Tennessee is one of the nine U.S. states that doesn’t have a state income tax. Which means you don’t have to worry about withholding anything from your employees’ payroll.
Not for the State of Tennessee, anyway. There’s still federal stuff to think about, of course.
Even though the Volunteer State doesn’t have a state income tax, it does have a couple other taxes for you to pay attention to, including:
- Unemployment Insurance Tax
- Business Tax
- State and Local Sales Tax
We’ll take a look at each one. But first, let’s explore what it would look like if Tennessee did have an income tax.
Tennessee State Income Tax
Ahh, 0% state income tax. Like Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, the Volunteer State has no payroll tax for you to worry about.
This definitely makes things easier on you when it comes to running payroll. And Tennessee is an outlier for the South: all of its neighbor states impose an income tax. Of these, Kentucky, Mississippi, and North Carolina levy a flat tax rate.
But Virginia, Alabama, Missouri, Arkansas, and Georgia charge a graduated tax with different brackets based on the employee’s income. And even with these brackets, most people end up getting taxed at the highest rate because the brackets are so low.
Take Georgia, for instance. To land in the lowest tax bracket—1% of taxable income—a single filer would need to make just $750 or less per year. The highest tax bracket—5.75% of taxable income—applies to single filers making $7,000 or more per year. Which is, in a perfect world, most people, because living on less than that is impossible.
It’s no wonder that the Peach State is moving to a flat tax rate in 2024.
Lucky for you, there’s no complicated math to do in Tennessee.
Tennessee Unemployment Insurance Tax
When you start a business in Tennessee, you’ll need to fill out a specific form and file it with the Tennessee Department of Labor & Workforce Development. The form is a mouthful: it’s called the Report to Determine Status, Application for Employer Number (LB-0441).
The point of the form is to figure out if you’re liable to pay unemployment insurance taxes. You’ll answer questions about what type of business you are and whether you have employees. Here’s a snapshot of what makes a business liable to pay UI tax in Tennessee:
- Employers that have at least one employee and are liable under the Federal Unemployment Tax Act (FUTA)
- Employers that pay $1,500 or more in gross wages during a single quarter
- Employers that have at least one employee for 20 or more weeks during a calendar year—even if it’s not the same employee the whole time
- Employers who acquire businesses that were previously liable for unemployment insurance tax
While these rules apply to most types of employers, there are exemptions for the agricultural industry. These employers only need to pay UI taxes if they:
- Have 10 or more employees during 20 weeks of the calendar year
- Pay $20,000 or more in gross wages during a single quarter
Self-employed individuals and independent contractors won’t be found liable for UI tax because they don’t employ anyone. But any other type of business could be.
If you are found liable, the state will assign you an employer account number.
The taxable wage base for UI taxes in Tennessee can change from year to year depending on how much money is in the state’s Unemployment Trust Fund. For the past several years, it’s been $7,000 per employee.
The tax rate ranges from 0.50 to 10% and depends on the reserve-ratio formula. In other words, how much money is in your business’s UI account. Or, more specifically, how much money you’ve paid in versus how much money has been paid out to employees.
The state’s Premium Rate Table can tell you more. You’ll pay your UI tax premiums and submit quarterly wage reports using the state’s TNPAWS system.
Tennessee Business Tax
With few exceptions, any business in Tennessee that makes $100,000 or more in gross profits must pay business taxes. There are two of them to worry about:
- State Business Tax: The rates vary based on a complicated dance of factors, but qualifying businesses must pay at least $22.
- City/County Business Tax: Many counties and cities in Tennessee charge a business tax too, but you’ll have to check your local area for exact rates.
Keep in mind that these taxes apply to businesses that sell products or services in the state, as well as to out-of-state businesses that perform certain activities within Tennessee. The Tennessee Business Tax Manual goes into all the nitty-gritty details.
You can pay your business taxes through the Tennessee Taxpayer Access Point (TNTAP).
Tennessee Sales and Use Tax
Since it has no income tax, the main way the Volunteer State earns revenue is through its sales and use tax. At 7%, the sales tax rate is among the highest in the United States. But your business doesn’t need to worry about use tax.
The sales tax applies to retail or any other tangible goods, along with some types of services. In addition to the state sales tax, local cities and counties can impose sales tax too.
Thankfully, all you need to do for sales tax is collect it and send it to the state via the Tennessee Taxpayer Access Point.
The Official Resources for Tennessee Payroll Taxes
If you need a quick guide to all the links where you can find official information about Tennessee’s business-related taxes, we’ve got you.
In no particular order, here’s our list:
- Tennessee Department of Labor & Workforce Development: Tax and Insurance
- Tennessee Department of Labor & Workforce Development: Unemployment Insurance Tax
- Tennessee Department of Revenue: Business Tax
- Tennessee Department of Revenue: Due Dates and Tax Rates
- Tennessee Department of Revenue: Tax Guidance
- Tennessee Department of Revenue: Sales and Use Tax
And remember, all of your Department of Revenue taxes need to be remitted through the Tennessee Taxpayer Access Point. But to pay UI taxes, you’ll need to head to the Department of Labor & Workforce Development’s TNPAWS site.
Get Your Tennessee Payroll Tax Done While You Sleep
Since Tennessee has no payroll taxes, you don’t need to worry about submitting them. But you do need to make sure to pay your unemployment insurance and business taxes. Not to mention collecting and remitting any applicable state and local sales taxes.
Plus, of course, all those lovely federal payroll taxes. (You can see from this list of federal payroll forms, there’s a lot.)
Filing all of these things manually is a waste of time and energy. And if you mess up, you might end up paying hefty fees and fines. The easiest way to keep track of everything is with a sturdy payroll software.
Payroll software services do all the heavy legwork for you. They file state and federal taxes on your behalf. They help you manage employee benefits, including things like retirement and healthcare. They generate pay stubs.
In short, they’re indispensable.
Sure, it’ll take you a minute to get everything set up. But once you do, it’s smooth sailing from then on out. Check out our favorite payroll software options here.
