If you are a self-employed freelancer or business owner, you may need to make estimated tax payments if you meet certain requirements. Quarterly estimated tax payments are how self-employed taxpayers pay their taxes to the IRS throughout the year. These payments are made every three months and are meant to cover self-employment taxes or Social Security/Medicare, and income tax.
Employees don't have to pay taxes quarterly. That's because their employers withhold taxes from their paycheck before they even receive the money. If you have a W-2 full-time or part-time job, you'll typically receive a tax refund.
In this article, we'll go over who has to pay estimated taxes, the due dates, exceptions to the rule, and the penalties if you miss payments.
Note: if you don't want to miss quarterly tax deadlines and also track your business expenses, try Bonsai Tax. Our tax software will scan your bank/credit card receipts to discover potential tax write-offs and help you maximize your savings. Users usually save $5,600 from their tax bill with our software. Try a 14-day free trial today.
Freelancers, independent contractors, and small-business owners who anticipate owing at least $1,000 in taxes, even after accounting for your withholding and refundable credits from their self-employed income, all need to pay quarterly taxes.
This is your taxable income or the part of a self-employed workers income used to calculate how much tax they'll owe Uncle Sam in a given tax year. For example, if your annual revenues is $45,000 and you claimed $15,000 in business deductions, your taxable income would be $30,000.
Even if their employers withhold taxes from their paychecks, people with rental income and assets may need to pay estimated quarterly taxes.
Self-employed individuals who owe less than that are able to pay their taxes when they file their annual tax returns. You must pay your taxes as you go under the law.
If you have not paid enough tax through withholding or quarterly estimated payments by the time you file your taxes, you may be subject to a penalty for underpayment. We'll go over this penalty rate later down below.
Remember, the quarterly tax payment are just an estimate. At the end of the tax year, you'll still need to file an annual tax return. It is best to consult with a tax professional to see if you'll need to file estimated tax payments.
If certain special criteria are met, Fishermans and Farmers may need to pay estimated taxes. If farming or commercial fishing account for more than two-thirds of your taxable gross income, you qualify as a farmer or fisherman.
According to the IRS, individuals, such as sole proprietors, partners, and shareholders in S corporations, may be required to make anticipated tax payments if:
Some taxpayers may be required to make projected tax payments, such as those who:
In short, you don't want to miss out on payments.
In addition to annual tax returns, self-employed people are responsible for paying estimated quarterly taxes. A self-employed individual pay quarterly taxes to cover Social Security tax, Medicare tax and income tax.
In 2021, the tax rate is:
High earners who make over $200,000 may be subject to an additional Medicare tax.
If you are required to file quarterly tax payments and you forget or just decide to skip out on paying them, then you'll have to pay an underpayment penalty. In order to avoid paying an underpayment penalty, you'll need to make your payments on time and send in the proper amount. Here are the due dates for estimated taxes.
The quarterly deadlines are as follows:
After you see if you need to pay estimated quarterly taxes, the next step is to calculate and send in the proper amount to the IRS. If you expect to make a similar amount of income from the previous year, refer to your expected gross income from the previous year (companies gross revenue after you subtract business expenses). Of course, you'll want to change or adjust the amount based on what you expect to earn this year.
The formula to calculate your quarterly tax payments is fairly simple. Once you have your expected adjusted gross income, take your total tax liability for the year, including self-employment tax, income tax, and any other taxes, and divide that number by four.
You don't need to send 25% of the total you expect to owe in year instead of needing to estimate what you'll owe each quarter.
There are also many free online tools to help you calculate your payment totals. If you overpaid your quarterly taxes, you'll get a tax refund at the end of the year. Payments are reported via a Form 1040-ES. A From 1040-ES is a form that calculates the total taxable income of a taxpayer and determines how much is to be paid or refunded by the government. You can use IRS Form 1040-ES to figure and pay your estimated tax. Use the IRS 1040-ES worksheet if your income varies each year.
Estimated tax payments should be paid as soon as you start earning money as a self-employed worker. Again, they must be sent in by April 15, June 15, September 15, and January 15 of the following year.
If it is your first year self-employed, you won't need to pay quarterly taxes by withholding. However, if you believe you'll earn a lot of money, it would be wise to send in estimate payments so you won't be left with a big tax bill at the end of the year or on your April tax return.
Higher income taxpayers have different rules for quarterly taxes. If your adjusted gross income for the year is over $150,000, then you'll need to cover 110% in estimated taxes.
In order to avoid an estimated tax penalty, you'll have to pay at least 90% of your previous year's tax liability through withholding, estimated or additional tax payments or a combination of the two. If you don't, there may owe an estimated tax penalty when you file your tax return.
If you skip out on quarterly tax payments, you'll have to pay an estimated tax penalty. The penalty amount will accrue based on how late you are and how much you make. Essentially, the IRS will add a penalty of .5% of the tax owed after the due date. This penalty amount will continue to accrue from the day your quarterly payment is due until the day it is paid. There is a penalty limit of 25% of the taxes owed.
Typically, taxpayers don’t have to pay a penalty if they meet any of these conditions:
For example, let's say you paid $5,000 in taxes last year. You'll send in equal payments of $1,250 this year. However, if you calculate your taxes at the end of the year to actually be $7,000, you'll need to pay the difference of $2,000 at tax time to avoid a penalty.
If it turns out that you overestimated or underestimated your earnings, you can always recalculate your estimated tax for the next quarter by completing another Form 1040-ES.
You'll most likely need to attach an extra form — IRS Form 2210 — to your annual return to explain why you didn't send equal quarterly payments.
A sure-fire way to avoid penalties is to pay for 100 percent of your previous year's taxes by each of the quarterly deadlines.
There are certain circumstances where the IRS might give you a break on penalties. Let's review some of the exceptions for missing payments for estimated quarterly taxes.
The IRS has made it really easy to send in estimated payments throughout the year. You can select a payment method via the IRS website or mail in a check with your Form 1040-ES.
Just use the Electronic Federal Tax Payment System (EFTPS) to submit payments electronically.
You could also mail in a Form 1040-ES.
Read our full detailed guide for how to send quarterly tax payments.
If you are a small business owner who has questions about filing or sending in estimated tax payments, we always recommend you consult with a tax professional.
They can help you file Form 1040-ES, set up automatic withholding from your bank account and answer any tax questions to keep you in line with the IRS's rules. A designated CPA or accountant can help you with your specific tax situation.
Estimated taxes are meant to help business owners to prepare to pay their tax duties. If you want an app to help you record all your tax receipts and remind you of your quarterly tax deadlines (so you don't have to pay unnecessary penalties), then try Bonsai Tax.
Our app can help you estimate your self-employment income tax, send you important filing reminders, and maximize your tax deductions.
Users typically save $5,600 with our app. Try a 14-day free trial today.
This article is meant to be a resource. Tax laws are always changing. If you have any questions about self-employment tax rates, quarterly estimated tax payment totals, or if you need to pay estimated taxes in the first place, we always recommend you talk to a tax advisor. A CPA or accountant can help you answer any estimated tax questions and help you properly file your tax return.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?