Payroll Laws, Taxes and Regulations In Tennessee

Running a business in Tennessee comes with unique payroll considerations. Tennessee is one of the few states with no state income tax on wages, which simplifies some aspects of payroll processing for employers. While Tennessee businesses don't need to withhold state income tax, they must still comply with federal tax requirements and other state-specific regulations.

Employers in Tennessee need to understand several key aspects of payroll management. They must properly withhold federal income taxes, Social Security, and Medicare from employee paychecks. Tennessee also has specific unemployment insurance requirements that businesses must follow, along with workers' compensation insurance obligations.

Key Takeaways

• Tennessee has no state income tax on wages but employers must still handle federal tax withholding and reporting requirements.
• Businesses must register for unemployment insurance and maintain accurate payroll records for at least four years.
• Proper employee classification and compliance with wage and hour laws prevent costly penalties and legal issues.

Tennessee Payroll Law Basics

Tennessee has minimal state-level payroll taxes compared to other states, with no state income tax requirements. Employers must still comply with federal regulations while following specific Tennessee labor laws.

Employer Compliance Requirements

Tennessee employers must follow both federal and state-level regulations when processing payroll. While Tennessee doesn't collect state income tax on wages, businesses must still withhold federal income tax, Social Security, and Medicare from employee paychecks.

Businesses must register with the Tennessee Department of Labor and Workforce Development to pay unemployment insurance taxes. The current Tennessee SUI tax rate varies by employer, based on their experience rating. New employers typically start with a standard rate.

Companies must also display required labor law posters in visible locations. These include minimum wage, workplace safety, and non-discrimination notices as specified by the Tennessee labor standards unit.

Employers should maintain accurate payroll records for at least three years, including hours worked, wages paid, and deductions made.

Employee Wage Protections

Tennessee follows the federal minimum wage of $7.25 per hour as it doesn't have a state-specific minimum wage law. Employers must pay at least this amount to non-exempt employees.

For overtime, Tennessee employers must follow the Fair Labor Standards Act (FLSA), which requires paying non-exempt employees 1.5 times their regular rate for hours worked beyond 40 in a workweek.

Tennessee has specific rules regarding final paychecks. Employers must issue final wages by the next regular payday or within 21 days of termination, whichever comes first.

Child labor regulations in Tennessee restrict working hours for minors under 18. Those under 16 face additional limitations on hours and types of work permitted, especially during school hours.

Tennessee doesn't require employers to provide paid sick leave, vacation time, or breaks, though many employers offer these benefits to remain competitive.

State And Federal Tax Obligations

Employers in Tennessee must manage several tax obligations at both the state and federal levels. Tennessee's tax structure is unique because it doesn't impose a state income tax on wages.

Payroll Tax Withholding

In Tennessee, employers don't need to withhold state income tax since Tennessee has no state income tax on earned income. This simplifies state-level payroll processing compared to most other states.

However, businesses must still withhold federal income tax from employee paychecks based on each employee's W-4 form and the current IRS tax tables. These federal withholdings typically include:

• Federal income tax
• Social Security tax (6.2% of wages)
• Medicare tax (1.45% of wages)

Employers must also pay their matching portion of Social Security and Medicare taxes. For higher-earning employees, additional Medicare tax withholding (0.9%) applies to wages exceeding $200,000.

Businesses operating in Tennessee must also pay federal unemployment tax (FUTA) and Tennessee unemployment insurance tax based on their experience rating.

Reporting Deadlines

Tennessee employers must adhere to specific deadlines for tax reporting and payments. Missing these deadlines can result in penalties and interest charges.

For federal taxes, employers typically must deposit withheld income taxes, Social Security, and Medicare contributions either monthly or semi-weekly, depending on the size of their tax liability. The schedule is determined by the IRS based on the employer's lookback period.

Form 941 (Employer's Quarterly Federal Tax Return) must be filed quarterly by the last day of the month following the end of the quarter:

• Q1 (Jan-Mar): Due April 30
• Q2 (Apr-Jun): Due July 31
• Q3 (Jul-Sep): Due October 31
• Q4 (Oct-Dec): Due January 31

Annual reports include Form 940 for FUTA tax, due January 31. W-2 forms must be provided to employees by January 31, with copies sent to the Social Security Administration by the same date.

Employee Classification Rules

Tennessee employers must properly classify their workers for tax purposes and to ensure compliance with state and federal labor laws. Getting these classifications wrong can lead to penalties and back taxes.

Exempt Versus Non-Exempt Staff

Exempt employees in Tennessee aren't entitled to overtime pay when working more than 40 hours per week. To qualify as exempt, employees must:

• Earn at least $684 per week ($35,568 annually)
• Be paid on a salary basis
• Perform job duties that fall under executive, administrative, or professional categories

Non-exempt employees must receive at least the minimum wage of $7.25 per hour and overtime pay (1.5 times regular rate) for hours worked beyond 40 in a workweek.

Tennessee follows federal Fair Labor Standards Act (FLSA) guidelines for these classifications. Misclassifying employees as exempt to avoid overtime can result in back pay and penalties.

Contractor Versus Employee

The distinction between independent contractors and employees is crucial for Tennessee businesses. Employers must pay unemployment insurance taxes for employees but not for contractors.

Key factors determining classification include:

• Level of control over how work is performed
• Who provides tools and equipment
• Integration into the company's operations
• Payment method (salary vs. project-based)
• Permanency of the relationship

Misclassification can trigger additional premiums, penalties, and interest charges. Tennessee's Department of Labor and Workforce Development actively investigates potential misclassification cases.

Businesses uncertain about proper classification can request assistance from a Tennessee unemployment tax auditor by calling (615) 741-2346.

Wage And Hour Regulations

Tennessee employers must comply with both federal and state regulations governing employee wages and working hours. The state follows specific guidelines on minimum wage requirements and overtime compensation.

Minimum Wage Standards

Tennessee does not have its own state minimum wage law. Employers must follow the federal minimum wage requirements of $7.25 per hour, which has been in effect since July 2009.

This rate applies to most employees, with some exceptions. Tipped employees may be paid as little as $2.13 per hour as long as their tips bring their total hourly earnings to at least $7.25.

New businesses should note that there are different minimum wage standards for certain groups:

• Young workers under 20 may be paid $4.25 per hour during their first 90 consecutive calendar days of employment
• Full-time students can be paid 85% of the minimum wage in certain positions
• Workers with disabilities may be paid special wage rates under specific certificates

Employers must display official minimum wage posters in the workplace where employees can easily see them.

Overtime Pay Compliance

Tennessee businesses must adhere to the federal Fair Labor Standards Act (FLSA) for overtime regulations. Employees who work more than 40 hours in a workweek must receive overtime compensation at a rate of at least 1.5 times their regular pay rate.

Not all employees qualify for overtime pay. Exempt employees include:

• Executive, administrative, and professional staff
• Outside sales representatives
• Certain computer professionals
• Some seasonal workers

Employers must keep accurate records of all hours worked by non-exempt employees. These records should include regular hours, overtime hours, and wages paid.

Time tracking systems should be implemented to properly document employee work hours. This helps prevent wage disputes and ensures compliance with labor laws.

Misclassifying employees as exempt when they should receive overtime can result in significant penalties, including back pay and damages.

Payroll Deductions And Benefits

Tennessee employers must understand their obligations regarding payroll deductions and the benefits they can offer employees. Proper management of these elements ensures compliance with state and federal laws while helping attract and retain talent.

Mandatory Deductions

Employers in Tennessee must withhold certain amounts from employee paychecks. Federal income tax withholding is required based on each employee's W-4 form. Social Security and Medicare taxes (FICA) must be withheld at 6.2% and 1.45% of wages respectively, with employers matching these contributions.

Tennessee has no state income tax, which simplifies payroll processing compared to many other states. However, employers must pay state payroll taxes for unemployment insurance on the first $7,000 of pre-tax wages for each employee.

Local taxes may apply depending on the municipality. Some Tennessee cities and counties impose occupational privilege taxes that employers must withhold.

Wage garnishments for child support, tax levies, or court judgments are also mandatory when employers receive proper legal orders.

Voluntary Benefits

Tennessee employers can offer various

Recordkeeping And Reporting

Tennessee employers must maintain accurate payroll records to comply with both federal and state requirements. Proper documentation protects businesses during audits and ensures compliance with tax and labor laws.

Required Payroll Records

Under the Fair Labor Standards Act (FLSA), Tennessee employers must maintain several types of payroll records. These include:

• Employee personal information (name, address, social security number)
• Hours worked each day and total hours worked each workweek
• Regular hourly pay rate
• Total daily or weekly straight-time earnings
• Overtime earnings for workweeks
• All additions to or deductions from wages

Records must be kept for at least three years according to federal requirements. This includes payroll records, collective bargaining agreements, and sales and purchase records.

For exempt employees, fewer details are required but employers still must maintain basic payroll information. Remember that OSHA recordkeeping requirements differ from Tennessee's workers' compensation laws.

Documentation For Audits

Preparing for potential audits requires organized and complete recordkeeping systems. Tennessee businesses should maintain:

• Time records (timecards, electronic time tracking data)
• Payroll registers showing gross wages, deductions, and net pay
• Tax withholding forms (W-4s)
• State and federal tax deposit receipts
• Documentation of employee benefits
• Records of paid time off accrual and usage

Digital recordkeeping systems can simplify compliance while ensuring accessibility during audits. Many Tennessee employers use comprehensive systems that integrate timekeeping, payroll processing, and tax filing.

Make sure all records are accurate, legible, and properly dated. Regular internal audits help identify discrepancies before they become problems during official reviews.

Penalties And Common Mistakes

Tennessee employers face specific consequences for payroll violations. Understanding these penalties and implementing proper practices can protect your business from costly mistakes.

Non-Compliance Fines

Failing to comply with Tennessee payroll laws can result in significant financial penalties. Employers who violate minimum wage requirements may face fines of up to $1,000 per violation. These penalties increase substantially for willful or repeated violations.

Late payment of employer taxes in Tennessee incurs a monthly penalty rate of 5% of the unpaid amount. This penalty applies even for partial months of lateness.

For meal break violations, businesses face penalties when they fail to provide the required 30-minute unpaid break for employees scheduled for six consecutive hours.

Severe or intentional violations can lead to more than just financial penalties. Businesses may face:

• Legal action from affected employees
• Damage to company reputation
• Possible criminal prosecution in extreme cases

Avoiding Payroll Errors

Businesses can take several practical steps to prevent costly payroll mistakes. Maintaining accurate employee classification (W-2 employees vs. independent contractors) is essential, as misclassification remains one of the most common and expensive errors.

Set up a reliable system for tracking employee work hours, especially for hourly workers. This helps avoid underpayment claims and ensures proper overtime calculations.

Key prevention strategies:

• Implement automated payroll systems with built-in compliance checks
• Stay current on Tennessee labor law changes
• Conduct regular internal payroll audits
• Document all payroll policies and procedures clearly
• Train payroll staff on compliance requirements

Many businesses benefit from working with payroll specialists who understand Tennessee's specific requirements. This expertise helps navigate complex regulations and avoid common pitfalls that trigger penalties.

Frequently Asked Questions

Tennessee employers face specific tax obligations and regulatory requirements for payroll processing. Here are answers to common questions about handling payroll in the state.

How do I calculate payroll taxes for employees in Tennessee?

Tennessee has a simplified tax structure compared to many states. There is no state income tax to withhold from employee paychecks.

Employers must withhold federal income tax based on each employee's W-4 form and current IRS tax tables. You'll also need to withhold federal FICA taxes (Social Security at 6.2% and Medicare at 1.45%).

As an employer, you must match the FICA contributions and pay federal unemployment tax (FUTA) at 0.6% on the first $7,000 of each employee's wages after credits.

What steps are required for Tennessee payroll tax registration?

New employers must register with both federal and state agencies to establish tax accounts. First, obtain a Federal Employer Identification Number (FEIN) from the IRS.

Next, register with the Tennessee Department of Labor and Workforce Development for unemployment insurance tax. This registration is mandatory if you have employees.

You'll need to submit business information including your FEIN, business type, and employee details through the state's online SIDES portal. Most employers can complete the Tennessee payroll tax registration process online.

What is the state unemployment tax rate for Tennessee in 2025?

New employers in Tennessee typically receive a standard unemployment insurance tax rate for their first few years of operation. For 2025, this rate ranges from 0.3% to 5.4% of the first $7,000 paid to each employee.

Your specific rate depends on your industry classification and experience rating. After establishing a work history, the state will assign a merit-based rate that reflects your unemployment claims history.

The taxable wage base remains at $7,000 per employee per year. This means you only pay unemployment tax on the first $7,000 of each worker's annual wages.

How can an employer obtain a Tennessee Employer Account Number?

To get your Tennessee Employer Account Number, complete the employer registration through the Tennessee Department of Labor and Workforce Development's online system.

You'll need your Federal Employer Identification Number (FEIN), business information, and details about your employees and operations. The registration process can usually be completed in one session.

After submission, you'll receive your employer account number by mail or electronically. This number is essential for all future unemployment tax filings and communications with the state.

What are the employer's responsibilities for payroll taxes in Tennessee?

Employers in Tennessee must maintain accurate payroll records and follow proper payroll tax regulations for both federal and state requirements. Keep records for at least four years.

File quarterly unemployment tax reports and make timely payments to the Tennessee Department of Labor and Workforce Development. The due dates are April 30, July 31, October 31, and January 31.

Employers must also report new hires to the Tennessee Directory of New Hires within 20 days of their start date. This reporting helps enforce child support obligations.

What regulations govern the administration of pay laws in Tennessee?

Tennessee follows federal minimum wage standards ($7.25 per hour) and overtime regulations. The state requires employers to establish regular paydays and notify employees of pay schedules.

Employers must provide a final paycheck by the next regular payday or within 21 days of termination, whichever is later. There are no state-mandated rest break requirements except for minor employees.

Tennessee law does not require employers to provide paid vacation or sick leave. However, if you offer these benefits, you must follow your established policies consistently.