Making the leap from being employed to becoming self-employed is an exciting milestone! You now have the flexibility to set your own schedule, choose your clients, and potentially earn more than you would in a traditional job. However, with these perks come new responsibilities, especially when it comes to taxes.
One of the biggest changes new self-employed individuals in Tennessee face is how their taxes are managed. As a self-employed individual, you are now responsible for all your tax requirements with the IRS. The process may be confusing for some, but fear not. By following these expert tax tips from a trusted Nashville accounting firm, you can ensure all your tax obligations as a self-employed individual are met with ease and efficiency.
1. Know You Need to Pay Self-Employment Tax
Self-employment tax is often a surprise for those newly transitioning into freelancing or self-employment. Unlike when you’re employed and your employer covers half of your Social Security and Medicare taxes, self-employed individuals must pay both portions, which total 15.3 percent of your earnings.
This tax is in addition to your regular federal income taxes, so it’s crucial to factor this into your budgeting and tax planning. The good news is that you can deduct the employer-equivalent portion of your self-employment tax from your taxable income.
2. Set Aside Money for Quarterly Estimated Taxes
As a self-employed individual, you no longer have an employer withholding taxes from your paycheck. This means you are responsible for paying estimated taxes every quarter. These payments cover both federal income tax and self-employment tax. If you fail to make these payments, or if you underestimate how much you owe, you may face penalties or interest charges.
To avoid this, set aside a portion of your income each month specifically for tax payments. You can save a percentage of your earnings based on your tax bracket, ensuring that you have enough to cover your quarterly estimated taxes.
3. Be Aware of Tennessee’s Sales Tax Requirements
While Tennessee does not impose a personal income tax, it has one of the highest sales tax rates in the country. As a self-employed individual, especially if you’re selling goods or services directly to consumers, you may need to collect and remit sales tax to the state. Tennessee’s base sales tax rate is 7%, but local sales taxes can raise the total rate to over 9% in some areas.
It’s essential to determine whether your business needs to collect sales tax, as the rules can vary depending on the type of product or service you offer. For example, tangible goods are typically subject to sales tax, but certain professional services may be exempt.
4. Maximize Your Tax Deductions with Professional Guidance
One of the advantages of being self-employed is the ability to deduct various business-related expenses from your taxable income. These might include home office expenses, internet and phone bills, business supplies, travel costs, and more. However, to claim these deductions, you need to keep meticulous records of your expenses and ensure they meet IRS guidelines.
Working with a Nashville accounting firm can help you identify all the deductions you’re entitled to, ensuring that you don’t leave any money on the table. From revenue to expenses, an accountant will help you track your financials and claim deductions that can significantly lower your tax liability.
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