Tennessee does not have a state income tax on wages

If you earn a paycheck in Tennessee, the state does not tax your wages. You will not see a Tennessee state income tax line on your pay stub, and you will not file a Tennessee state income tax return for wages you earned. This applies whether you live in Tennessee year-round, work there temporarily, or are self-employed.

However, Tennessee does tax certain types of income that are not wages. The state taxes interest and dividend income at a flat rate of 3.85 percent. This applies to money you earn from savings accounts, bonds, stocks, mutual funds, and similar investments. If you received interest or dividends in Tennessee during the tax year, you may owe state tax on that income even though you owe nothing on your wages.

The federal government still taxes your wages. Filing a federal return is required if your income exceeds the threshold set by the IRS each year. Tennessee's lack of state income tax does not change your federal filing obligation.

Key Takeaways

  • Tennessee does not tax wages or salary income, so you will not file a state income tax return for money you earned from a job.
  • Tennessee taxes interest and dividend income at 3.85 percent, which is separate from any federal tax you owe on that income.
  • You must still file a federal income tax return if your income exceeds the IRS threshold, regardless of Tennessee's state tax rules.
  • Self-employed people do not pay Tennessee state income tax on their business income, but they do owe federal self-employment tax.
  • Other states may tax your Tennessee income if you moved there or worked there, so your state of residence matters even if Tennessee does not tax you.

What Tennessee taxes instead of income tax

Because Tennessee does not collect income tax, the state relies on other revenue sources. Tennessee has a sales tax of 9.55 percent on most purchases, though the rate varies slightly by county because local governments add their own sales tax on top of the state rate. You pay this tax whenever you buy goods or services in Tennessee.

Tennessee also taxes gasoline, cigarettes, alcohol, and other specific products. The state collects property tax on real estate and tangible personal property. Businesses pay a franchise and excise tax. These taxes together replace the revenue that income tax would generate in other states.

The practical effect is that Tennessee residents and workers pay more in sales tax and property tax than residents of states with income tax. Whether you pay more or less overall depends on how much you spend, how much property you own, and how much you earn.

Interest and dividend income: the exception to the wage rule

Tennessee's 3.85 percent tax on interest and dividends applies to income from investments, not from work. If you have a savings account, money market account, or certificate of deposit, the interest you earn is taxable in Tennessee. If you own stocks or mutual funds that pay dividends, those dividends are taxable in Tennessee.

You report this income on your Tennessee tax return, which is separate from your federal return. The state provides Form INC (Individual Income Tax Return) for this purpose. You will need records from your bank or investment firm showing how much interest or dividends you received during the year. Most banks and brokers send this information on a 1099-INT or 1099-DIV form.

If your interest and dividend income falls below a certain threshold, you may not have to file a Tennessee return. The threshold changes each year. Check the Tennessee Department of Revenue website or speak with a tax preparer to confirm whether you must file based on your specific income.

How Tennessee's tax rules affect your federal return

Tennessee's lack of state income tax does not reduce your federal tax burden. The IRS taxes your wages, interest, dividends, and other income regardless of what Tennessee does. You will report the same income on your federal return that you would report if you lived in a state with income tax.

One difference is that you cannot deduct Tennessee state income tax on your federal return because you do not pay it. In states that have income tax, some taxpayers can deduct state income tax paid as an itemized deduction on their federal return. Since Tennessee has no income tax on wages, this deduction is not available to you.

You may be able to deduct Tennessee sales tax instead, but only if you itemize deductions on your federal return rather than taking the standard deduction. Most taxpayers take the standard deduction because it is larger, so this option rarely saves money.

Self-employment and business income in Tennessee

If you are self-employed or own a business in Tennessee, you do not pay Tennessee state income tax on your business income. However, you do owe federal self-employment tax, which covers Social Security and Medicare. This is a federal obligation, not a state one.

You will file a federal Schedule C (Profit or Loss from Business) to report your business income and expenses. You will also file Schedule SE (Self-Employment Tax) to calculate how much you owe. These are federal forms, not Tennessee forms.

Tennessee does require businesses to file a franchise and excise tax return if they meet certain thresholds. This is a separate tax from income tax and applies to the value of your business or its net income, depending on the type of business. A tax preparer or the Tennessee Department of Revenue can tell you whether your business must file.

What happens if you move to or from Tennessee

If you move out of Tennessee during the year, you may owe income tax to your new state on income you earned after you moved. Most states tax income earned within their borders, regardless of where you live now. If you moved to Tennessee from another state, you may still owe tax to that state on income you earned before you moved.

Some states have reciprocal agreements with Tennessee, meaning they do not tax wages earned in Tennessee by residents of the other state. Kentucky, Virginia, and Illinois have such agreements with Tennessee. If you live in one of these states and work in Tennessee, you may not owe income tax to your home state on your Tennessee wages. You will still owe Tennessee's interest and dividend tax if you have that income.

If you worked in Tennessee but moved away, you do not owe Tennessee tax on income you earned after you left. However, you may owe tax to your new state on all income you earned there. The rules vary by state, so check with your new state's tax authority or a tax preparer.

Frequently Asked Questions

Do I have to file a Tennessee tax return if I only earned wages?

No. If your only income was wages and you have no interest or dividend income, you do not file a Tennessee state return. You will still file a federal return if your income exceeds the IRS threshold for your filing status.

What if I earned interest from a savings account in Tennessee?

Yes, you owe Tennessee tax on that interest at 3.85 percent. You will file Tennessee Form INC to report it. Your bank will send you a 1099-INT showing the amount of interest you earned.

Can I deduct Tennessee taxes on my federal return?

You cannot deduct Tennessee income tax because Tennessee does not tax wages. You may deduct Tennessee sales tax if you itemize deductions on your federal return, but most people take the standard deduction instead, which is usually larger.

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

No. Kentucky has a reciprocal agreement with Tennessee, so you do not owe Tennessee income tax on wages you earned in Tennessee. You still owe Tennessee tax on any interest or dividend income you have.

Do I pay federal self-employment tax if I am self-employed in Tennessee?

Yes. Tennessee does not tax your business income, but the federal government does. You will file federal Schedule C and Schedule SE to report your business income and calculate your federal self-employment tax.