How do payroll taxes differ from income taxes?

Understanding Payroll Taxes vs. Income Taxes in Tennessee

In Tennessee, distinguishing between payroll taxes and income taxes is essential for effective business operations and compliance.

What Are Payroll Taxes?

Payroll taxes are taxes that employers must withhold from employee wages and also contribute to on behalf of employees. These taxes fund federal and state programs such as Social Security, Medicare, and unemployment insurance.

• Federal Payroll Taxes: Employers withhold Social Security and Medicare taxes (FICA) from employee paychecks and match these amounts.
• Federal Unemployment Tax (FUTA): Paid by employers to fund unemployment benefits.
• Tennessee State Unemployment Insurance (SUI): Employers pay state unemployment taxes, which vary based on experience rating.
• Local Payroll Taxes: Tennessee does not impose local payroll taxes.

What Are Income Taxes?

Income taxes are taxes on individual or business earnings. Tennessee does not have a state income tax on wages, which means employees do not pay state income tax on their salaries. However, Tennessee does tax interest and dividend income through the Hall Income Tax, which is being phased out.

• Federal Income Tax: Employers must withhold federal income tax from employees' wages based on IRS guidelines.
• Tennessee State Income Tax: No state wage income tax applies, simplifying payroll withholding requirements.

Operational Implications for Tennessee Businesses

• Payroll Setup: Ensure payroll systems correctly withhold federal payroll and income taxes while excluding state income tax withholding.
• Tax Payments and Reporting: Employers must remit withheld federal taxes and pay employer payroll taxes on time to avoid penalties.
• Unemployment Insurance: Register with the Tennessee Department of Labor and Workforce Development to manage state unemployment tax obligations.
• Recordkeeping: Maintain accurate payroll records for tax filings, audits, and employee verification.
• Automation: Use payroll software or services that update tax rates and compliance rules automatically to reduce errors.

As of 2026, staying current with federal payroll tax requirements and Tennessee’s unemployment insurance rules is critical for smooth business operations and compliance.