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.
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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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.
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.
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.
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.
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:
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.
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.
As the same implies, you will pay your estimated taxes on a quarterly basis. The due date for quarterly tax payments is as follows:
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.
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.
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.
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.
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.
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.
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.
For a tax underpayment penalty to apply both of the following must apply to your situation.
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.
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:
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.
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.
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?