My wife is starting a new job as a therapist at a local clinic. She just had a meeting to go over the pay details. She’s not salaried, gets no benefits, and her pay comes from insurance or private clients. If it’s insurance, she gets paid once the clinic does. We’re used to that setup since her current job is similar.
What’s new is that they said her paychecks won’t have any taxes withheld—no federal, no state. The manager suggested she set aside 30% from each check for taxes at the end of the year. This threw me off because I’ve never heard of this. My quick search didn’t help much except showing people discussing penalties for underpayment.
Can anyone explain how this works? What’s the best way to handle the taxes so we’re not hit with a huge bill all at once? Is there a way to pay in smaller amounts throughout the year?
Edit: Thanks for all the info about 1099 contractors and quarterly tax payments. I’ll go over this with my wife and figure out the next steps.
Axel said: @Nico
Isn’t quarterly payment only required if you owe over $1,000 in taxes?
Yes, but most people in her situation will owe more than $1,000. If she’s just starting this job late in the year, she might not need to make estimated payments until next year.
Grier said:
She should definitely make quarterly estimated tax payments to avoid penalties.
How does she go about doing that? Sorry, we’re new to this.
If you’re new to this, the IRS website is a good place to start: Estimated taxes | Internal Revenue Service. Also, since she’s a contractor, she’ll probably file a Schedule C for her business expenses. Things like licensing fees, insurance, and travel could be deductions.
Consider setting up a separate bank account just for her work income and expenses to make things easier to track.