How do independent contractors pay taxes?

This week our team wanted to cover another popular question we get from independent contractors and freelancers this time of year. We’ve heard from many of you who are self-employed, maybe for the first time recently (congrats!) and are curious about filing your taxes for the very first time.

If you’re new to being your own boss, or thinking about making the move to self-employment, accountant and financial advisor Rob Lane has your back.

How do independent contractors pay taxes?

I am a newly self-employed, independent contractor. How do I pay taxes each year?

If you are self-employed or an independent contractor, you don’t have income taxes withheld from your paycheck so you need to manage your taxes on your own throughout the year. The IRS requires you to pay estimated taxes quarterly if you expect to owe more than $1,000 in federal taxes for the year. Your estimated taxes are due based on the income period and you do not have to pay estimated taxes until you actually start earning income. If you earn income between January 1st and March 31st, you must pay your quarterly taxes by April 15th; the taxes on income earned between April 1st and May 31st are due by June 15th. For income earned between June 1st and August 31st, tax payments are due by September 15th; and for income earned between September 1st through December 31st, you need to pay your taxes by January 15th of the following year.

However, many independent contractors choose not to pay quarterly taxes and use their income as working capital for the business instead. At the end of the year, these contractors pay a penalty imposed by the IRS; typically this is slightly higher than the cost to borrow working capital during the year. You should discuss the pros and cons of paying quarterly taxes or the tax penalty with your accountant throughout the year and they will help you determine which is more beneficial for your specific tax situation. If you choose to make one tax payment at the end of the year, your accountant will help you determine how much money to set aside so that you have the funds available come April. Also be sure to keep track of all of your business expenses during the year, this includes office supplies or work travel costs. As an independent contractor, you are able to deduct expenses related directly to the business, which in turn reduces your taxable income. Depending on your state and municipality, you may also need to make state or local tax payments throughout the year. Your accountant will be familiar with the local tax laws and will be able to help you determine how much and when those payments are due.

More questions about how to choose a tax preparer this season? Submit a question for one of our tax professionals or find an accountant near you. You can always contact our team at for extra assistance.

Can I take money out of my 401(k) to pay taxes?

This week we have another popular question answered from Seattle accountant, Rob Lane.

Unfortunately, it’s not uncommon for many of us to get hit with a tax bill, rather than the desired refund, at the end of tax season. This has the potential to leave the recipient searching for ways to cover the bill without draining savings. Many even look toward tapping into retirement to cover the cost.

Rob has some advice for those looking  into this option:

Can I take money from my 401(k) to pay taxes?

What kinds of penalties might I receive if I take money out of my 401(k) early to pay taxes?

In general, distributions from a 401(k) plan to pay your taxes prior to reaching the age of 59 ½ or 55 in some cases will be treated as an early distribution and be subject to a 10% Internal Revenue Service (IRS) penalty. Of course, once you reach your full-retirement age, 401(k) distributions can be used for any and all expenses including paying taxes. Since 401(k) plans are employer-sponsored retirement plans, your employer and the agent carrying out the plan determine how the plan will operate and what features will exist within the plan. This includes when distributions can be made. An instrument called a plan document is used to communicate these determinations. Therefore, in rare cases, your plan document may explicitly allow distributions to pay taxes, although unlikely. A number of other options exist that would allow you to access your 401(k) funds to pay taxes prior to retirement age and without penalty.  

The first option, in which the IRS has been known to waive the early withdrawal penalty on, would be to allow the IRS to levy your 401(k) account. This would allow the IRS to directly access your account and withdraw the amount you owe in taxes including late payment and interest penalties. This option is generally initiated by the IRS in cases in which a taxpayer owes a significant amount of back taxes and previous attempts by the IRS to arrange payment were unsuccessful.

The second (and more preferable) method to access 401(k) funds without subjecting those funds to IRS penalties is taking out a 401(k) loan. Most 401(k) plans allow tax free loans to be taken out on up to 50% of your vested account balance to a maximum of $50,000 within a 12 month period. A general 401(k) loan, in which there are no or very limited restrictions on how the funds can be used, has a maximum term of 5 years and requires you to pay interest, usually at the prime plus one rate (prime rate + 1%). However, the interest you pay on a 401(k) loan is unlike the interest you pay on your mortgage or car loan. These interest payments are essentially make-up payments intended to increase the balance of your 401(k) as if the funds were never loaned out and were still invested in the plan. Like when you make contributions to your 401(k), the repayment of your loan will be made through a pre-tax payroll deduction. A major risk factor of a 401(k) loan is if the loan is not repaid it will be subject to tax and the 10% early withdraw penalty.

In addition, there are provisions within the Internal Revenue Code (IRC) that allow you to access your retirement funds before reaching full retirement age and without penalty. These provisions, allow for hardship withdraws which are intended to be used to satisfy an immediate and heavy financial need after exhausting all other assets, excluding your principle residence and personal property. The IRS has determined the following expenses stipulate an immediate and heavy financial burden:

  1. Medical expenses including cost of care for a spouse or dependent;
  2. Purchasing a principle residence, payments required to prevent foreclosure or eviction, and substantial repairs related to a principle residence;
  3. Tuition expenses including related educational expenses for the next 12 months of post-secondary education including expenses for a spouse or dependent;
  4. Funeral expenses for a parent, spouse, or dependent

More questions about how to choose a tax preparer this season? Submit a question for one of our tax professionals or find an accountant near you. You can always contact our team at for extra assistance.

What am I missing by not using a professional tax preparer?

Earlier this week, the first post in our Tax Advice series covered what you should look for when selecting a tax preparer this season. Many of you have likely done taxes in the past but done so on your own with software like TurboTax or TaxSlayer.

Today we wanted to help some of you that still may be considering whether or not to use a professional tax preparer versus DIY software. This is another frequently asked question we get and to help you out, we pulled some advice from Networthy friend and professional, Brandon Ferguson:

What am I missing by not using a professional tax preparer?

I’ve always done my own taxes using Quickbooks but this year am considering using a professional tax preparer. However, I want to see what kinds of things I’m missing out on by not using a professional.


  1. Software can never replace the personalized service you get from a tax professional.
  2. Doing it yourself can take a significant amount of your time to do it properly.
  3. You could be missing valuable advice or tax code updates.

A lot of people have started to file their own taxes using electronic software, but these tools can never compare to the personalized service you would receive from a professional tax preparer.  

Filing your own taxes can be time consuming and stressful, even if you are using a program to help you.  You may even find yourself searching the internet for tax laws in your area and then trying to interpret them to see if they are applicable to your situation.  If you hire a professional tax preparer, you will only need to spend a few hours working with them and they will be able to clearly answer any questions you may have.  

When you do not use a professional tax preparer, you are missing out on advice that you would never get through any software program.  For instance, a tax preparer may tell you about a tax credit you did not know existed or help you decide when it is more advantageous to take one tax credit over another. Not only will a professional tax preparer be able to quickly prepare your taxes, but they will also help you identify deductions you may not have been aware of and missed out on, such as the cost to have taxes prepared.  If you prepare you own taxes, and are not a tax professional yourself, you’ll most likely make the eventual mistake.  

Most professional tax preparers not only use software to check your taxes, but they review them themselves several times before filing your taxes for you. While mistakes may still happen, they are much less likely with a professional tax preparer.  Although most people are never audited by the IRS, having a tax preparer that can help you gather all necessary paperwork, understands the taxes you have filed and can work with the IRS on your behalf is invaluable if an audit should occur.  Without a tax preparer you will be scrambling to gather all of this information and liaise with the IRS on your own.

More questions about how to choose a tax preparer this season? Submit a question for one of our tax professionals or find an accountant near you. You can always contact our team at for extra assistance.

What do you look for in your tax preparer?

Tax season is underway and many of you are likely working to get your paper work in order to (hopefully) file sooner rather than later.

At Networthy, we’ve received a lot of great questions this season from customers about filing their taxes. We thought this would be a good opportunity to share some of those questions with readers as well as answers from our community of professionals.

Each week, our team will be sharing some of these questions and answers from our community in order to ease you through the (often stressful) tax season.

The first answer in our Tax Advice series comes from Seattle accountant, Rob Lane:

What do you look for in your tax preparer?

I am looking for an accountant to prep my taxes this year? What do you typically look for in your tax preparer?


  1. Decide whether you need an Enrolled Agent (EA) or Certified Public Accountant (CPA).
  2. Consider whether you need an attorney to sort out any legal matters.
  3. Do they actually have time to properly prepare your taxes and file before the deadline?
  4. Check how accessible your tax preparer plans to be to answer questions or clarify their methods.
  5. Consider overall costs and experience for your tax preparer.

In light of the increasing complexity of the US tax code there are many factors to consider when choosing your next tax preparer. One of these factors is deciding what type of professional can provide you with a high-quality and cost-effective tax preparation services. There are two professionals who mainly prepare tax returns in the United States. Theses tax preparers are Enrolled Agents (EA) and Certified Public Accountants (CPA).

The main difference between an Enrolled Agent and a CPA is an Enrolled Agent has been given the permission to represent taxpayers by the Internal Revenue Service (IRS) and CPAs have been licensed by the states they intend to practice in. Other differences between EAs and CPAs are there are no minimum education requirements to becoming an EA and CPAs tend to have master degrees. In addition, EAs are required to pass an IRS exam covering individual and business tax topics and CPAs are required to take a comprehension accounting exam covering tax, audit, financial reporting, and other business topics administered by the American Institute of Certified Public Accountants (AICPA). Due to higher education requirements and exam complexity CPAs tend to be the preferred tax preparer. Although, EAs tend to be a less expensive service provider and may be the preferable tax preparer when your tax situation rather basic and straightforward.

Another profession frequently dealing with taxes are attorneys. Attorneys practicing in the area of tax law tend to offer services related to business entity structure, assisting in the audit appeal process, representing clients in tax court, and estate and trust management. In rare cases, attorneys will prepare returns. However, their core service is practicing law, not preparing tax returns.

After choosing what type of professional will provide you with the best service, a number of other factors should be considered. The first should be availability. Just like if a doctor has too many patients, a tax preparer with too many clients may not be able to give all their clients the attention they need. A preparer with limited availability may not have the capacity to file your return on time or worse rush though your return, leaving deductions on the table. When trying to determine if the preparer will have the availability to bring you on as a valuable client think about if there is a feeling the preparer is interested in you and saving you money and if the preparer is taking the time to ask you detailed questions about the complex areas of your return.

Another factor to consider when choosing your next tax preparer is accessibility. Ideally your tax preparer will be by your side year-round to answer questions, assist in the audit process (if necessary) and provide tax planning services. Hiring a preparer that simply files your taxes in April and disappears until the next tax season may provide you with great filing services. However, to truly create exceptional tax savings a year-round approach is required. Finding a preparer that is committed to helping you create the best tax scenario by monitoring your situation throughout the year will result in higher tax savings down the road. Therefore, when considering your next preparer ask if tax planning services will be included, if you will charged for phone calls to ask questions and seek advice, and if they will provide you updates on how the tax code is changing in the current year or near future and what you can do to now to create the best tax result once the new laws are implemented.

The final important factor to consider when choosing your next tax preparer is how much you will pay for their services. Which can seem like a balancing act when trying not to overpay for having your taxes prepared while not leaving valuable deductions on the table by hiring an under qualified preparer. While there is not a good rule of thumb to make sure you are getting a good return on your tax preparation fees. You should be getting more tax savings than you are paying in fees. Tax savings does not mean you should get a bigger tax refund than you paid in fees. Rather, it means your preparer reduced your tax bill by an amount greater than the amount you will pay them in fees.

Therefore in conclusion, the first factor to consider when choosing your next tax preparer is what type of professional will service you best. CPAs tend to be more expensive than Enrolled Agents. However, CPAs have more education and a more prestigious designation. EAs can still be a very cost effective tax preparation solution when your tax situation is pretty straightforward. After that considering if a preparer is available, accessible, and cost effective will lead to an overall good decision on who will prepare your taxes this year and in the future.

More questions about how to choose a tax preparer this season? Submit a question for one of our tax professionals or find an accountant near you. You can always contact our team at for extra assistance.

Networthy Launches

After several months in development and working one-on-one with accountants and financial advisors, we are excited to announce the launch of

Our objective with Networthy has always been to create a marketplace where consumers can find and meet professionals with the skills to help them reach their financial goals.

We have created a number of features to empower consumers to make the most informed financial decisions possible. Consumers on Networthy can now search for an accountant or financial advisor, rate and review professionals, or ask important financial questions to be answered by one of our pros.

Curious about what kinds of questions other users are asking? Browse our list of financial Q&As and see the answers coming from our network of professionals.

Our professionals now have unparalleled access to consumers searching for financial services. Having worked closely with financial professionals over the last several months, we have created a platform that gives accountants and financial advisors the ability to display their credentials, interact with potential customers through our Q&A, and amplify their name across our advertising network.

Financial professionals are welcomed to join Networthy, fill out your profile, and begin answering user questions. The more you engage, the more your name will be seen by prospective customers.

Our team encourages questions and comments from anyone with feedback or looking for more information. We are working to build a valuable marketplace that fits the needs of both consumers and professionals. If there is something you would love to see, please feel free to send a message our way at

We Are Networthy

In 2006, marketing software giant, Marketo wrote a blog that told customers about the marketing problems they wanted to solve. They got scores of feedback from customers that helped guide them in the development process and created software that companies actually wanted to use.

10 years later we’ve decided to take a page from their playbook.

We are Networthy.

A Seattle-based company looking to break down the barriers between Financial Professionals and consumers. Give us some feedback and help to create a website that would function they way you want.

1.) The problem: Consumers can’t easily find or meet quality professionals online.

  • Consumer 1 goes online looking for a Financial Professional (Accountant, Financial Advisor…etc.,). They find some white page style directories and lots of ads. They pick up the phone and start calling down the list.
  • Pro 1 meets new clients through traditional person-to-person referrals. or through their firm. They don’t keep a complete or updated online presence. They are hard to research, find or contact in the digital world.

2.) Our plan: Create a marketplace that connects the Pro and Consumer.

  • Consumers want to know what you’re like, what you’ve done, answers you’ve given that demonstrate your talent. Customers are demanding to be more informed about where they go and who they hire. They want the ability to know about your area and level of expertise. Maybe even how available you are to new clients right now. This really narrows the phone calls they’d have to make to get to you.
  • Pros want marketing dollars to be as effective as possible. This means marketing to an active, incentivized audience that reduces the amount of time and money needed to onboard the client.Telling customers about your history, specialties, even fees, ensures customers understand what is a good fit. Participating in forums creates organic content that Google loves to promote and gives the customer a chance to see your expertise.

3.) Feedback: We’re looking for opinions from real pros and customers. We want to make sure Networthy is accessible and useful for all of you.     


  • Would you complete a profile about yourself, experience and specialties that potential customers could search by?
  • Do you have feedback about pricing models (our inspiration models have advertising pricing models anywhere from $99-5,000/month!)?
  • One of our models, (a site that reviews and rates lawyers), launched in 2007 with a website that founders pre-populated with lawyers who were rated from 1-10. Lawyers were upset they weren’t given a choice about being on site but Avvo profile adoptions soared because of the incentive. The tactic certainly encouraged some new users while deterring others. What do you think?


  • If you needed an accountant, mortgage broker or Financial Planner today would you want to research them? Are you interested in reviews? Eduction? Work experience or specialties?
  • How do you know if you have a bad Financial Professional? How do you find a good one?
  • Where do you turn if you have a financial question that you can’t answer?