Overview of Tennessee Taxes
In Tennessee, there is no income tax on wages. The state has a flat 6% tax rate that applies to income earned from interest and dividends. No Tennessee cities have 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.
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Tennessee Paycheck Calculator
Photo credit: ©iStock.com/benkrut
Tennessee Paycheck Quick Facts
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, 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, 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 and your allowances. 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 claim more allowances on your W-4, your employer will withhold less money and your paycheck will be bigger. Keep in mind, though, if you claim too many allowances, you run the risk of underpaying your taxes all year and owing money during tax season. If you decide to claim fewer allowances, more money will be withheld in taxes and your paycheck will be smaller. You can also 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 thing to note is that federal income tax withholdings changed slightly in early 2018. The IRS has released new withholding guidelines to reflect President Trump's new tax plan. If you haven’t looked at your W-4 since then, it’s a good idea to check that your information is still correct and you’re claiming the proper number of allowances.
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.
There is a flat tax rate on income from interest and dividends over $1,250 (this amount is doubled for joint filers). This is called the "Hall income tax" after the senator who sponsored it in 1929. This rate was 3% for 2018 but it will decrease by 1% every year until it completely phases out by 2022. So the rate for 2019 is 2% and the rate for 2020 will be 1%. The first year without this tax will be 2021.
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 averaging 9.46%, and even pushing to 9.75% in some areas. This doesn't affect your paycheck, but your wallet will likely feel it whenever you make purchases.
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.
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 country. Zoom between states and the national map to see data points for each region, or look specifically at one of the four factors driving our analysis: Semi-Monthly Paycheck, Purchasing Power, Unemployment Rate, and Income Growth.
Methodology Our study aims to find the most paycheck friendly places in the country. These are places in the country with favorable economic conditions where you get to keep more of the money you make. To find these places we considered four different 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.
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 rate index that shows the counties with the lowest unemployment. For income growth, we calculated the annual growth in median income over five years for each county and 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.
Sources: SmartAsset, government websites, US Census Bureau 2017 5-Year American Community Survey, MIT Living Wage Study, Bureau of Labor Statistics