If you’re an LLC owner, paying your taxes four times a year can seem like an unnecessary chore. But if you estimate your LLC quarterly taxes correctly, it can actually ease your tax burden – when tax season arrives, you will have already paid your tax liability.
In this guide, you’ll learn how to pay estimated quarterly taxes for your LLC and how estimated taxes work.
Note: If you want to stay on top of your quarterly tax payments and record all of your business expenses, try Bonsai Tax. Our tax receipt organizer would scan your bank/credit card statements to discover potential tax write-offs and save you thousands of dollars on your taxes. Users typically save $5,600 from their tax bill. Claim your 14-day free trial today.
The IRS typically considers Limited Liability Companies (LLCs) as pass-through entities or flow-through entities. A pass-through entity is a type of business structure where income generated by a business is treated as the personal income of the business owner. Basically, the profit your business generates is exempt from corporate income tax.
Incorporated businesses, on the other hand, typically have to pay corporate income tax before distributing earnings to their owners. The owners will then report the dividends they receive as personal income when they file their taxes.
Unfortunately, if you run an incorporated business, you’ll have to pay taxes twice on the income your business gets. And that’s the benefit of being a pass-through entity – you avoid double taxation.
Another benefit is that you can receive extra deductions that aren’t offered to owners of incorporated businesses. For instance, you can take advantage of the Tax Cuts and Jobs Act’s 20% deduction on Qualified Business Income (QBI).
Also, if your business suffers a loss, the IRS will pass through the loss, and your overall taxable income will reduce.
Aside from LLCs, other types of pass-through entities include:
That said, the default tax status that the IRS assigns to your LLC is determined by whether your business is run by a single person or multiple people. You can choose your LLC to either be taxed as a sole proprietorship, partnership, or corporation. If you don’t decide, then the IRS will tax your business as a partnership or sole proprietorship by default.
The IRS treats LLCs as ‘’Disregarded Entities”. What this means is that the IRS simply ignores the structure of your business and taxes it like a sole-proprietorship. Just like sole-proprietors, you’ll report whatever income your LLC gets on your personal tax returns.
You can pay yourself with monthly distributions, but you won’t pay income tax on them as you’ve already paid income tax on your LLC’s profits. Note, though, that you’ll need to pay self-employment tax on the distributions you receive.
Read our resource about a LLC vs sole-proprietorship.
Naturally, filing returns is a bit complicated for multi-member LLCs compared to single-member LLCs.
If an LLC is owned by multiple people, the IRS typically treats the business as a partnership.
If you’re one of the owners of a multi-member LLC, you’ll have to fill out Form 1065. Each owner will also receive a Schedule K-1 that’ll include each owner's share of credits, income, and deductions.
To understand how this works, let’s use an example. Let’s say you own 50% of a business and your partner owns the remaining 50%. In such a situation, both you and your partner will have to pay taxes on half of the LLC’s profits. You can also get 50% of the tax deductions available to your LLC and you’ll be able to write off half of the losses your business incurs.
If an limited liability company is taxed as a single member or partnership, the LLC can receive a 1099.
LLC owners have to pay taxes similarly to independent contractors, freelancers, and self-employed individuals. Normally the IRS withholds Social Security and Medicare taxes from W-2 employees' paychecks. But since LLC owners are not W-2 employees, these taxes are not usually withheld from what they earn. Instead, they have to pay these taxes – called self-employment taxes – directly to the IRS.
The rate for self-employment tax is 15.3% – the sum of Social Security tax that’s 12.4% and Medicare tax that’s 2.9%. When you’re a W-2 employee, this rate is split in half between you and your employer – your employer pays 7.65% and the remaining 7.65% is withheld from your paycheck.
But as an LLC owner, you pay the entire 15.3%. The good news, though, is that you can write off half of the self-employment tax when you file your annual tax return.
The IRS requires you to pay self-employment taxes throughout the year in installments. These installments are referred to as estimated quarterly taxes, and they’re due four times a year. Note, though, that these quarterly payments are due only if your earnings exceed a certain amount. So, depending on how much you earn, you might end up paying taxes on four “Tax Days” throughout the year.
You need to report quarterly taxes using Form 1040-ES. To figure out if you’ll be using Form 1040-ES to make estimated payments in the 2022 tax year, do the following:
Let’s say, for instance, you paid $700 in taxes last year. You estimate you’ll pay $1,200 as tax this year, and 90% of that is $1,080. So the smaller amount is $700. You need to figure out the credits and withholdings you’ll get this year and compare them to this $700.
If you estimate you’ll be paying at least $1,000 in taxes after you’ve taken out all the deductions, and the amount of your expected withholdings and credits is lower than the number you’ve calculated – in this case, $700 – then you need to report your earnings on Form 1040-ES and pay quarterly tax payments.
Because these are “estimated” taxes, chances are high that you can overpay them. Luckily, if you do overpay quarterly taxes, then you can request a refund from the IRS at the end of the year.
Again, Form 1040-ES can help you calculate your estimated LLC quarterly estimated tax payments. Here is a simple process you can follow:
Typically, most self-employed taxpayers pay estimated taxes in 4 equal installments. But this may not be the case in some circumstances. For instance:
Note that underpayment isn’t an option as the IRS will likely charge you a penalty if you don’t pay enough in LLC estimated taxes throughout the year. Even if you expect to get a tax refund, the IRS can still penalize you for underpayment.
But there are some specific occasions where you can get a break on penalties failing to file quarterly taxes. They include:
Making quarterly tax payments late can also attract penalties from the IRS, that’s why it’s important to make each payment on time. Here’s when you need to pay quarterly taxes in 2022:
Note: if you want filing reminders sent to you so you don't miss important deadlines and would like to track all your business expenses, try Bonsai Tax. Our tax software for contractors can help you estimate your taxes as well as scan your bank/credit card receipts to discover potential tax deductions. Users save, on average, $5,600. Claim your 14-day free trial now.
If the payment deadline falls on a weekend or holiday, then the quarterly payment due date changes to the following business day
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?