Being self-employed in Tennessee offers a lot of freedom and flexibility, but it also comes with its own set of responsibilities, especially when it comes to taxes. Understanding how self-employed taxes work in Tennessee can help you stay compliant and avoid any surprises come tax season. Whether you're a freelancer, a small business owner, or an independent contractor, this guide will walk you through everything you need to know about managing your taxes effectively.
Self-employment tax is a critical component of your tax obligations if you work for yourself. This tax is essentially the self-employed person's version of the Social Security and Medicare taxes that are withheld from the paychecks of traditional employees. The self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.
As a self-employed individual, you are responsible for paying the entire 15.3% yourself, unlike traditional employees who share this cost with their employers. However, you can deduct the employer-equivalent portion of your self-employment tax when calculating your adjusted gross income, which can help reduce your overall tax burden.
It's important to note that this tax applies to your net earnings, which is your total income from self-employment minus any business expenses. Keeping accurate records of your income and expenses is crucial for determining your net earnings and ensuring you pay the correct amount of tax.
As a self-employed individual, you must file an annual tax return with the IRS if your net earnings from self-employment are $400 or more. This is done using Schedule C (Form 1040) to report your income and expenses, and Schedule SE (Form 1040) to calculate your self-employment tax.
In addition to your annual tax return, you may need to make estimated tax payments throughout the year. These payments are typically due quarterly and are necessary if you expect to owe $1,000 or more in taxes when you file your return. Estimated taxes cover both your income tax and self-employment tax obligations.
Tennessee does not have a state income tax on wages, salaries, or other earned income. However, it does impose the Hall Income Tax on interest and dividend income, though this tax is being phased out and will be completely eliminated by 2021. For self-employed individuals, this means you generally won't owe state income tax on your business earnings.
Despite the lack of state income tax, you may still be responsible for other state taxes, such as sales tax if you sell goods or services. Tennessee has a state sales tax rate of 7%, with additional local taxes that can bring the total rate up to 9.75% in some areas. If your business involves selling taxable goods or services, you must register for a sales tax permit and collect sales tax from your customers.
One of the benefits of being self-employed is the ability to deduct business expenses from your taxable income. These deductions can significantly reduce your tax liability, so it's important to understand what expenses qualify and how to claim them.
Common deductible business expenses include office supplies, travel expenses, advertising costs, and professional services such as accounting or legal fees. If you use your vehicle for business purposes, you can also deduct either the actual expenses incurred or the standard mileage rate
Home office expenses are another potential deduction if you use part of your home exclusively for business. This can include a portion of your rent or mortgage, utilities, and home maintenance costs. To qualify, the space must be used regularly and exclusively for business purposes.
To claim these deductions, it's essential to keep detailed and accurate records of all your business expenses. This includes saving receipts, invoices, and any other documentation that supports your claims. Good record-keeping not only helps you maximize your deductions but also protects you in the event of an IRS audit.
Paying your self-employment taxes on time is crucial to avoid penalties and interest charges. Here’s how you can manage your tax payments effectively:
As mentioned earlier, if you expect to owe $1,000 or more in taxes, you need to make estimated tax payments. These payments are due on April 15, June 15, September 15, and January 15 of the following year. You can use Form 1040-ES to calculate your estimated taxes and make payments online through the IRS Direct Pay system or by mail.
When you file your tax return, you will report your total income and expenses for the year and calculate your final tax liability. If your estimated tax payments were insufficient, you may owe additional taxes when you file your return. Conversely, if you overpaid, you may be eligible for a refund.
Several resources are available to help self-employed individuals in Tennessee manage their taxes and stay compliant with state and federal regulations.
The Tennessee Small Business Development Centers (TSBDC) offer free resources and support to small business owners and self-employed individuals. They provide workshops, training, and one-on-one consultations to help you understand your tax obligations and manage your business finances effectively.
The IRS website offers a wealth of information for self-employed individuals, including guides on how to file taxes, calculate estimated payments, and claim deductions. The IRS also provides online tools and calculators to help you manage your taxes throughout the year.
Hiring a professional tax advisor or accountant can be a wise investment for self-employed individuals. These professionals can help you navigate complex tax laws, ensure you claim all eligible deductions, and provide guidance on tax planning strategies to minimize your liability.
Managing self-employed taxes in Tennessee requires careful planning and organization. By understanding your tax obligations, keeping accurate records, and taking advantage of available resources, you can ensure that you meet your responsibilities and make the most of your self-employment journey. Whether you're just starting or have been self-employed for years, staying informed and proactive about your taxes will help you succeed in your business endeavors.
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Brad Thibeau is the Head of Growth & Partnerships at Everlance. Brad has worked at Everlance since 2021 with a focus on helping self employed people save time and money on their taxes.
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