If you are one of the people who get their income from self-employment, then you need to learn how to file quarterly taxes. For a beginner, this task may be daunting - but the process may be easily learned with time.
Quarterly taxes are often a better option than yearly taxes, as you pay estimated taxes throughout the year rather than one lump sum. Whether you are new to taxes or you want to brush up on your knowledge, this article will teach you how to approach quarterly estimated tax payments.
Note: If you want filing reminders and estimates for your quarterly tax payments, try Bonsai Tax. Our app will send you important deadline reminders and also scan your bank/credit card receipts to record all of your business expenses. Users typically save $5,600, on average, from their tax bill. Claim your 14-day free trial today.
The American tax system works on a pay-as-you-earn system. In other words, as you earn money throughout the year, you need to receive income for it. This way, the government will also receive a steady income.
For this reason, taxes are paid in two ways. W-2 employees will pay their taxes through withholding, whereas taxpayers that get their money through freelancing will pay through quarterly taxes.
If you are self-employed, there's no way to have your tax payments withheld from your paycheck. For this reason, the IRS requires that the individuals make these payments themselves, by their due date.
Quarterly tax payments are usually a better alternative to paying the taxes all in one lump sum. The IRS allows you to do that as well, but this might cause you to be overwhelmed by the larger sum. By paying quarterly, you pay in smaller increments, and the penalty will not be as big.
In most cases, freelancers are required to pay quarterly taxes. If you are the owner of a small business or owe a minimum amount of $1,000 in income tax, then you are expected to pay quarterly taxes.
In case you owe less than $1,000, then you will not be required to pay quarterly taxes. Instead, all you have to do is pay your due taxes as you are filing for a tax return.
Making less money does not make you exempt from taxes. It just changes the way you would normally make the payment.
Moreover, if you had no tax liability during the previous year, then you may also be exempt from paying quarterly taxes. This may be because you did not have to file for an income tax return, or because the "total tax" box on your Form 1040-ES stated $0.
To put it simply, as long as you are self-employed or you have your own business, you need to file for quarterly taxes, lest you'll receive a penalty. You are considered self-employed if you work in the following circumstances:
Side hustles might also be exempt from paying quarterly self-employment tax. All you need to do is ask the potential employee to withhold the necessary extra and file for you.
The same thing also applies in case you file jointly with your spouse and they have a W-2 job.
As a self-employed person, if you wish to avoid getting fined for underpayment of estimated taxes, then you'll want to file and pay by their due date. The tax year for 2021 is nearly over, but if you still want to know the dates, you may go by the following deadlines:
Depending on the circumstances, some self-employed individuals may skip the last quarterly tax payment in January, and pay what they expect to owe on the 1st of February, 2022.
The dates for the 2022 tax year are also out for taxpayers to keep in mind. People owing self-employment tax need to pay their quarterly tax by the following due dates:
Aside from the January date, every other deadline is the same. This makes them fairly easy to follow when making your estimated tax payment.
In order to pay your quarterly taxes, you first need to figure out exactly how much you owe. In many cases, the numbers will depend on the state along with the tax year that you are in. Because of this variety, the IRS often offers a tax calculator for you to use, or even calculates how much you owe.
With that in mind, if you plan to make those calculations yourself, you need to be thorough. Here are the steps you should take if you need to pay quarterly taxes:
Note: you can also determine how much taxes you'll owe at the end of the year by using Bonsai's online self-employed tax calculator. Just plug in your filing status, what State you are in, how much money you are planning to earn, etc and our tool will calculate everything for you.
Let's say that you are a self-employed individual who works as a freelancer, and expect to get an adjusted gross income of around $50,000. Taking out the business expenses that require no taxes, you estimate that the taxable income will be somewhere around $35,000.
At this point, you know how much you earn, but don't know how much you owe. For that, you need to consider the current tax rate. Considering this year's rate, as well as the example above, you'll owe somewhere around $4,000 in income taxes.
Bear in mind that the federal tax payment system not only taxes you for your annual income, but your status as well. You will have to pay a self-employment income tax (also referred to as the Social Security and Medicare Tax). This is somewhere around 15.3% of your total net income. Considering the example, you will have to pay $4,950 more.
By adding the self-employment tax and the income tax, you will get the total amount for the income taxes that you need to pay that year. In the example above, you'll get $8,950. Since you'll owe more than $1,000, you will have to make quarterly payments.
Bear in mind that the tax bill might change fairly often throughout the year. If your business grows and you begin making more money, you might want to make the adjustments. Otherwise, you will receive an underpayment penalty or be at risk for the tax liability.
Likewise, if you begin overpaying due to a decrease in income, you may also recalculate or ask for a tax refund.
You may also redirect the income taxes by following the form 1040 instructions.
You owe more than $1,000, which means that you'll need to pay quarterly rather than go for lump sums. This step is fairly easy, as all you have to do is to divide your annual tax amount by four. In this example, you'll need to pay estimated taxes of $2,238 every three months.
Now that you've determined exactly how much you'll have to pay, it is time that you send the taxes due to the IRS. . There are several ways in which self-employed people and small business owners may pay their taxes quarterly:
Online payments represent the most common option, as they allow taxpayers to complete the process from the comfort of their home. This may be done by going to the payment page of the IRS and using your debit or credit card to make the payment.
A business owner may also pay their annual tax by phone. This may be done by signing up for the Electronic Federal Tax Payment Services and using the voice option to pay your taxes quarterly by phone.
Since it's the era of technology and smartphones, you may also pay taxes using the IRS app. Simply download the IRS2Go app on your tablet or smartphone, and make the payment there.
A small business may also pay their taxes in the old-fashioned way, through checks or money orders. This is a good option if you have a local IRS office set up or if it's much easier for you to mail the expenses.
Once you have calculated your quarterly tax payments as a self-employed individual, it is time that you make your due payments for estimated taxes. Here are the ways you may do that:
When you need to pay quarterly taxes, you may also do so through overpayment. For instance, when you are filing form 1040 or form 1040-ES, any overpayment may be directed to the adjusted gross income tax. It is often a better solution for many people as compared to receiving a tax refund on the money.
As a result, when you are calculating the estimated taxes for the current year, you may want to consider this amount as well.
If you are paying for the first time, you might want to use a tax calculator or employ the help of a financial advisor. In most cases, the IRS will also provide the help that you need and may even calculate the taxes for you.
That being said, if you are going to stay self-employed for a while, the chances are high that you will eventually learn to calculate those taxes yourself.
If you forget to pay your estimated taxes due or you pay quarterly taxes late, but owe more than $1,000 throughout the year, then you risk exposing yourself to tax liability from the IRS. However, there are instances when you may be exempt from paying a tax bill.
The circumstances in which you may be exempt from filing your quarterly include the following:
Regardless of the circumstances, you always need to be in contact with the IRS, whether you can make the payment or not. If you can't pay due to the reasons above, you still need to file your annual paperwork with the IRS along with the proof.
As a freelancer or an independent contractor, as long as you owe more than $1,000 in taxes per year, then you need to file for quarterly taxes. Ideally, you should keep track of your business expenses so that you know exactly what to expect every quarter. When in doubt, work with a tax advisor or directly with the IRS.
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?