Overview of Tennessee Taxes
In Tennessee, there is no income tax on wages. As of 2020, the state had a 1% tax on income earned from interest and dividends, though it has fully repealed it beginning on Jan. 1, 2021. No cities in Tennessee levy local income taxes.
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- Our Tax Expert
Jennifer Mansfield, CPA Tax
Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.
Tennessee Paycheck Calculator
Tennessee Paycheck Quick Facts
- Tennessee income tax rate: 0%
- Median household income: $56,071 (U.S. Census Bureau)
- Number of cities that have local income taxes: 0
How Your Tennessee Paycheck Works
As is the case in all U.S. states, you have to pay federal income and FICA taxes in Tennessee. FICA (Federal Insurance Contributions Act) taxes are Social Security and Medicare taxes. You’ll pay 6.2% and 1.45% of your income for these taxes, respectively. Your employer typically matches these percentages for a total of 12.4% received for Social Security and 2.9% for Medicare. If you earn wages in excess of $200,000 (single filers), $250,000 (joint filers) or $125,000 (married people filing separately), that money is subject to a 0.9% Medicare surtax, which employers do not match.
While your employer typically covers 50% of your FICA taxes, this is not the case if you are a self-employed worker or an independent contractor. In this case, you are responsible for ensuring that 100% of your FICA taxes are paid and will likely need to cover the entirety of them yourself. However, you may be eligible to take a deduction during tax season to get back some of the “employer” portion of your FICA taxes.
As mentioned above, Tennessee employers withhold federal income tax from your paycheck each pay period. This goes to the IRS, where it is counted toward your annual income taxes and funds a range of expenses.
When you start a new job, you'll fill out a W-4 form detailing your filing status, income level and more. This form is how employers know how much to withhold from your pay. If any of your information changes, you'll need to fill out a new W-4 and submit it to your employer. If you're looking to adjust your tax bill come tax season, you can opt to have an added dollar amount of your choice withheld from each paycheck. There is a line on your W-4 where you can enter the additional withholding you’d like.
One item to note is that federal income tax withholdings changed slightly over the last few years. Though there weren't any changes for 2020, the newest Form W-4 includes significant revisions. For instance, it no longer uses allowances and it removes the option to claim dependency or personal exemptions. Instead, it includes a five-step process that asks you to enter dollar amounts for other forms of income and deductions. If you were hired before 2020, you don't need to fill out this new W-4, unless you switch jobs or adjust your withholdings.
Tennessee Median Household Income
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You won't pay any state income tax on wages earned in Tennessee. You also won't have to pay any local income taxes, regardless of which city you reside in.
Up until recently, Tennessee levied a flat tax on income earned from interest and dividends over $1,250, or $2,500 for joint filers. This was called the "Hall Income Tax" after Sen. Frank Hall, the senator who sponsored it in 1929. At its peak, this tax rate used to be 6%, but a bill signed in 2016 by Governor Bill Haslam set the Hall Income Tax on a track to be repealed by 2021. The tax rate was lowered by 1% each year, meaning it was 1% in 2020, 2% in 2019, 3% in 2018 and so on. So as of Jan. 1, 2021, the Hall Income Tax is fully repealed, meaning Tennessee now has no income taxes of any kind.
While you won't feel a significant impact from a traditional state income tax in Tennessee, the downside is that Tennessee sales tax rates deal a tough hit to taxpayers' cash flows during the year. Tennessee residents pay the highest overall sales tax nationwide, with rates ranging from 8.50% to 9.75% depending on where you live. This doesn't affect your paycheck, but your wallet will feel it whenever you make a purchase.
Overall, Tennessee has a low tax burden compared to other states, making it a relatively affordable place to live. If you’re planning on moving to the Volunteer State or if you’re thinking about refinancing a mortgage there, take look at our Tennessee mortgage guide. It has all the details about mortgage rates and information you’ll want to be familiar with before starting this process.
A financial advisor in Tennessee can help you understand how taxes fit into your overall financial goals. Financial advisors can also help with investing and financial plans, including retirement, homeownership, insurance and more, to make sure you are preparing for the future.
How You Can Affect Your Tennessee Paycheck
While you can't control all factors in your Tennessee paycheck, there are some choices that affect the size of the checks you receive throughout the tax year.
Say, for example, you decide to pay for health or life insurance through an employer-sponsored plan. Any premiums you pay for this will be subtracted from your wages. These premiums usually come out pre-tax, which means they come out of your pay before income tax is applied. Pre-tax contributions lower your taxable income and save you money on taxes.
You don't have to worry about state or local income taxes in Tennessee, but you can reduce how much you owe in federal taxes. If you're looking to do this, one tactic that you may want to explore is putting money in tax-advantaged accounts like a 401(k) or 403(b) retirement plan. Not only will you be saving for the future, but since these accounts take pre-tax money, you will save some money now, too. Those savings could make it worth the fact that your paychecks will be smaller.
If you have certain fixed medical expenses like copays or prescriptions, you may also want to take advantage of a health savings account (HSA) or flexible spending account (FSA). This helps to lower your taxable income in the same way that a 401(k) does. One important factor to keep in mind, though, is that the money you put into an FSA won’t all roll over from one year to the next. You will lose any money you put in over $500 if you don’t use it by the end of the year.
Most Paycheck Friendly Places
SmartAsset's interactive map highlights the most paycheck friendly counties across the U.S. Zoom between states and the national map to see data points for each region, or look specifically at one of the four ranking factors in our analysis: Semi-Monthly Paycheck, Purchasing Power, Unemployment Rate, and Income Growth.
Methodology To find the most paycheck friendly places for counties across the country, we considered four factors: semi-monthly paycheck, purchasing power, unemployment rate and income growth.
First, we calculated the semi-monthly paycheck for a single individual with two personal allowances. We applied relevant deductions and exemptions before calculating income tax withholding. To better compare withholding across counties, we assumed a $50,000 annual income. We then indexed the paycheck amount for each county to reflect the counties with the lowest withholding burden, or greatest take-home pay.
We then created a purchasing power index for each county. This reflects the counties with the highest ratio of household income to cost of living. We also created an unemployment index that shows the counties with the lowest rate of unemployment. For income growth, we calculated the annual growth in median income throughout a five year period for each county and then indexed the results.
Finally, we calculated the weighted average of the indices to yield an overall paycheck friendliness score. We used a one-half weighting for semi-monthly paycheck and a one-sixth weighting for purchasing power, unemployment rate and income growth. We indexed the final number, so higher values reflect the most paycheck friendly places.