Jan
02
2025

Guide to Custodial Accounts and How They Work

By | Family Finances, Life & Career, money | Comments Off on Guide to Custodial Accounts and How They Work

Many parents want to save for their child’s future. One way to do this is by setting up a custodial account. This type of account specifically allows an adult to put money into a savings or investment account for a minor, which they can then access once they reach adulthood.

Custodial accounts can be a great way to give a child a financial gift. These funds can eventually be used for such expenses as their education, a car, wedding, renting an apartment, or even buying a home. If college is a particular goal, you can even open a custodial account designed for this very purpose.

If you’re considering opening up a custodial account for a young person, read on to learn what a custodial account is, the different types, and how they operate.

What Is a Custodial Account?

A custodial account is savings or an investment account, established with a bank, brokerage firm, or mutual fund company, that’s managed by an adult on behalf of a minor, also known as the beneficiary.

Custodial accounts typically allow a parent, grandparent, family friend, or guardian to start saving for the child, until they reach adulthood, which depending on the state of residence, could be 18, 21, or even 25 years of age.

Even though the custodian manages and oversees the funds, the account is in the child’s name. Once the child reaches adulthood, the account legally transfers to their control.

Recommended: What is Retail Banking?

How Custodial Accounts Work

Opening a custodial account is simple. You can likely start one with almost any financial institution, brokerage firm, or mutual fund company. All a custodian probably needs to establish one is to provide basic personal information about themselves and the child. Once a custodial account is created, the adult can start contributing funds into the account.

The financial institution sets the terms of the account, which may include a minimum balance, maintenance fees, and initial investment requirements, among other stipulations. Individuals can usually contribute as much as they want to a custodial account, but there’s a federal cap on how much you can contribute that’s free of the gift tax imposed by the IRS. In 2024, this amount is up to $18,000 for individuals and $36,000 for married couples per child, per year. In 2025, this amount is up to $19,000 for individuals and $38,000 for married couples per child, per year.

Custodial bank accounts usually come with protections for the beneficiary. While the custodian can withdraw money from the account, legally the money must only be used to benefit the minor. This means the adult in charge of the account can’t use the funds for their own personal reasons. Additionally, any contribution made becomes the property of the child, so transactions can’t be changed or reversed.

A monthly contribution to a custodial account can make a big difference in a child’s life because the money can substantially accumulate over the years. According to Fidelity Investments, starting to contribute $50 a month to a custodial account when a child is 5 years old can result in $21,000 once that child reaches age 21. Put in $150 a month and that amount goes up to $63,000, while $250 a month clocks in at $104,900.

Recommended: Tax Credits vs. Tax Deductions: What’s the Difference?

Types of Custodial Accounts

There are two main types of custodial accounts: the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). While both have the same objective and eliminate the need to start a trust, they work in slightly different ways. Another option is the Coverdell ESA and 529 accounts that can help with saving for college.

Uniform Gift to Minors Act (UGMA)

The Uniform Gift to Minors Act (UGMA), established in 1956, is a custodial account that grants adults the opportunity to give or transfer many different kinds of financial assets to a child. Here’s what is important to know:

•   Besides cash, assets in an UGMA account can include individual stocks, index funds, bonds, mutual funds, and insurance policies.

•   UGMA accounts aren’t limited to educational expenses. In fact, the money can be used by the beneficiary for anything once they come of age. A UGMA doesn’t have restrictions or contribution and withdrawal limits, but, as previously noted, gift tax limits apply.

•   This kind of custodial account is available in all 50 states and is easy to set up at many financial institutions and brokerages nationwide. Keep in mind there may be a minimum deposit required to open an UGMA.

•   There aren’t any tax benefits for contributions, but up to $1,300 of any earnings from a custodial account in 2024 may be tax-free (up to $1,350 in 2025). And earnings above the tax-free threshold are taxed at the child’s (not parent’s) tax rate, up to certain limits.

•   Since education costs are one main reason parents or loved ones open a custodial account, one thing to know is because the funds are considered an asset owned by the child, it can affect their ability to get financial aid and student loans.

Uniform Transfers to Minors Act (UTMA)

The Uniform Transfers to Minors Act (UTMA), is a newer, expanded version of an UGMA. There are some differences between them to be aware of:

•   The main difference is that an UTMA account can include physical assets, such as cars, art, jewelry, and real estate.

•   You are not able to open a UTMA in every state. Currently, South Carolina and Vermont are two that don’t allow you to open a UTMA custodial account. And many states have a higher age at which a beneficiary can take control of a UTMA compared to a UGMA account.

•   The zero contribution limits, tax benefits, and financial aid impact that come with UGMAs are the same for UTMAs.

Coverdell Education Savings Account (ESA) and 529 Plans

There are two educational savings plans that fall under the umbrella of custodial accounts and can help a parent save for college for their child. One is the Coverdell Education Savings Account (ESA).

•   This type of custodial account exists solely for saving for a child’s future educational needs. According to the IRS, ESA contributions made must be in cash and are not tax deductible.

•   Unlike UTMAs and UGMAs, there’s a $2,000 limit per year to how much you can contribute to the ESA’s account beneficiary.

•   ESA custodial accounts also have income-based restrictions and are only available to families who fall under a certain income level. Coverdell ESA’s are created by each state so you’ll need to see if your state offers one.

A 529 College Savings Plan, also known as a “qualified tuition plan” is often considered a kind of custodial account because it’s created to pay for the beneficiary’s educational expenses, whether it’s for college, tuition costs for kids in grades K-12, certain apprenticeship programs, and even to pay student loans.

•   Unlike other custodial plans, a 529 College Savings account can remain in the holder’s name even when the beneficiary reaches the age of majority in their state.

•   There aren’t any income limits for a 529 Plan, which differentiates it from a Coverdell ESA.

•   The 529 Plans are state-sponsored and most states offer at least one. You must be a U.S. resident to open a 529 Plan.

•   You don’t have to be a resident of the state and can pick another state’s plan, but your state may offer a tax deduction if you live there and open one. The Federal Reserve features a list of state 529 Plans.

Custodial Accounts vs. Traditional Savings Account

Both a custodial account and a traditional kid’s savings account can be opened with the goal of putting money away for a child’s future. However, they are two separate types of accounts that operate in different ways.

•   A traditional savings account opened for a minor is a type of joint account that typically can be accessed and used by both the minor and their parent or guardian. Some states and financial institutions have age limits or restrictions on whether a child can be on a joint account. With a custodial account, as previously mentioned, a minor can’t make any transactions until they reach the age of maturity.

•   Traditional savings accounts typically have no limits on how much money you can keep in the account, but banks may have a base amount you need to open an account along with minimum balance requirements.

•   Custodial accounts may be better for long-term savings, while a traditional savings account can teach kids about banking and good finance habits.

Recommended: Understanding the Different Types of Bank Accounts

Pros and Cons of Custodial Accounts

Custodial accounts have their upsides and downsides. Here’s some pros and cons to consider, presented in chart form:

Pros of Custodial Accounts Cons of Custodial Accounts
Easy to set up Custodian loses monetary control when beneficiary comes of age
Can be inexpensive to establish May have a cap on how much you can contribute due to gift-tax laws
May have tax benefits Not as tax-exempt as other types of financial accounts
Money is the property of the child Can impact the ability to get financial aid
Anyone can make a contribution to the account Contributions are irrevocable

4 Steps to Opening a Custodial Account

Setting up a custodial account is simple and doesn’t take up a lot of time. Here’s how to open a custodial account in four steps.

🛈 Currently, SoFi does not offer custodial bank accounts and requires members to be 18 years old and above.

1. Decide on the Type of Custodial Account

Research the various options to determine which kind of account would best suit your goals and those of the child. For example, is the goal strictly for educational expenses? Are there limits to contributions? Do you want contributions to include physical assets as well as monetary funds?

2. Figure out Where You Want to Open the Account

Banks, brokerage firms, and mutual fund companies all offer custodial accounts. Pick the one that best suits your comfort level, familiarity, and goals for the child.

3. Gather the Child’s Personal Information as Well as Your Own

When you open the account, you’ll want to have the necessary information ready, such as the custodian and child’s Social Security numbers, addresses, phone numbers, and dates of birth.

The person who will be controlling the account will most likely have to provide employment information and have the account number(s) ready for another bank or investment account they want linked so they can transfer the money between accounts.

4. Open the Account

Many financial institutions make it easy for you to start an account online through their websites, or you can go to the financial institution in person.

The Takeaway

Custodial accounts can be a solid way to sock money away for a child’s future, whether it be for their education, a financial gift, or to provide them with a leg up on savings once they become young adults. These accounts can be opened at financial institutions and banks around the country, and you don’t even need to leave home to set one up. Depending on which type of custodial account you choose, you may also enjoy some tax-advantages too.

FAQ

Are custodial accounts a good idea?

They can be. Saving and investing money on behalf of a child can make their lives easier once they’ve become an adult. Having a built-in financial cushion they can use for their education, housing, a trip, or even towards retirement can be a valuable gift to someone as they start their adult life.

How does a custodial account work?

A parent, grandparent, guardian, or loved one can open a custodial account for a child, at a bank, brokerage, or mutual fund firm. The account is for the benefit of the child and managed by an adult or the custodian of the account, with contributions added over time, if desired. Once the child turns 18, 21, or 25 (depending on which state they live in), the money is turned over to them.

What are the pros and cons of custodial accounts?

The advantages of a custodial account are an automatic savings available to the child when they become of age, typically to spend on whatever they want; some potential tax breaks for the person who opens the account; and the ease of setting them up. Downsides of a custodial account include a possible cap on how much you can give because of gift-tax restrictions; the inability to reverse any transaction after its completed; and, since the account is considered an asset of the child, it could affect their ability to be eligible for financial aid when applying to schools.

Photo credit: iStock/Drazen Zigic

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This article is not intended to be legal advice. Please consult an attorney for advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Jan
02
2025
How Are Bonuses Taxed? Understanding the Bonus Tax Rate

How Are Bonuses Taxed? Understanding the Bonus Tax Rate

By | Financial Independence, Life & Career, money | Comments Off on How Are Bonuses Taxed? Understanding the Bonus Tax Rate

Earning a bonus at work can be a reason to celebrate, but keep in mind that the money gets taxed, just like regular income. While you may be told the gross amount that’s coming your way, the amount you actually deposit can be significantly less once the withholding comes out.

So how does your employer calculate how much to withhold from your bonus? Learn the details here, including:

•   Why are bonuses taxed?

•   How are bonuses taxed?

•   Are taxes on bonuses higher than standard income taxes?

•   What can you do to lower the taxes on a bonus?

Why Are Bonuses Taxed?

The answer to “Why are bonuses taxed?” is simple, albeit a bit circular: The IRS considers bonuses to be taxable income.

The IRS doesn’t categorize bonuses as regular wages, however; instead, it labels bonuses as “supplemental wages,” meaning there are specific guidelines for employers when withholding taxes.

That said, there are two different ways that a bonus can be taxed, which may or may not impact which tax bracket you’re in.

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How Are Bonuses Taxed?

All bonuses — whether performance-based, sign-on, or holiday — are subject to income taxes, just like regular income. But how are bonuses taxed, numerically speaking?

Because bonuses are folded into Box 1 (“Wages, tips, other compensation”) on your W-2 tax form, you’ll likely wind up paying the same amount of taxes on the bonus as the rest of your income.

However, your employer may have withheld money from your bonus check differently from how it withholds taxes from regular earnings. That means when you receive the bonus payment, there could be a larger or smaller percentage of tax withheld than you’re used to.

Employers have two methods for withholding taxes on bonus payments:

1.    The percentage method

2.    The aggregate method

Recommended: Tax Season: A Guide to Understanding Your Taxes

The Percentage Method

Many employers use the percentage method to withhold taxes from bonus payments. Why? Because it’s much easier for the employer.

For this method, the IRS allows companies to withhold a flat 22% rate of bonus payouts. It’s straightforward math for employers, nice and easy! They don’t have to check the recipient’s details, such as the salary and tax bracket.

A couple of points to consider:

•   Depending on how much you earn, a 22% rate could be lower or higher than your usual tax withholdings.

•   The flat 22% applies to all bonuses equal to $1 million or less.

•   If your bonus is larger than $1 million, your employer is required to use this method — and taxes on a bonuses above $1 million are computed at a flat 37% rate.

And remember: Just because your employer withholds 22% of your bonus, that doesn’t necessarily mean that’s what you actually owe. When you file your tax return, you may find that you overpaid (and are due a refund) or underpaid (and owe additional money). This will typically depend on your tax bracket and how much you’ve already paid through other withholdings and/or estimated quarterly payments.

Recommended: Tips for Your First Physician Sign-On Bonus

The Aggregate Method

If your employer tacks your bonus payment onto your regular paycheck, the company can instead use the aggregate method to withhold a portion of the bonus.

In this bonus taxation scenario, your employer would treat this combination payment as a regular (but larger) paycheck and withhold funds based on the withholding specifications on your W-4. That is, it would withhold the percentage of your paycheck for tax purposes that reflects your exemptions and filing status.

Recommended: How to File Your Taxes for the First Time

Can You Lower the Taxable Amount on a Bonus?

If your regular wages are your primary (or only) source of income, it’s easy to estimate which tax bracket you’ll be in when you go to file — and you can set up tax withholdings based on that estimate.

But if you receive a large, unexpected bonus that increases your income enough, you might graduate to a higher tax bracket for that excessive income. This means you would owe more in taxes and may have underpaid throughout the year.

For that reason, you may want to lower your taxes on your bonus. While you can’t ask the IRS to tax your bonus less, you can look for ways to lower your taxable income for the year so that you stay within a lower tax bracket.

Recommended: What Are the Tax Benefits of Marriage

Tips for Lowering the Amount You Are Taxed on a Bonus

So you’ve just received a hefty bonus check but are concerned about paying taxes on it, especially if it’s large enough to bump you up to a higher tax rate. What can you do? Here are some ways to handle the tax burden:

•   Anticipating the bonus: If your total compensation includes an anticipated bonus, you can submit a W-4 with your employer at any point to increase withholdings throughout the year to account for the bonus you’ll eventually earn. It won’t lower your taxable income, but by withholding slightly more money from each paycheck, you may be able to avoid owing a large amount when you go to file your taxes. Making sure your W-4 is up to date is an important part of preparing for tax season.

•   Investing your bonus in a tax-advantaged account: An easy way to avoid paying taxes on your bonus is to invest it in a tax-advantaged account, like a 401(k) or traditional IRA. Money invested in these is pre-tax, and it’s usually a good idea to save money for retirement anyway.

   Depending on your health insurance plan, you may also be able to contribute to a health savings account (HSA) for medical costs. An HSA is also a tax-advantaged account.

•   Donating your bonus: You could use your bonus to make an end-of-year donation to a charity. That can be a tax deduction that would lower your taxable income. Of course, that means you don’t get to keep the money, but if you’re passionate about a nonprofit, it may be worth it to hand over your bonus.

   Keep in mind, however, you can only deduct charitable contributions if you’re itemizing deductions. This strategy won’t work if you plan to take the standard deduction.

•   Working with an accountant: Paying for an accountant can get expensive, but they may have additional strategies to help you reduce your taxable income. On top of that, they can help you analyze your bonus to make sure you actually have to pay taxes on it. All monetary bonuses are indeed taxable, but the IRS doesn’t tax certain fringe benefits from employers, such as tickets for entertainment events.

•   Deferring your bonus: This might sound odd, but you could ask your employer to defer your bonus until next year. This would allow you to update tax withholdings in the new year so you’re prepared for the additional income. In addition, it would enable you to focus on tax deductions and tax-advantaged investments during the next tax year to reduce your taxable income.

   Also, if you expect to make less in the following year, it could be beneficial to receive your bonus then — there’s less risk of getting bumped up to a higher tax bracket.

The Takeaway

Earning a bonus can be great: It’s money that you weren’t guaranteed or perhaps even expecting, and now you can use it to fund emergency savings, pay down debt, invest for retirement, or even treat yourself to something nice. But just remember: Bonuses are subject to income taxes, so Uncle Sam will take a chunk out of the check.

Planning to jump-start your emergency savings by depositing a bonus payment? Consider opening an online bank account to help your money grow faster. With a SoFi Checking and Savings account, you’ll earn a competitive annual percentage yield (APY), pay no account fees, and get to spend and save in one convenient place. That’s what we call better banking!

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

How much is the typical yearly bonus?

The typical yearly bonus depends entirely on your employer, industry, job level, job performance, and salary. Often, employers pay bonuses as a portion of your job salary.

If you want to see what other employees in your industry typically make for bonuses, you can look at employee-reported salary data on job sites such as Glassdoor and Salary.com.

How can bonuses impact your finances?

If you aren’t expecting a bonus and receive one, this could be a major boost to your finances. You could stash the unanticipated bonus in your emergency fund, contribute to a retirement account or HSA, or even spend it on yourself or your family, purchasing something you couldn’t otherwise afford.

However, remember that bonuses are taxable income. Your employer likely took out 22% already to cover the taxes. However, if the bonus is large enough to put your income over a certain threshold, you might move up in tax brackets and owe more than expected when you go to file.

Are there bonuses that are not taxable?

The IRS considers bonuses to be taxable income. Any cash bonus will be subject to income taxes. However, the IRS has exceptions for what it calls “de minimis fringe benefits,” which include things like:

•   Occasional food, such as doughnuts in the morning or a meal for a lunch and learn

•   Tickets to a sporting event or concert

•   Group-term life insurance for your spouse or dependent (as long as the face value is $2,000 or less)

Photo credit: iStock/AJ_Watt

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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2025
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What Happens If I Miss the Tax Filing Deadline?

By | Budgeting & Goals, Financial Independence, money | Comments Off on What Happens If I Miss the Tax Filing Deadline?

If you miss the annual deadline for filing your income taxes, you don’t necessarily need to panic. Missing that tax filing deadline may not mean a big penalty, and you may have more options than you think. However, it can be wise to take steps to remedy the situation as soon as possible.

For 2024 tax returns, the deadline is set for April 15, 2025. If you’re wondering what might happen if you miss that date, read on.

Key Points

•   Missing the tax filing deadline can result in “failure to file” and “failure to pay” penalties, each with a monthly rate.

•   An extension for tax filing can be requested by submitting IRS Form 4868 by the original deadline, usually April 15.

•   Filing taxes early avoids late penalties, can speed up refund processing, and may reduce stress.

•   No late-filing penalties will usually apply if you are due a refund, but delays in receiving the refund can occur.

•   Typically, unclaimed refunds after three years become property of the U.S. Treasury, and the IRS will no longer issue them.

When Is the Tax Filing Deadline?

Usually, the tax-filing deadline is April 15 for the prior year. So if you are filing your return for tax year 2024, April 15 of 2025 would be the due date.

Worth noting: If April 15 falls on a weekend or holiday, the next business day is used. In the case of 2023, April 15 fell on a Saturday, but on Monday, April 17, the Emancipation Day holiday was observed in Washington, D.C. For this reason, the federal tax-filing date was actually on Tuesday, April 18, that year.

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Reasons Why Someone Might Miss the Tax Filing Deadline

Turning in school papers, paying your credit card bill, applying for rebates: Life is full of deadlines that sometimes are missed. Missing the deadline for taxes is no exception. Here are some common reasons why people don’t file on time:

•   You think you don’t owe any money and figure, why bother to file?

•   You think you do owe money but can’t afford to pay your tax bill, even if you deplete your savings account, so you avoid it entirely.

•   You are missing tax documents and didn’t have time to hunt for them or know where to find them.

•   You ran out of time to get organized and file or simply procrastinated.

•   You had trouble understanding taxes, got stressed out by the process, and didn’t get it finished.

•   You couldn’t afford a tax preparer but realized you didn’t know how to file on your own.

•   You got sick or injured or had a family emergency that interfered with filing.

•   You had a change in status (i.e., were in the middle of a divorce or became widowed) and didn’t know how to file in those new circumstances.

Recommended: 7 Tips to Managing Your Money Better

Are There Penalties for Missed Tax-Filing Deadlines?

“What happens if I miss the tax deadline?” you may wonder. The answer is: It can cost you. For individuals, the IRS can levy penalties for a few infractions related to the annual tax filing deadline. Here’s a closer look:

The most common punishment for this offense is a late payment penalty that’s equal to 0.5% of the money owed. But it’s important to be aware of these finer points:

•   The IRS can penalize a taxpayer for “failure to file,” which occurs when a person fails to file their tax return by the appropriate April date or by the date specified if the person requests and receives an extension. The IRS can levy a penalty of 5% of the taxes owed per month for each month that the taxes are owed after the April filing deadline passes if you didn’t get an extension. This hits a cap of 25% after five months and can’t go any higher.

•   Another infraction when missing the tax deadline is “failure to pay.” This occurs when a taxpayer doesn’t pay the money they owe on their tax return, even if they file on time. The most common punishment for this offense is a late payment penalty that’s equal to 0.5% of the money owed. That may not sound like much, but it’s due every single month, until the tax is paid in full. And that penalty can be as much as 25% of the overdue taxes.

•   What if both “failure to pay” and “failure to file” penalties are applied in the same month? In this case, the “failure to file” penalty will be lowered by the sum of the “failure to pay” penalty applied that month.

•   The IRS can also penalize taxpayers for failure to pay estimated taxes over the course of a year. The penalty will be calculated based on the amount of the underpayment, how long the taxes were left unpaid, and the interest rate the IRS charges.

•   Another reason the IRS may charge a penalty is if your check to the government bounces. You will likely be assessed an additional 2% on the amount owed to the government.

One last note: You may wonder what happens if you file just a day or two late. It does matter! Even a single day late counts against you; the IRS takes deadlines very seriously.

Recommended: Tax-Deductible or Not? A Guide to Year-End Donations

How Do Extensions Work?

There are years when completing your taxes by the April deadline is just too much to accomplish. Preparing for tax season and completing a return isn’t always simple. As a taxpayer’s financial life evolves, filing can become quite complex and time-consuming. And even if you use a professional tax-preparer, April can be an extremely hectic time for them, and they may not be able to fit you in before the big deadline.

So what happens if you’re missing the tax deadline? Don’t just sit back. This is when an extension may come in handy.

•   The way to get one is to file an IRS Form 4868 , which is an application for permission to take an extra six months (until October) to file your taxes. Taxpayers, however, can’t be late when requesting the extension. You have to submit the form by the April deadline.

•   You can file for an extension online or by mail.

•   An extension only applies to filing your return. It’s important to note that you still have to send the IRS a check for your estimated taxes by April 15 or whatever the due date is in a given year.

•   If you take, say, another month to file the complete return and you owe more than you estimated on Form 4868 in April, you may face penalties for the shortfall.

•   Those penalties will typically grow with each month you take to file, even with the extension.

•   If you overestimate the taxes you owe and pay too much by the April deadline, then you’ll receive a refund after you eventually file.

What Deadlines Mean If You’re Owed Money

All of this discussion about deadlines and penalties ignores one issue: What does all of this mean if you expect to get money back from the government in the form of a tax refund?

A tax refund happens if you overpay your taxes over the course of a year, whether through your regular paycheck deductions, quarterly payments, or other means. When you file your return, it’s a chance to get that money back. Tax refunds are quite common — in terms of 2023 returns filed in 2024, the IRS issued 120.9 million refunds to individuals, totaling about $461.2 billion.

All of the deadlines and penalties described so far apply to anyone who owes money to the IRS in a given year. For taxpayers who are owed money by the government, the rules are different. Some specifics:

•   There is no late-filing fee for taxpayers who file returns requesting a refund from prior years.

•   The annual tax filing deadlines have a different significance for people who will receive a refund check from the IRS. For these taxpayers, there’s a real incentive to file taxes ahead of the deadline. The sooner you file, the sooner you’re likely to receive your refund. The IRS says it issues roughly 90% of its refunds in under three weeks, though it warns that some returns require additional review and may take longer as a result.

•   After a return is three years overdue, the IRS will no longer pay that money. The good news is that there is no late-filing fee for taxpayers who file returns requesting a refund from prior years.

It may seem unlikely that people would leave money unclaimed, but consider this: In 2023, the IRS announced a last call for more than $1.5 billion in unclaimed income tax refunds due to individual taxpayers who never got around to filing their federal income tax returns in a past year. Those unclaimed funds eventually become property of the U.S. Treasury.

So, as you see, it could definitely pay to file that return.

Tips for Filing a Late Tax Return

If you missed the tax filing deadline or know that’s going to happen, here’s advice:

•   You can file the IRS Form 4868 requesting an extension by the tax filing deadline. Even if you do file for a tax extension, however, know that any funds owed are still due by the April date, but you may be able to send in the actual return later.

•   Always file your return as soon as possible. You may want to contact a tax professional to assist you with this, or you can reach out to the IRS for help. You might want to call the IRS Tax Help Line at 1-800-829-1040 or visit your local IRS office.

•   If you owe money but can’t pay it all at once, pay as much as you can, as soon as you can, and look into available options, such as payment plans with the IRS. These can give you an extended timeframe in which to pay what you owe. You may want to consult the IRS’ online Payment Plan tool.

Tips for Getting Your Taxes in on Time

Now that you’ve read about how complicated it can be if you miss the tax filing deadline, here are a few tips to help you get those returns in on time:

•   Get organized early. Gather all the records you’ll need to file (such as a W-2) as they become available.

•   Check against last year’s return to see if there were any forms you had then (say, a Form 1099 reflecting interest on a bank account) that you don’t have now. Track down anything that’s missing.

•   Create or log into an account at IRS.gov to make tracking your progress easier. You can make payments there, too.

•   Make sure you’ve withheld enough money so that you don’t owe too much when you file. If you do wind up having to pay a significant amount, develop a plan early to pay it on time or as close to on time as possible.

•   Know your banking details or open a bank account so that you can use direct deposit, which is usually the fastest way to get a refund.

The Takeaway

Life happens: Sometimes, despite your best intentions, deadlines get missed. When that happens with tax filing, though, there can be some very real financial penalties involved. That’s why it’s important to know when your tax returns are due and then do everything in your power to file on time.

If you can’t get your return finished by Tax Day in mid-April, know the right moves to request an extension and possibly look into a payment plan for money owed that you can’t pay all at once. Having your bank account information handy, especially when you are due a refund, can be valuable.

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FAQ

When is the tax deadline?

The deadline for tax-filing is usually April 15 for the previous year’s taxes. However, if that date falls on a weekend or holiday, it will move forward by up to a few days.

How long are the tax extensions given if I miss the tax deadline?

The usual tax extension is six months. However, this is a longer timeline to file your return. Funds owed are still due in April. It can be wise to pay as much as possible towards your total debt to the IRS by Tax Day, and then send the remainder as soon as possible, perhaps via a payment plan with the IRS.

What happens if you miss the tax deadline by one day?

The IRS takes deadlines seriously. For every month that you are late filing your return, you will be assessed a penalty on the total amount owed. That wording of “a month” does not mean the first 30 days after the deadline are a kind of freebie during which you can send in your return and any payment due without penalty. Rather, being even a single day late puts you into that “one month” late category.

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2025
Preparing to File Taxes as a Freelancer

Preparing to File Taxes as a Freelancer

By | Budgeting & Goals, money, Money & Life | Comments Off on Preparing to File Taxes as a Freelancer

For some people, freelancing is the way they earn their living, relishing the freedom and flexibility of this type of work. For others, it’s a smart way to bring in some income in addition to a salary. Regardless of whether you’re managing your freelance business as a full-time endeavor or a side hustle, one fact is true: You’ve got to pay taxes on your earnings.

In this guide, you’ll learn about the steps to take in your situation, including:

•   How do you pay taxes as a freelancer?

•   Why are freelance taxes higher?

•   What are some ways to reduce taxable income?

•   What deductions should freelancers take?

•   What should freelancers know about tax refunds?

How Taxes for Freelancers Are Different

The first thing to note is that taxes for freelancers are notably different in two major ways: Freelancers pay a larger percentage of their income (because of self-employment tax), and they’ve got to make estimated tax payments every quarter.

What Is Self-Employment Tax?

Self-employment tax is 15.3%. That’s 12.4% for Social Security and 2.9% for Medicare.

That doesn’t mean that’s all that freelancers pay. Self-employment tax is what freelancers pay on top of regular income taxes. The percentage you pay in income taxes depends on what tax bracket you’re in but can range from 10% to 37%.

Why do freelancers pay a self-employment tax? When you’re an employee for a business who receives a W-2 form, your company pays some taxes for you.

But if you’re a freelancer — whether a writer, photographer, dog walker, or consultant — your clients don’t pay any taxes for you, so you’ve got to pick up the slack.

And don’t forget: You may also have to pay state and local taxes, depending on where you live.

What Are Quarterly Taxes?

Most people think of April 15 as the dreaded Tax Day for all Americans, when they have to pay their taxes. But taxes aren’t actually due on April 15: They’re due when you earn the money.

That’s why employers withhold taxes from every paycheck. Tax season is just that special time where the IRS wants you to go over the numbers and make sure the right amount was withheld — and pay up if you actually owe more. (Or, if you overpaid, file your return to claim a refund.)

But since taxes aren’t withheld when freelancers earn revenue from clients, the government expects freelancers to make quarterly tax payments throughout the year.

Freelancers have two options:

1.    Pay 100% of the taxes they owed the prior year, split over four payments.

2.    Pay 90% of the taxes they’ll owe for the current year, split over four payments.

Note that these percentages may be different if you’re a farmer, fisherman, or high-income earner.

Estimated taxes are among the most complicated parts of being a freelancer, and you can face underpayment penalties if you don’t send Uncle Sam your fair share throughout the years.

You can check out the IRS’s guidelines for estimated taxes , but a tax professional may be worth the cost if you’re confused.

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Paying Taxes as a Freelancer

Now that you understand that freelancers must pay more in taxes and that they need to keep track of more tax deadlines, consider the actual process for freelancer tax filing.

Here’s how to pay freelance taxes in five steps.

1. Determine If You Have to Pay Freelancer Income Tax

First and foremost, it’s a good idea to make sure you actually have to pay freelancer taxes. If you fit the bill of the IRS’s definition of an independent contractor, you’ll have to file as a freelancer and will be subject to self-employment taxes.

The IRS says you’re an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

It’s a rather broad designation and might fit traditional freelance gigs like writers and graphic designers, but it can also apply to app-based workers, like drivers for Uber and Lyft, and even doctors, lawyers, and veterinarians.

Even if you receive a W-2 from an employer but made other revenue on the side, you’re still subject to freelancer income taxes — and must make estimated payments on that income.

2. Calculate How Much You Earned

As a freelancer, you may receive 1099-NECs from clients for the work you do, detailing just how much money you made from them (as long as you made $600 or more).

Even if you don’t receive a 1099, you still have to report any income you made on your tax return. This means paying taxes if you are paid on Venmo or another platform versus by check or a direct deposit.

If you don’t declare the income, you’re committing tax fraud — and the IRS can find out during an audit.

You may want to use a tax preparation checklist to help you organize these materials. You might start by compiling all your 1099-NECs and any other income forms, including 1099-INTs, 1099-Ks, 1099-MISCs, and W-2s, and then input them on your tax return or into your tax software. If you have additional income not represented by any forms, you’ll be able to report that as well.

3. Compile Your Business Expenses

As a freelancer, there are several tax deductions that can cut your business tax bill and protect your profits. These deductions include a broad range of ordinary and necessary costs associated with running your business.

Common Tax Deductions for Freelancers

Business expenses can vary significantly depending on the kind of work you do, but you may be able to to use some of these freelancer tax deductions, like:

•   A portion of your rent or mortgage (your home office deduction)

•   Phone and internet bills

•   Any computer and software expenses

•   Automotive expenses, including miles on your car when used for business (and only for business)

•   Office supplies

•   Travel expenses

•   Marketing and advertising expenses

•   Continuing education

Freelancers may also be able to take the qualified business income deduction and self-employment tax deduction.

Other Tax Deductions and Tax Credits

Business expenses may apply to freelancers specifically, but independent contractors can take advantage of other common tax deductions and credits.

If you itemize rather than take the standard deduction, you may be able to deduct mortgage interest payments, charitable contributions, and the state and local taxes. And if you have education debt, you may be able to take the student loan interest deduction.

Tax credits are also a useful tax tool and can greatly reduce your tax bill as a freelancer. Some popular tax credits include the child tax credit, Earned Income Tax Credit, and electric vehicle tax credit.

Recommended: Fastest Ways to Get Your Tax Refund

4. Account for Estimated Payments

If you made estimated tax payments the previous year, don’t forget to apply those to your tax form when filing. After all, if you’ve handed over a chunk of change to the IRS already, you’ll want credit for it.

You’ll add your total payments to line 26 on Form 1040 if filling out the form yourself, but most tax software and accountants should prompt you for this information.

5. File and Calculate Estimated Payments

The last step in how to pay freelance taxes: You’re now ready to complete your forms, and send in your tax return and any payments that you owe. And it’s not necessarily just federal taxes that are needed for freelancer tax filing: Depending on where you live, you may owe state, local, and school district income taxes as well.

After filing, surprise: You’re not done yet. You’ll also need to estimate taxes for the current year. Your first quarterly payment is due on Tax Day in April.

If you’re working with an accountant, they can help you calculate how much you’ll likely owe and print out vouchers for you to mail in with your payments. If you wind up making significantly more or less throughout the year, you can adjust your estimated payments to match. That’s part of learning how to budget on a fluctuating income.

Freelancer Tax-Filing Tips

Freelancing and taxes can seem complicated. Here are tips to help you save money and hit all your deadlines.

Plan for Retirement as a Freelancer

Reducing your taxable income is helpful when you have to pay significantly more in taxes on your earnings. One way to do this — and prepare for your future — is to open a retirement account and make pre-tax contributions.

You can contribute to a traditional IRA, but there are also retirement plans designed for self-employed individuals, including a SEP IRA and a solo 401(k). It’s worth educating yourself about how these work and contribution limits so you can find the best option for your financial situation and aspirations.

Research Deductions

You may be tempted to take the standard deduction when filing, but if you have a lot of business expenses, you may earn a larger tax break by itemizing. Tax software and accountants generally know all the different types of taxes and guidelines. They can help you find all the tax deductions you qualify for, but it never hurts to do some research on your own.

Stay Organized

Organization is crucial when running your own business — and that holds true at tax time. By organizing your bills and tracking your income throughout the year (even on a daily basis), you should have good records of all your revenue and expenses.

Find record- and receipt-keeping systems that work for you. You may also want to set calendar reminders so you never miss a quarterly tax payment deadline.

Work with a Tax Professional

Freelancer income taxes can be challenging and confusing. If you’re overwhelmed and worried about making a mistake, it may be worth the money to hire an accountant or tax preparer.

Plus, the tax-filing fee may count as a deductible business expense for next year.

Understand Tax Refunds for Freelancers

Know that it is unlikely that you’ll get a tax refund as a freelancer. What often triggers a tax refund is that a full-time employee had too much money withheld for taxes from each paycheck and their overpayment comes back to them. (They can adjust their W-4 employee withholding tax form to avoid this situation in the future.)

But as a freelancer, it is unlikely you are overpaying your taxes, especially if you are tracking your income and paying the appropriate amount of quarterly taxes.

Recommended: Maximizing Your Time and Money

The Takeaway

Taxes can get more complicated if you’re a freelancer. You likely will pay more in taxes (thanks to the self-employment tax), and you’ll probably need to make quarterly estimated payments. It’s wise to regularly track and review your earnings and expenses so you can stay on top of how you are doing. For many freelancers, working with a tax professional is the best path forward.

Also worth noting: As a freelancer, you need several tools to stay organized and run your business, including a bank account.

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FAQ

Why is freelance tax so high?

Freelance taxes are higher because they include self-employment tax. This additional 15.3% is what employers traditionally pay on behalf of their employees. In the case of freelancers, they’re both the employer and the employee so they have to cover that amount.

Do I need to declare freelance income?

Yes, you must declare all freelance income. Even if you didn’t make enough to trigger a 1099 from a client — or that client forgot to send you a 1099 — you must report any and all income to the IRS.

What happens if you don’t file freelance taxes?

If you don’t make quarterly tax payments as a freelancer, you could be subject to underpayment penalties when you go to file. If you don’t pay at all, you’ll be subject to Failure to File and Failure to Pay penalties. You’ll owe interest on top of the fines — and eventually could face jail time if you don’t pay.

Can freelancers pay taxes annually?

While freelancers must file taxes annually like everybody else, they are usually required to make quarterly estimated taxes since no taxes are being withheld from their payments throughout the year.

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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Jan
02
2025

Understanding and Avoiding Student Loan Scams

By | Fresh Out of School, Student Loans, student_loan | No Comments

Student loan scams are widespread, costing Americans billions of dollars annually. They range from student loan forgiveness scams to outright theft of your hard-earned money. Since President Biden announced his plan for student loan forgiveness in August 2022, there has been an increase in student loan scams promising loan forgiveness or relying on borrower confusion around loan forgiveness.

There are plenty of authentic student loan lenders, though, that might help you in the long run. Continue reading for more information on common student loan scams, how to protect yourself from scams, and government resources you can turn to.

Key Points

•   The most common types of student loan scams include phishing scams, loan forgiveness scams, and fraudulent loan consolidation scams.

•   To protect yourself from student loan fraud, never share your Social Security number, Federal Student Aid (FSA) ID, or bank details with unverified sources. Scammers often misuse this data for identity theft or fraudulent activities.

•   Investigate companies claiming to offer loan assistance. Check for reviews, Better Business Bureau ratings, and whether they have complaints or legal actions against them.

•   If you suspect an education loan scam, report it immediately to the Federal Trade Commission (FTC) or your loan servicer. Prompt action can protect others from falling victim and may help recover lost funds.

•   To avoid student loan scams, choose a trustworthy student loan provider to work with. Research and compare lenders, understand the terms and conditions of the loan agreement, and seek guidance from loan counselors before making a decision.

Types of Student Loan Scams

Those under stress from student loan debt can feel compelled to go to extreme measures to get rid of their debt, which can make them more susceptible to predatory tactics. Below are the most common types of student loan scams.

Phishing Scams

A student loan phishing scam is a fraudulent attempt to steal personal or financial information by pretending to be a legitimate lender, loan servicer, or government agency. Scammers typically use emails, phone calls, or text messages to lure victims into providing sensitive details such as Social Security numbers, bank account information, or login credentials, often under the guise of offering loan forgiveness, lower payments, or other benefits.

Always verify communication through official channels, avoid sharing sensitive details, and be cautious of unsolicited offers to protect against identity theft and financial loss.

Deceptive Loan Forgiveness Scams

Deceptive loan forgiveness scams are when a student loan assistance company advertises loan forgiveness or lower payments in exchange for an upfront fee, personal information, or recurring payments.

Unsuspecting people pay and then six months later, the firm may shut down. These scams exploit confusion around genuine forgiveness programs and target borrowers seeking financial relief.

Identity Theft and Fraudulent Loan Consolidation Schemes

Identity theft and fraudulent loan consolidation schemes target borrowers by posing as legitimate loan service providers. Scammers steal personal information to take out loans or charge fees for nonexistent consolidation services. Victims face financial loss, damaged credit, and legal issues.

To protect yourself, verify lenders through official sources, never share sensitive details over unsolicited calls or emails, and monitor your credit report regularly. Reporting suspicious activity promptly can help minimize damage and prevent future fraud.

Recommended: 7 Financial Aid Secrets You Should Know

How to Protect Yourself from Scams

Student loan scams prey on borrowers seeking financial relief, often promising quick fixes or forgiveness that seems too good to be true. Protecting yourself requires awareness, diligence, and a cautious approach to offers related to your student loans. By recognizing scam tactics and implementing safeguards, you can protect your finances and personal information.

Recognizing Red Flags and Warning Signs of Scams

Red flags and warning signs of student loan scams to look out for include:

•   Upfront fees: Scammers demand payment before providing any services, which is illegal for legitimate debt relief companies.

•   Guaranteed loan forgiveness: Promises of instant or guaranteed forgiveness are false, as genuine programs have strict qualifications and timelines.

•   Pressure tactics: High-pressure tactics urging immediate action or claiming limited-time offers signal a scam.

•   Requests for personal details: Asking for sensitive information, such as your FSA ID, Social Security number, or bank account details, is a major warning sign.

•   Unsolicited contact: Receiving unexpected calls, emails, or messages about loan forgiveness or repayment assistance may indicate a scam.

•   Suspicious company names: Fraudulent entities often use names resembling legitimate organizations to create confusion.

•   Unsecure websites: Look for HTTPS and official government URLs; unsecured sites may collect data for scams.

•   Promises to “negotiate” debt: Claims to negotiate or reduce your debt beyond legal limits are misleading.

•   Lack of written documentation: Refusing to provide detailed agreements or contracts is a red flag.

•   False government affiliation: Fraudsters often pretend to be associated with the Department of Education or other federal programs.

Verifying the Legitimacy of Loan Forgiveness Programs

Legitimate loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF), are only available through official channels like the U.S. Department of Education. Always research the organization or program offering assistance. Cross-reference their details with official government websites, or contact your loan servicer directly for verification.

Safeguarding Personal Information from Scammers

Never share sensitive information like your FSA ID, Social Security number, or banking details with unverified entities. Regularly monitor your credit report for unauthorized activity and use secure communication channels when discussing your loan details. Stay vigilant to keep your financial and personal data safe.
Taking these steps ensures you stay informed and protected, reducing the risk of falling victim to scams.

Recommended: How to Live With Student Loan Debt

Government Resources for Loan Borrowers

The government provides essential resources to help student loan borrowers manage their debt and protect their rights. Understanding your rights as a borrower is crucial; federal loans offer protections such as income-driven repayment plans, deferment, and forbearance. Borrowers are also entitled to clear communication from loan servicers regarding their repayment options.

Accessing reliable information about loan repayment options is easy through official websites like StudentAid.gov, which offers tools to compare repayment plans and check eligibility for loan forgiveness programs. For direct assistance, borrowers can contact their loan servicer or the Federal Student Aid Information Center.

If you encounter scams, report them to the Federal Trade Commission (FTC) or file complaints with the Consumer Financial Protection Bureau (CFPB). These organizations investigate fraudulent activities and ensure borrowers are treated fairly. Staying informed and utilizing government resources can help you manage loans securely and effectively.

Choosing a Trustworthy Student Loan Provider

Selecting a trustworthy student loan provider is essential for managing your education finances responsibly. Start by researching and comparing reputable lenders. Look for established institutions with positive reviews and transparent lending practices. Check interest rates, repayment terms, and any additional fees to ensure you find the best fit for your needs.

Understanding the terms and conditions of loan agreements is critical. Read all documents carefully to grasp key details, such as the interest rate type (fixed or variable), repayment schedule, and penalties for missed payments. Avoid lenders with vague terms or hidden charges, as these may lead to financial difficulties later.

Seeking guidance from financial advisors or loan counselors can help you make informed decisions. These professionals can explain loan specifics, evaluate your financial situation, and recommend trustworthy lenders. Taking these steps will ensure you choose a provider that supports your educational journey without unnecessary risks.

Recommended: How to Pay for College Without Financial Aid

The Takeaway

Student loan scammers take advantage of borrowers who are trying to pay off student loan debt. These scams often appeal to borrowers looking for quick student loan relief and offer their service in exchange for a fee. To protect yourself, avoid offering personal information via requests on the phone, and make sure you choose a reputable lender when taking out student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.


Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.


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FAQ

How do common student loan scams work?

Common student loan scams often promise instant debt relief, loan forgiveness, or reduced payments in exchange for upfront fees. Scammers may impersonate legitimate organizations, demand sensitive personal information, or use high-pressure tactics. They exploit borrowers’ anxiety about student debt to steal money or commit identity theft.

Is there a way to stop student loan scam calls?

To stop student loan scam calls, register your number with the National Do Not Call Registry and use call-blocking tools or apps. Avoid sharing personal information with unknown callers, and report suspicious calls to the Federal Trade Commission (FTC).

What is student loan forgiveness fraud?

Student loan forgiveness fraud involves scammers pretending to offer legitimate debt relief programs to steal personal information or money. They often charge upfront fees, promise guaranteed forgiveness, or impersonate government agencies. Protect yourself by verifying offers with trusted sources like the Federal Student Aid website and avoiding unsolicited requests.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).

This content is provided for informational and educational purposes only and should not be construed as financial advice.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

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