Many people have to file their quarterly taxes in California on their own. Rather than having to make full payments in a bigger lump sum, quarterly estimated payments allow you to break down everything into four different quarters.
But who needs to pay these quarterly taxes, and how much do you have to pay exactly? What are the due dates that you'll have to expect this year - and most importantly, what will happen if you fail to make those payments on time? Well, read on to find out.
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Do you have to pay estimated taxes? Well, you should make estimated tax payments if, by the end of the tax year, you expect to owe taxes more than:
Also, both the IRS and the Franchise Tax Board expects your withholdings and tax credits to be less than at least one of the following:
No matter the source of your income, if you expect to owe the amounts mentioned above, then you will need to file for estimated taxes. Otherwise, you'll become subject to tax liability.
As with every other state in the United States, California also requires you to make estimated tax payments. If you expect to owe an estimated tax of at least $500 to the IRS, then you have to gather your records and file your estimated taxes. Make sure you respect the deadlines for the tax year that you are paying for.
Due dates for quarterly estimated tax payments are spread throughout the year, having you input four forms and payments. The dates for California are the same as with the rest of the United States. The only difference is the percentage needed for each payment.
This is how much you will have to pay for each due date:
It is important that you respect all of these due dates. Otherwise, you will be subjected to tax liability, for not reporting your taxable income.
Figuring how much tax you have to pay can be slightly tricky, especially if you are only beginning as a self-employed person. The main idea here is to estimate just how much you're likely to owe in the year that comes so that you may apply for tax relief.
A helpful tool would be to take your records from the prior year and use them as a guide. If you determine that your California revenue has changed throughout the year, you need to make the updates accordingly.
Remember, it's always better to pay slightly more than slightly less when making your estimated tax payments. If you pay more, then you may get your money back.
However, if you pay less, you may be charged with willful neglect, and the California FTB will charge tax liability on you. You need to make sure that you cover the payment amount by the quarterly due dates.
If you are not fully certain how much you have to pay in estimated tax or cannot make a prediction, then you may ask for help from the California FTB. They will help you predict some reasonable estimated tax payments.
There are two ways for you to pay your estimated taxes. The first one is to go to the main IRS website and make the payment there. This is often a good option when you want to make the payment from the comfort of your home.
The second option is to go by traditional mail to the Franchise Tax Board - and make sure you write everything clearly. The address is PO Box 942867, Sacramento CA 94267-0008.
When you make the payment online or send the money order to the California Franchise Tax Board, you also need to put down your ITIN or SSN. Alongside that information, you must also add Form 540-ES.
Bear in mind that each due date has its own payment form. Therefore, when you are paying income tax, make sure that you pick the right one, with the correct date.
If you do not want to incur estimated tax payment penalties, then yes, these payments are mandatory. The tax code says that anyone who expects to owe taxes of at least $500 must make a quarterly estimated payment.
First things first, if you fail to pay your state income tax to the California Franchise Tax Board on time, then you risk an estimated tax penalty. Depending on how late you are, the penalty may vary.
Moreover, if the California Franchise Tax Board determines that your balance is due and you haven't paid your alternative minimum tax, they may garnish your wages.
Depending on your debt, they can also record and file liens against your property, levy what bank accounts you may have, and seize your assets.
Last by not least, when you make estimated tax payments, you also become eligible for income tax return. By failing to make this payment, you forfeit your right for getting said tax return.
The California Franchise Tax Board will also incur several penalties if you fail to make your estimated payments on time. Depending on your offense, you may end up paying the following penalties:
Underpayment penalties happen when you fail to make the estimated tax payments in full on time. These penalties will usually take place when you file for tax returns at the end of the taxable year.
To calculate your penalties for underpaid estimated payments, you will need to use IRS Form 2210. The first page of this form has a flowchart that will tell you whether you have to file the form as well or not.
Even if there is no need to file Form 2210, you may still use it in order to calculate the approximate penalty that you owe.
Note: the best way to avoid penalties is to file the correct payments on time.
Calculating the underpayment amount can be fairly challenging, as the rates change from one year to another. In most cases, a tax advisor might be necessary. That being said, you may still follow the list of instructions from Form 2210.
If you want to spare yourself the headache, you may simply leave this in the hands of the IRS. Keeping your estimated payments in mind, they will calculate the penalty amount.
Also, if you pay the entire amount that you owe by the bill due date, it won't even take any extra fees or penalty for overpayment. This is how things are typically done:
To calculate a California quarterly tax underpayment, Form 5805 may be used. The form itself and the rates may be different, but the technique is the same. You can still leave it to the IRS to take care of things for you.
In certain circumstances, the penalty can also be waived. First, if you subtract your withholding, tax credits and estimated payments, and owe less than $500 to the FTB, you are not charged a penalty. The same applies if you owe less than $100 to the IRS.
If you didn't get any income tax liability in the prior year, then you'll also be spared the penalty. Fishermen and farmers go by special rules as well, and may not pay a penalty.
Some special circumstances might also waive your penalty:
No matter the cause for the underpayment, you need to bring proof that supports your claims.
Tax time can be rather stressful for many residents of California, and quarterly taxes are no exception. Make sure that you save your receipts ahead of time to pay less California taxes and that you calculate everything carefully. This will help you prevent an accidental underpayment.
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?