The Ultimate Guide For What Happens If You Pay Quarterly Taxes Late...

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Tom Smery

Tom Smery is a certified CPA for over a decade. In his free time, he writes articles to pass on his expert knowledge on taxes and accounting. Thomas has a wide range of deep knowledge on 1099 taxes, and finance topics. You can find him fishing when he is not preparing taxes for his clients or writing about accounting.

Quarterly taxes are tax obligations are associated with anyone the IRS considers to be self-employed. While it is possible to pay the actual amounts due, most people opt to make estimated income tax payments based on prior-year income. As with all IRS regulations, there are some conditions to keep in mind if using prior-year income as well as information on what happens if you pay quarterly taxes late.

Are You Required to Pay Quarterly Taxes?

If the IRS considers you to be self-employed then you are required to file quarterly taxes. There are several different scenarios that can lead the IRS to consider you as self-employed and some of them might be surprising if you also have a full-time job where you receive a W-2 at the end of the year. Single-member and partnership LLCs must pay quarterly taxes as well.

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Scenario 1: Self-Employed/Independent Contractor

This scenario is fairly straightforward. If you carry on a trade or business as a sole proprietor or independent contractor then you are classified as self-employed. The only potential for confusion is determining if you are an independent contractor if you do not consider yourself self-employed.

The easy test to determine if you are an independent contractor is if there is an employer-employee relationship. If you have an employer and you receive a W-2 then you are not an independent contractor. While this may seem clear there are numerous cases where an "employer" will say you are an independent contractor when you are not.

You are not an independent contractor if you perform services that can be controlled by an employer. This means if the payer controls what will be done and how it will be done you may be an employee - even if the original agreement was meant to be an independent contractor arrangement. Fundamentally, what matters is the employer has the legal right to control the details of how the services are performed.

Scenario 2: You Are a Member of a Partnership

If you are a member of a partnership then you must file quarterly tax payments. A partnership is a relationship between two or more people to do trade or business. To be a partnership each person must contribute money, property, labor, or skill. You must also share in both profits and losses. While a partnership does file end-of-year tax returns, it is up to you as an individual to pay estimated quarterly taxes.

Scenario 3: You Are Otherwise in Business for Yourself (Including a Side Hustle)

This is the situation that has the potential to trip up most people. It is easy to determine if you are self-employed if you receive no W-2 wages but when does a part-time business or side hustle require quarterly estimated tax payments? The general rule is if you expect to owe more than $1,000 when you file your annual return then quarterly tax payments should be made.

If you want to avoid making an estimated tax payment you can adjust the taxes withheld by your employer to compensate for the amount due during the tax year. While this will mean smaller net paychecks it will alleviate the burden of filing quarterly tax payments. It will also reduce the amount owed on your annual tax return.

Financial Guidelines Regarding Estimated Taxes

Along with considering whether the IRS considers you as self-employed, your financial situation will also determine if you are required to pay estimated taxes. If both of the below apply, then you will be required to file estimated tax payments.

You expect to owe at least $1,000 in federal taxes after subtracting any tax withholdings and applicable refundable credits
Your federal withholding and refundable credits are expected to be less than the smaller of:
90% of the tax shown on your current year federal tax return
100% of the tax shown on your prior year federal tax return

Who Does Not Have to Pay Estimated Taxes?

Along with adjusting your W-2 tax withholdings there is also an additional set of conditions which may allow you to avoid paying estimated taxes. You can avoid this if you meet all of the following conditions:

You had no tax liability in the prior tax year. This means in the prior year your total tax was zero or you did not have to file an annual return.
You were a US citizen or resident for the entire calendar year.
Your prior tax year covered a 12 month period (this typically applies to the partnership scenario).

How to Pay Quarterly Taxes

There are three common questions related to how to pay quarterly taxes. How to figure out the amount to pay; When to pay quarterly taxes; How to pay your quarterly taxes. To see how much taxes you'll owe, try Bonsai's free self-employment tax calculator tool.

How to Determine Your Estimated Tax Payments

The first step to making an estimated tax payment is determining how much should be paid. If you go to the IRS website, you will be instructed to use Form 1040-ES to determine your estimated payment. Without diving into the details of the form, essentially you will determine your expected adjusted gross income, taxable income, taxes, deductions, and created for the year. Most people can use the prior-year tax return as a guide. It is vital to set money aside for 1099 taxes to pay these quarterly taxes on time.

If you notice that your estimates or too high or too low then you can use Form 1040-ES to adjust your estimated payment amounts. It is critical to remember that you may need adjustments due to changes in your own financial situation as well as adjustments to the tax laws.

When to Pay Quarterly Taxes

As the same implies, you will pay your estimated taxes on a quarterly basis. The due date for quarterly tax payments is as follows:

April 15th
June 15th
September 15th
January 15th

These payment dates are based on the prior quarter earnings. For example, the April 15th due date is based on taxable income earned from January 1 to March 31. As with all tax payments, if the due date falls on a weekend or holiday, the actual deadline is extended to the next business day. Try Bonsai Tax for updated reminders on when your payments are due.

How to File and Pay Quarterly Taxes

There are several different methods of paying your quarterly self employment tax. None of the options are better or worse than any other. It all depends on your situation and preferences.

Apply Your Prior Year Tax Refund to Your Current Year Taxes

This strategy is straightforward. You can pay all or a portion of your estimated taxes for your current year but applying last year's tax refund towards it. This means you won't get a refund deposited in your bank account but it could cover one or all of your estimated payments, depending on your refund amount. You can eliminate some of your filing requirements which saves time if you are doing it yourself or money if you are paying a tax preparer to file payments for you.

Submit Payments Online

Another option is to pay all of your estimated taxes online. As with all federal tax payments made during the year (such as payroll taxes) you can use the Electronic Federal Tax Payment System (EFTPS) website. This is not only an easy way to pay your taxes it also eliminates the need to mail in a 1040-ES form.

Submit Payments with Form 1040-ES Via Mail

As with a majority of tax payments, you can make the estimated payments by mailing a check and including the appropriate form. For this type of payment, the correct form is the 1040-ES. The 1040-ES is not just a required form but will also help you calculate what is due for each quarter.

Do Not Submit Payments and Pay the Balance With Your Annual Tax Return

This option is essentially not paying your estimated taxes. Instead, you will pay the actual balance due at the end of the year. While this is an option, there are some things to consider before choosing this route as it inherently applies the quarterly payment regulations were intentionally ignored in most cases.

What Happens If You Pay Quarterly After the Due Date?

When it comes to estimated taxes the idea of "late payment penalties" isn't as straightforward as it sounds. For estimated taxes, if it is paid after the due date it is applied to the next quarter by default. For example, if your second quarter payment is two weeks late the payment is applied towards the third-quarter payment. You will then receive a notice from the IRS informing you of the estimated tax penalties and fees.

What Causes an Underpayment Penalty?

For a tax underpayment penalty to apply both of the following must apply to your situation.

You don't make any estimated tax payments during the year.
The amount withheld from all other income sources (such as a W-2 employer) is less than 90% of your tax bill at the end of the year.

How Does the IRS Determine Your Penalty?

The Internal Revenue Service has a specific system to determine your penalty. When you file your annual tax return, they will calculate how much you should have paid for each quarter. Next, they will apply the penalty rate (a pre-set percentage) to determine the penalty for each quarter. Finally, the penalty amount for each quarter is totaled to determine the final underpayment penalty due.

Should You Allow the IRS to Calculate the Penalty Amount?

If you know you have already underpaid your estimated tax obligations then there will be no difference between you calculating the penalty amount and the IRS calculating the amount. The IRS will calculate the amount for you if:

You did not withhold enough during the year
Any of the exceptions do not apply to your situation
You did not file Form 2210 during the tax year

The key to letting the IRS determine the penalty amount for you is making sure you make the payment by the stated date on the IRS letter.

When to File Form 2210 to Reduce Your Payment

Form 2210 may allow you to lower your payment. There are very specific scenarios outlined in Form 2210 which will allow you to reduce your payment. If you are filing Form 2210 and have questions as to whether any of the outlined situations apply then consulting a tax preparer is likely the best option to determine if you would qualify for relief.

What Defines a Verbal Contract?

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.

When is a Verbal Agreement Legally Binding?

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:

Offer and acceptance: An offer is made and accepted by another party involved in the agreement;
Consideration: The involved parties must exchange something of value (money, a service, time, etc), this is known as consideration;
Intention and certainty: All parties must fully understand the terms of the contract and intend to make a legally binding agreement freely; and
Capacity: The parties must have the capacity to legally enter into the contract; they're above age and of a stable mindset.

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.

How strong is a verbal agreement 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.

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When are verbal agreements not enforceable?

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:

The sale of real estate or vehicles
Real estate leases lasting longer than one year.
Property transfer following the death of the owner.
The case of a party agreeing to pay debt for someone else.
Any contract that requires more than a year to fulfil.
A contract involving and exceeding a specified amount of money (which varies by state).

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.

How are Verbal Contracts Enforced?

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?

How can you prove an oral contract?

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.

Written vs Verbal Contracts: What's the Verdict?

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.

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Say hello to digital contracts

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.

Benefits of written contracts

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.

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