any capital expenditures you may be able ton amortize them. But again, definitely hire a professional to help you, it will be well worth the cost.