Tennessee does not have a state income tax on wages or salaries
You do not pay Tennessee state income tax on money you earn from a job. Tennessee is one of nine states with no tax on wages, which means your paycheck is not reduced by a state income tax withholding. If you work in Tennessee or live there and work elsewhere, you will not owe Tennessee income tax on that employment income when you file your state return.
This applies whether you are a W-2 employee, a 1099 contractor, or self-employed. The absence of a wage tax is a permanent feature of Tennessee law, not a temporary break or exemption that expires.
Key Takeaways
- Tennessee collects no state income tax on wages, salaries, or self-employment income from work.
- You still file a federal income tax return; the lack of state tax does not change your federal obligations.
- Tennessee does tax certain investment income, including interest and dividends, at a flat rate of 1 percent.
- If you moved to Tennessee from a state with income tax, you do not owe back taxes to Tennessee on income earned before you arrived.
- Your employer will not withhold Tennessee state income tax from your paycheck, so your take-home pay is higher than it would be in a state with wage tax.
What Tennessee does tax instead of income
Tennessee replaced wage income tax revenue with other taxes. The state collects sales tax (currently 9.55 percent statewide when you combine state and local rates), property tax on real estate and vehicles, and a 1 percent tax on certain investment income.
The investment income tax applies to interest earned in bank accounts, dividends from stocks, and income from bonds. It does not apply to capital gains — the profit you make when you sell an investment for more than you paid for it. This distinction matters if you have significant savings or investment accounts.
How this affects your federal tax return
The absence of Tennessee state income tax does not change what you owe the federal government. You still file a federal Form 1040 and pay federal income tax based on your total income, filing status, and deductions. Tennessee's lack of state tax is separate from federal tax.
When you file your federal return, you will report your income the same way whether you live in Tennessee or any other state. The only difference is that you will not also file a Tennessee state income tax return for wage income.
If you moved to Tennessee from another state
Moving to Tennessee does not create any tax debt to the state for income you earned before you arrived. If you worked in a state with income tax and paid that state's tax on your earnings, you do not owe Tennessee anything retroactively. Your tax obligation to your previous state ends when you establish residency in Tennessee.
If you moved mid-year, you may still owe income tax to your former state for the months you lived there. That state's tax authority will determine your residency date based on when you moved, not when you changed your driver's license. Keep documentation of your move — a lease, utility bill, or change of address — in case a former state questions when you left.
Self-employed income and Tennessee taxes
If you are self-employed or run a business, you do not pay Tennessee state income tax on your business income. You still pay federal self-employment tax (Social Security and Medicare), which is a federal obligation separate from income tax. You will also owe federal income tax on your net business income.
You may owe Tennessee sales tax if you sell goods or services subject to sales tax in the state. You may also owe property tax on business equipment or real estate. But the income itself — your profit — is not taxed by Tennessee.
Investment income and the 1 percent tax
Tennessee's 1 percent tax on investment income applies to interest and dividends. If you have a savings account earning interest, you will owe Tennessee 1 percent of that interest. If you own stocks that pay dividends, you will owe 1 percent of those dividends.
This tax does not apply to capital gains. If you buy a stock for $100 and sell it for $150, Tennessee does not tax the $50 gain. The 1 percent tax is only on the income the investment generates while you hold it, not on the profit from selling it.
You report this tax on a separate Tennessee form when you file. The amount is usually small unless you have substantial savings or investment accounts, but it is a tax that exists even though Tennessee has no wage income tax.
Frequently Asked Questions
Do I have to file a Tennessee tax return if I live there?
Not if your only income is wages or salary. If you have investment income subject to the 1 percent tax, you will need to file a Tennessee return to report and pay that tax. Check with a tax preparer or the Tennessee Department of Revenue if you are unsure whether you have reportable income.
If I work in Tennessee but live in another state, do I owe Tennessee tax?
No. Tennessee has no income tax on wages regardless of where you live. You will owe income tax to the state where you live, based on that state's rules. Some states tax residents on all income; others tax only income earned within the state.
Does Tennessee tax retirement income or Social Security?
Tennessee does not tax Social Security benefits. Retirement income from pensions and 401(k) withdrawals is also not taxed by Tennessee. This is one reason retirees often move to Tennessee — their retirement income is not subject to state tax.
What if I receive unemployment benefits in Tennessee?
Tennessee does not tax unemployment benefits. This is another form of income that escapes Tennessee's tax system, even though the state has no general wage tax.
Can Tennessee change this and add a state income tax?
Technically yes, but it would require a change in state law. Tennessee's lack of income tax is not a constitutional protection; it is a policy choice. Any change would need to pass the state legislature and governor. No such proposal is currently in effect.