Tennessee does not have a state income tax on wages

Tennessee has no state income tax on wages or salaries. If you work and earn a paycheck in Tennessee, the state does not take a percentage of that income. This applies whether you work for an employer, are self-employed, or receive income from a job.

However, Tennessee does tax certain other types of income. The state taxes dividends and interest income at a flat rate of 3.75 percent. This applies to money you earn from investments, savings accounts, bonds, or stock dividends. The wage income exemption does not cover these investment earnings.

Because Tennessee has no wage tax, your federal income tax withholding is the main tax deduction you will see on a paycheck. State tax withholding does not appear on Tennessee paychecks.

Key Takeaways

  • Tennessee does not tax wages, salaries, or self-employment income from work.
  • Tennessee taxes dividends and interest income at 3.75 percent, even though wages are not taxed.
  • You will not see Tennessee state income tax withheld from your paycheck.
  • Federal income tax still applies to Tennessee residents, and you must file federal returns as required by the IRS.

What types of income Tennessee does tax

The 3.75 percent tax on dividends and interest applies to earnings from investments. This includes interest from savings accounts, money market accounts, certificates of deposit (CDs), bonds, and dividend payments from stocks or mutual funds. If you receive a 1099-INT form (interest income) or 1099-DIV form (dividend income), that income is subject to Tennessee tax.

Some types of investment income are exempt from this tax. Interest from U.S. Treasury securities and municipal bonds issued in Tennessee are not taxed. Retirement account distributions from IRAs and 401(k)s are also exempt from Tennessee's dividend and interest tax, though they may be subject to federal tax.

Tennessee also has a sales tax and property tax. The state sales tax rate is 9.55 percent when combined with local rates, though this varies by county. Property tax is assessed by county and varies widely depending on where you own real estate.

How the lack of income tax affects your finances

Because Tennessee does not tax wages, workers keep more of each paycheck compared to states with income tax. A person earning $50,000 per year in wages pays no Tennessee state income tax on that amount. In a state with a 5 percent income tax, that same person would owe $2,500 to the state.

This does not mean Tennessee has no taxes. The state makes up revenue through sales tax, property tax, and the tax on investment income. If you spend money on goods or services, you pay sales tax. If you own property, you pay property tax to your county. The overall tax burden depends on your individual situation — how much you earn, how much you spend, and whether you own property.

For people who receive most of their income from wages and salaries, Tennessee's lack of income tax is a financial advantage. For people with significant investment income, the 3.75 percent tax on dividends and interest is a cost to factor in.

Federal income tax still applies in Tennessee

Tennessee residents must still file federal income tax returns and pay federal income tax. The absence of state income tax does not change your federal tax obligations. You will still have federal tax withheld from your paycheck, and you must file a federal return with the IRS by the deadline each year.

Your federal tax withholding depends on your income level, filing status, and the W-4 form you complete with your employer. The IRS sets federal tax rates and rules, not Tennessee. If you owe federal tax or are owed a refund, that is handled through the federal system.

Self-employed income and Tennessee taxes

If you are self-employed or run a business in Tennessee, you do not pay Tennessee state income tax on your business income or net profit. However, you must pay federal self-employment tax and federal income tax on that income.

Self-employed people must file a federal Schedule C (Profit or Loss from Business) and pay self-employment tax to cover Social Security and Medicare. You may also owe quarterly estimated tax payments to the federal government. Tennessee does not require state quarterly payments because there is no state income tax.

If your business generates dividend or interest income (such as from business investments), that income is subject to Tennessee's 3.75 percent tax on dividends and interest.

Retirement income and Tennessee taxes

Tennessee does not tax retirement income from pensions, 401(k) distributions, or IRA withdrawals. This applies to both the principal amount you contributed and the earnings that accumulated in the account. If you receive a pension from a former employer or withdraw money from a retirement account, Tennessee does not take a state tax on that money.

Social Security benefits are also not taxed by Tennessee. Federal tax may apply to Social Security depending on your total income, but Tennessee does not tax these benefits.

This makes Tennessee attractive to retirees who receive income from pensions or retirement accounts. However, you still owe federal income tax on most retirement distributions, and property tax applies if you own a home.

Frequently Asked Questions

Do I have to file a Tennessee state income tax return?

No. Because Tennessee has no income tax on wages, you do not file a state income tax return. You still must file a federal return with the IRS if your income exceeds the federal threshold for your filing status.

If I work in Tennessee but live in another state, do I owe Tennessee tax?

No. Tennessee does not tax wages regardless of where you live. If you work in Tennessee and earn wages, Tennessee does not tax that income. Your home state may tax your income depending on that state's rules.

Are capital gains taxed in Tennessee?

Capital gains (profit from selling stocks, real estate, or other assets) are not subject to Tennessee state tax. Federal capital gains tax may apply depending on your income and how long you held the asset, but Tennessee does not tax capital gains.

What if I receive income from multiple states?

Each state taxes income earned within its borders according to its own rules. If you earned wages in Tennessee, Tennessee does not tax that income. If you earned wages in another state, that state may tax it. You may need to file returns in multiple states depending on where you worked.

Does Tennessee tax rental income from property I own?

Rental income is not subject to Tennessee state income tax. However, you must pay federal income tax on rental income. You may also owe property tax on the rental property itself to the county where it is located.