Does Tennessee Have State Withholding Tax?
Clarify your Tennessee payroll tax duties. While the state has no income tax on wages, employers must still manage other crucial tax obligations.
Employers in Tennessee navigate a unique tax landscape. The obligations for withholding taxes from employee paychecks are a key part of payroll management, and understanding the specific state-level requirements is necessary for any business to maintain compliance.
State Income Tax Withholding on Wages
Tennessee is one of the few states that does not levy a general income tax on an individual’s wages or salaries. Consequently, employers in Tennessee are not required to withhold state income tax from their employees’ paychecks. This simplifies the payroll process, as there is no state-level withholding form equivalent to the federal Form W-4 for employees to complete.
This clarity has not always existed. For many years, Tennessee levied a specific tax known as the Hall Income Tax, which applied only to certain types of unearned income, like interest from bonds and dividends from stock. This tax was never applied to wages and was fully repealed as of January 1, 2021. Its repeal solidified Tennessee’s position as a state without a personal income tax or a corresponding withholding requirement for employers.
Required Federal Payroll Tax Withholding
The absence of a state income tax withholding requirement does not absolve Tennessee employers from other tax obligations. All employers must adhere to federal law, which mandates the withholding of specific taxes from employee pay. These federal obligations are entirely separate from state tax law.
The primary federal withholding is for federal income tax, and the amount is determined by the information an employee provides on their Form W-4, “Employee’s Withholding Certificate.” In addition to federal income tax, employers must withhold and remit Federal Insurance Contributions Act (FICA) taxes. FICA consists of two separate taxes: Social Security and Medicare. For Social Security, a tax is applied to wages up to an annual limit of $176,100 for 2025, while the Medicare tax applies to all wages without a limit. Employers are also required to pay a matching employer portion of these FICA taxes.
Tennessee Unemployment Insurance Tax
While Tennessee does not have an income tax, employers are responsible for paying a state-level payroll tax to fund the unemployment benefits system. This is known as the Tennessee Unemployment Insurance (TUI) tax. It is an employer-only tax and is not deducted from an employee’s wages.
Any business with at least one employee in Tennessee must register with the Tennessee Department of Labor & Workforce Development to establish an employer account number. New employers are typically assigned a standard tax rate of 2.7%. This rate is applied to the first $7,000 of each employee’s wages paid during the calendar year. After a period of time, an employer’s rate may be adjusted based on their specific history of unemployment claims. Employers file a quarterly Wage and Premium Report to report wages and pay the TUI tax due.