Tennessee does not have a state income tax on wages

Tennessee eliminated its tax on wages and salaries in 2021. If you work in Tennessee or live there and earn a paycheck, you do not owe state income tax on that money. This applies whether you are an employee, self-employed, or a contractor.

Tennessee does tax other forms of income — specifically investment income like dividends, interest, and capital gains. That tax is called the Hall Income Tax and applies only to those specific sources. Most working people in Tennessee pay no state income tax at all.

Key Takeaways

  • Wages, salaries, and self-employment income from work are not taxed by Tennessee at the state level.
  • Investment income — dividends, interest, and capital gains — is taxed at 5.75 percent under Tennessee's Hall Income Tax.
  • You still owe federal income tax to the IRS; Tennessee's lack of state income tax does not change your federal obligation.
  • Tennessee funds state services through sales tax, which is 9.55 percent statewide when combined with local rates.

What income Tennessee does tax

The Hall Income Tax applies to investment income only. This includes dividends from stocks, interest from bonds or savings accounts, capital gains from selling investments, and income from partnerships or S-corporations that is classified as investment income rather than wages.

The tax rate is 5.75 percent on this investment income. If you have $10,000 in dividend income in a year, you would owe $575 to Tennessee. Retirement account distributions — from IRAs, 401(k)s, and similar plans — are generally exempt from this tax.

Most people who work for a paycheck and do not have significant investment accounts will never owe Tennessee state income tax. The Hall Income Tax affects a smaller portion of the population.

How Tennessee replaced income tax revenue

Tennessee relies heavily on sales tax instead of income tax. The statewide sales tax rate is 9.55 percent when you combine the state rate with local taxes. This is one of the highest sales tax rates in the country. Every purchase you make in Tennessee — groceries, clothing, gas — is subject to this tax.

Tennessee also collects revenue from property taxes, business taxes, and excise taxes on items like gasoline and cigarettes. The state has chosen to fund schools, roads, and other services through these taxes rather than taxing income.

Federal income tax still applies in Tennessee

Tennessee's lack of state income tax does not change what you owe the federal government. You must still file a federal tax return with the IRS and pay federal income tax on your wages, self-employment income, and investment income. The IRS tax rates and rules apply the same way in Tennessee as they do in every other state.

If your employer withholds federal income tax from your paycheck, that money goes to the IRS, not to Tennessee. When you file your federal return, you report the same income you would report in any other state.

Self-employed workers and Tennessee taxes

If you are self-employed in Tennessee, you do not owe state income tax on your business income. You do owe federal self-employment tax to the IRS, which covers Social Security and Medicare. You also owe federal income tax on your net business profit.

You will need to file a federal Schedule C with your tax return and pay estimated quarterly taxes to the IRS. Tennessee does not require a separate state income tax filing for self-employed people, but you may need to register for a Tennessee business license depending on your business type.

Retirement income and Tennessee taxes

Distributions from retirement accounts like 401(k)s, traditional IRAs, and Roth IRAs are not subject to Tennessee state income tax. This applies to both the money you withdraw and any earnings within those accounts. You still owe federal income tax on these distributions — that is a federal rule, not a Tennessee choice.

Social Security benefits are also not taxed by Tennessee. Pension income from a former employer is not taxed by Tennessee either. If you are retired and living on these income sources, you will have no Tennessee state income tax obligation.

Frequently Asked Questions

Do I need to file a Tennessee state tax return?

Most people do not. If your only income is wages, you have no filing requirement to Tennessee. If you have investment income subject to the Hall Income Tax, you may need to file — check with a tax professional or the Tennessee Department of Revenue to be certain based on your specific situation.

What if I work in Tennessee but live in another state?

You do not owe Tennessee state income tax on your wages, regardless of where you live. Tennessee taxes income based on the type of income, not where you live or work. Your home state may tax your income — that depends on your home state's rules, not Tennessee's.

Does Tennessee tax retirement account withdrawals?

No. Withdrawals from 401(k)s, IRAs, and similar retirement plans are exempt from Tennessee state income tax. You will owe federal income tax on most retirement distributions, but Tennessee does not tax them.

Is the 9.55 percent sales tax the same everywhere in Tennessee?

The state portion is the same, but local taxes vary by county and city. Some areas have higher local sales taxes than others, so the total rate you pay depends on where you make your purchase. Check your local rate with your county or city tax assessor.

If I move to Tennessee, do I owe back income tax?

No. Tennessee does not tax wages retroactively. Once you move to Tennessee, your wages going forward are not subject to state income tax. Your previous state may still tax income you earned while living there.