It's that time of year again. Tax season is quickly approaching and for many people, it can be a stressful time. One question on the minds of many taxpayers is "When are estimated taxes due?" Well, we have you covered! This blog post will answer that question as well as provide other helpful information about tax season in general.
In this article, we'll go over the deadline, rules for making quarterly taxes, and exceptions for making quarterly estimated tax payments.
Many folks who work at a company, have taxes withheld from their paychecks in order to pay to the government. In most cases, the money taken from the employee's annual income is refunded to them. If the employer does not withhold enough, then the employee will have to pay additional taxes.
Independent contractors on the other hand are paid in full. They are self-employed and do not have taxable income withheld from their paychecks throughout the year. Individuals have to pay estimated taxes if they have a substantial amount of taxable income that is not subject to withholding.
The U.S operates on a "pay-as-you-go" system. Money earned that is without withholding from an employer for Social Security and Medicare taxes (or self=employment tax), then you have to pay the IRS every quarter. It forces contractors or self-employed folks to pay estimated taxes four times a year instead of waiting until annual tax returns are due.
To avoid a penalty, the IRS due dates to make estimated tax payments are on:
If a due date falls on a weekend or legal holiday, then the IRS requires payments to be issued on the next business day.
In 2021, the due date for the first estimated tax payment was not moved back from April 15 although the filing deadline was moved to May 17. This means you are still required to make an estimated tax payment by April 15.
If you're self-employed or have other fourth-quarter income that requires you to pay quarterly estimated taxes, get them postmarked before each deadline due date. You could also use a tax software for freelancers like Bonsai Tax to have you send reminders.
The IRS has three conditions for if you are required to pay estimated taxes. You do not have to file quarterly taxes if you meet these three conditions:
Fishermen and farmers have exceptions if they have to pay estimated tax.
The IRS accounts for when taxpayers has life events that may affect their taxes. Life events like marriage, child birth or serious injury could impact their taxes.
The worksheet of Form 1040-ES is typically used by individuals, sole proprietors, partners, and S corporation stockholders. They'll need to know what their adjusted gross income is likely to be.
The penalty does not affect folks who owe less than $1,000 in taxes. Those who are expected to owe less than $1000 in tax liability do not need to worry about estimated taxes.
This is after taking into account any withholding and refundable tax credits such as earned income credits and premium tax credits.
You can easily calculate your quarterly estimated tax payments by using many free online tools. Each estimated tax payment should be the same every quarter. It is calculated by adding up your total tax liability for the year (including income tax, self-employment tax, and any other taxes—and dividing that number by four.
You can use Form 1040-ES to calculate and pay your estimated taxes. See if the 2021 estimated tax payments are influenced here.
There are many ways to make estimated tax payments to the IRS.
You may send estimated tax payments with Form 1040-ES by mail, or you can make your estimated tax payments online with IRS Electronic Federal Tax Payment System (EFTPS) or by phone using the IRS2Go app. Visit IRS.gov/payments to view all the options.
While you can prepare and calculate self-employment taxes in order to pay by April 15 the following year, you will likely be subject to penalties and interest for not paying Quarterly Estimated Taxes (QET).
Many freelancers don't understand this and end up paying more self-employment taxes each year because of penalty fees they've accrued. To avoid this, it is always best to pay the estimated taxes every quarter to the IRS and state (if applicable).
When you file your tax return, if you paid too much in quarterly taxes, you can get a refund. If you paid too little, you will owe taxes and receive a penalty.
The IRS has clear rules for filing estimated taxes and many freelancers don't understand this at all, which leads to an increase in self-employment taxes every year because they're accumulating penalties due to not paying quarterly estimated taxes on time.
You can either pay 100% of the tax owed with your return or use a payment method other than withholding.
You need to pay quarterly estimated taxes if you fall into one of these categories:
If you use your prior year tax bill as a gauge for your current year's tax liability, as long as you pay 100% of your tax bill from the previous tax year, you will not receive a penalty.
If your income changes dramatically i.e. you lost a client and your income plummeted, you can adjust the remaining estimated tax payments. By doing so, you can avoid or minimize overpaying estimated tax payments. Many self-employed individuals will overpay their 2021 estimated tax due to the coronavirus pandemic.
Failing to pay a quarterly estimated tax payment properly will mean fees on top of the taxes you owe. If you don't pay enough of your tax liability or less than you should throughout the year, you can receive an underpayment tax penalty.
Alternatively, instead of making estimated payments throughout the year, you can estimate your Federal tax liability and pay in full on the designated Tax Day. While you can pay all your taxes by April 15, it's probably not the best for your bank account.
What happens if you pay estimated taxes late? Well, if you miss the deadlines to file your quarterly taxes, the IRS estimated tax penalty rate is typically .5% of the tax owed on the due date. With each month that passes after the deadline and you don't file, the IRS will add an additional penalty. The penalty caps out at 25%. So, pay your estimated taxes right away if you miss the deadline!
If you didn't earn income until later on in the year, you don't have to pay estimated tax until you have the income to owe taxes on. For example, if you start earning income after August 2021, then you are not required to make estimated payments until the September 15, 2021 quarter. If this were the case, then you could potentially file your estimated taxes in full or divide the payments in 2 (with the second payment due in January 15).
For farmers and fishermen who earned two-thirds of their income by farming or fishing, they can make just one estimated tax payment for the tax year or by January 18, 2022. It should also be noted, if you file your tax return prior to March 1, 2022, and pay all of your tax you are responsible for at that time, you do not need to make estimated tax payments.
We hope this guide has helped you understand quarterly taxes better as well as show you the due dates or deadlines for filing. Remember, you can always use an annualized installment method at tax time to avoid a penalty for not paying or filing estimated taxes throughout the year. So, if you file your 2021 tax return by January 31, 2022 and pay off the entire balance, you don't have to make the payment owed on January 18, 2022.
Be sure to check the IRS's site for more updates. Paying estimated taxes by the deadlines is important for many reasons, including avoiding penalties. However, the most important reason is to avoid any delinquent payments from showing up on your credit report.
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?