Tennessee Remote Employee Tax Withholding: No Wage Tax, KY Reciprocity

Tennessee is one of nine U.S. states with no individual state income tax on wages or salaries, having fully repealed its Hall tax on interest and dividend income effective January 1, 2021. The state's lack of wage income tax simplifies payroll administration for employers with Tennessee employees but creates a hidden trap for Tennessee residents who work remotely for employers in convenience-rule states like New York, Connecticut, and Oregon. Tennessee also maintains a limited wage reciprocity agreement with Kentucky that benefits border-region commuters. This guide walks through the Tennessee tax landscape, residency considerations, the absence of wage withholding, SUI mechanics, out-of-state employer obligations, the convenience-rule trap for Tennessee residents, Tennessee-specific wage laws including Right to Work, recent developments, and common payroll mistakes.

Tennessee's Tax Landscape

Tennessee does not levy an individual state income tax on wages, salaries, or self-employment income. The state also does not levy a tax on interest and dividend income, having fully repealed the Hall tax effective January 1, 2021, completing a multi-year phase-out that began in 2016. Tennessee does impose a franchise tax and an excise tax on businesses, with the franchise tax of 0.25% applied to the greater of net worth or book value of property in Tennessee (with a minimum $100) and the excise tax of 6.5% applied to net earnings from business conducted in Tennessee. The Tennessee Department of Revenue (TN DOR) administers the franchise and excise taxes, sales tax, and other business taxes.

The state's primary revenue source is the state sales tax, with a state rate of 7.0% on most tangible personal property and certain services, plus local option sales taxes of up to 2.75% that bring the combined rate as high as 9.75% in some jurisdictions. Tennessee's combined state and local sales tax rate is among the highest in the nation, which is the trade-off for the absence of an income tax. The state also imposes a 4.0% state single-article tax on the purchase price of any single article of tangible personal property sold for $1,600 or more (with the first $1,600 taxed at the regular rate and the amount above $1,600 taxed at 4.0%, capped at $3,200 in single-article tax for items priced at $10,500 or more). For payroll purposes, the absence of state income tax means the only state payroll tax most employers face is State Unemployment Insurance.

The Hall Tax Repeal

The Hall tax, enacted in 1929, was a tax on interest and dividend income from investments, named for its legislative sponsor. The tax applied to most interest and dividend income but excluded wages, salaries, self-employment income, and certain exempt interest such as interest on Tennessee municipal bonds. The Hall tax rate was 6% for most of its history, with a $1,250 single / $2,500 joint exemption for taxpayers age 65 or older. The Tennessee General Assembly enacted a multi-year phase-out in 2016 legislation that reduced the rate from 6% to 5% in 2016, 4% in 2017, 3% in 2018, 2% in 2019, 1% in 2020, and 0% effective January 1, 2021.

The full repeal of the Hall tax completed on schedule, and no Tennessee Hall tax is owed for tax years 2021 and later. Taxpayers who previously filed Form INC 250 (the Hall tax return) no longer need to file any Tennessee individual income tax return. The repeal made Tennessee one of the few states with no individual income tax of any kind (joining Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming). The repeal did not affect the Tennessee franchise and excise taxes, which apply to businesses and remain in effect. Employers with Tennessee employees no longer need to consider the Hall tax in payroll or benefits planning, although out-of-state investment income earned by Tennessee residents is now entirely free of state income tax.

Tennessee Residency Rules

Tennessee does not have a state income tax, so it does not enforce residency rules for income tax purposes in the way that income-tax states do. However, residency is still relevant for other purposes, including voter registration, driver's licensing, in-state tuition, and determining whether a worker is subject to another state's income tax. Tennessee is a popular domicile state for retirees and high-net-worth individuals relocating from income-tax states, particularly those from neighboring states like North Carolina, Georgia, and Virginia. The TN DOR publishes guidance for new residents confirming the absence of state income tax and explaining the franchise and excise tax obligations for businesses operating in the state.

For Tennessee residents who work remotely for out-of-state employers, the key residency issue is whether the work-state can assert taxing jurisdiction over the Tennessee resident. If the work-state sources wage income to the employee's physical work location, a Tennessee resident working remotely from Tennessee has no work-state-source income. But if the work-state enforces a convenience rule (New York, Connecticut, Delaware, Pennsylvania, Arkansas, Nebraska, Oregon, and limited application in New Jersey), the work-state can source 100% of the wages to itself even though the employee works entirely outside the state. Tennessee residents who move from income-tax states should keep comprehensive documentation of the relocation to defend against an audit by the prior state of domicile.

Withholding for Tennessee Residents

Tennessee does not impose state income tax withholding because there is no state income tax. Employers with Tennessee employees withhold only federal income tax (using the federal Form W-4), Social Security tax, Medicare tax, and federal Additional Medicare Tax where applicable. The state does not require a state-equivalent W-4 form for any purpose. Federal Form W-4 is the only withholding form Tennessee employees complete. The absence of state withholding simplifies payroll processing for both the employer and the employee, but the employee may still face state income tax in another state if they perform work in or for an employer in an income-tax state.

Tennessee residents who work in another state occasionally — for example, attending in-person meetings at the employer's headquarters in another state — may create work-state-source income for those days. The employer should track days worked in each state and withhold accordingly. The Tennessee resident would then file a non-resident return in the work state to reconcile the withholding. Because Tennessee has no income tax, the resident cannot claim a credit for taxes paid to other states on a Tennessee return, so the work-state tax is a true out-of-pocket cost. The one exception is Kentucky, where the limited wage reciprocity agreement (discussed below) exempts Tennessee residents from Kentucky income tax on Kentucky-source wages.

Withholding for Non-Residents

Tennessee does not impose state income tax withholding on non-residents because there is no state income tax. A non-resident employee who performs work in Tennessee has no Tennessee income tax withholding obligation, regardless of the number of days worked in the state. The non-resident employee's home state may tax them on the wages earned in Tennessee, depending on the home state's sourcing rules. For example, a Kentucky resident who commutes to Tennessee for work would owe Kentucky income tax on all wages (Kentucky taxes residents on worldwide income), unless the Kentucky-Tennessee reciprocity agreement applies.

Tennessee's lack of state income tax makes it an attractive destination for employers seeking to hire remote workers from neighboring income-tax states (Kentucky, North Carolina, Georgia, Alabama, Arkansas, Mississippi, Missouri, and Virginia). A remote worker who relocates from North Carolina to Tennessee eliminates their North Carolina state income tax liability, although North Carolina may attempt to audit the relocation to confirm that domicile genuinely changed. Employers should ensure that employees who claim to have moved to Tennessee genuinely establish Tennessee domicile, with Tennessee driver's license, vehicle registration, voter registration, and updated federal tax address.

Tennessee Reciprocity (Limited, With Kentucky)

Tennessee has a limited wage reciprocity agreement with Kentucky, although the practical impact is one-sided because Tennessee has no state income tax. The reciprocity agreement provides that a Tennessee resident who commutes to Kentucky for work owes no Kentucky income tax on the Kentucky wages, and a Kentucky resident who commutes to Tennessee for work owes no Tennessee income tax (which would be the case regardless of reciprocity). The reciprocity agreement is administered by both states' revenue departments and is documented in their respective employer tax guides.

The Tennessee-Kentucky reciprocity agreement is particularly important for residents of the border region, including the Clarksville, Tennessee area near Fort Campbell and the Tri-Cities area in northeast Tennessee. A Tennessee resident working in Kentucky can claim exemption from Kentucky withholding by filing Form K-4 with their Kentucky employer, marking the reciprocity exemption box. The employer should not withhold Kentucky income tax from a Tennessee resident who has claimed the reciprocity exemption. The reciprocity agreement does not extend to other neighboring states, so Tennessee residents who commute to North Carolina, Georgia, Alabama, or other income-tax states owe tax to those states on the work-state wages, with no Tennessee credit to offset.

SUI (Tennessee Department of Labor and Workforce Development)

Tennessee State Unemployment Insurance is administered by the Tennessee Department of Labor and Workforce Development (TDLWD) under the Tennessee Employment Security Law (TCA Title 50, Chapter 7). The new employer SUI rate is approximately 1.0% for most non-construction industries, with a higher rate for new construction employers. The SUI wage base is $7,000 per employee per year for 2025 — the federal minimum wage base — producing a maximum new-employer per-employee contribution of $70 (1.0% × $7,000) for non-construction. Tennessee has the lowest SUI wage base in the country, tied with several other states that use the federal minimum.

After the initial period (typically the first two to three years), the SUI rate becomes experience-rated based on the employer's benefit charge ratio and taxable payroll. Experience-rated Tennessee SUI rates range from 0.01% to 10.0% under the standard experience-rating schedule, with the lowest rate reserved for employers with strong employment records and the highest rate for employers with significant benefit charges. Employers file quarterly wage reports with TDLWD through the online Employer Express system and remit contributions by the standard quarterly deadlines (April 30, July 31, October 31, and January 31). Timely filing is critical because late or missing wage reports can trigger FUTA credit reductions, which add 0.3% per year of delinquency to the federal unemployment tax rate.

Out-of-State Employer With a Tennessee Remote Employee

An out-of-state employer that hires a Tennessee remote employee creates Tennessee payroll tax nexus, but the only state payroll tax registration required is the SUI account with the TDLWD. Because Tennessee has no state income tax withholding, the employer does not register for an income tax withholding account, does not withhold state income tax, and does not file quarterly withholding returns. The SUI registration is completed through the TDLWD Employer Express online system and typically processes within five to ten business days. The employer may also need to register for Tennessee franchise and excise tax if the remote employee creates substantial nexus for the business.

Once registered for SUI, the out-of-state employer must file quarterly wage reports with TDLWD and remit SUI contributions on the first $7,000 of wages per Tennessee employee per year. The employer does not need to file an annual state reconciliation with Form W-2 copies for state income tax purposes, because no state income tax is withheld. However, the employer must still file federal Form 941 quarterly, federal Form 940 annually, federal Form W-2 copies with the Social Security Administration, and federal new-hire reporting with the Tennessee State Directory of New Hires. Tennessee sales tax registration may be required if the employer has economic nexus with the state under the post-Wayfair threshold. Workers' compensation coverage must be in place for the Tennessee employee under Tennessee Workers' Compensation Law.

Tennessee Resident Working for an Out-of-State Employer

A Tennessee resident who works remotely for an out-of-state employer is not subject to Tennessee income tax on any wages, because Tennessee has no state income tax. The critical question is whether the work-state can tax the resident on the same wages. If the work-state sources wage income to the employee's physical work location, the Tennessee resident working entirely from Tennessee has no work-state-source income and owes no work-state tax. If the work-state enforces a convenience rule, the analysis changes dramatically.

The convenience-rule trap for Tennessee residents is one of the most overlooked issues in multi-state payroll. New York's convenience rule (20 NYCRR 132.16), Connecticut's retaliatory convenience rule (Conn. Gen. Stat. §12-711(b) through (e)), and Oregon's convenience rule (ORS 316.127) all source wage income to the employer's state when a non-resident employee works outside the employer state for their own convenience rather than the employer's necessity. A Tennessee resident working entirely from Tennessee for a New York employer is subject to New York income tax on 100% of wages, with no Tennessee credit to offset the liability. The resident bears the full New York tax, which can exceed 6.85% for high earners. The same trap applies to Tennessee residents working for Connecticut or Oregon employers under those states' convenience rules.

Tennessee-Specific Wage Laws

Tennessee follows the federal minimum wage of $7.25 per hour, as the state has not enacted a higher minimum wage. The Tennessee Department of Labor and Workforce Development enforces wage payment laws but does not have a separate state minimum wage statute. The Tennessee Wage Regulation Act, codified in TCA Title 50, Chapter 2, governs the timing and method of wage payment for Tennessee employees. Wages must be paid at regular intervals not exceeding one month, on regular paydays designated in advance. Final paychecks for discharged employees must be delivered within three business days of separation, while final paychecks for employees who quit must be delivered by the next regular payday.

Accrued unused vacation is not required to be paid out at separation unless the employer's policy or contract provides for it. Tennessee is a Right to Work state under the Tennessee Constitution, Article I, Section 1, and TCA Title 50, Chapter 17, meaning union-security agreements requiring union membership as a condition of employment are prohibited. Tennessee's Right to Work law was reinforced by a 2022 constitutional amendment approved by voters that enshrined Right to Work in the state constitution, making it more difficult to repeal through future legislation. Tennessee is also an at-will employment state, meaning either party may terminate the employment relationship at any time with or without cause, subject to anti-discrimination and other legal protections.

Recent Tennessee Tax Developments

The most significant recent Tennessee tax development is the completion of the Hall tax repeal, which took full effect on January 1, 2021. No Tennessee Hall tax is owed for tax years 2021 and later, and taxpayers no longer need to file Form INC 250 (the Hall tax return). The TN DOR has updated its publications and employer guidance to reflect the full repeal. The state has also enacted several business tax reforms, including the 2024 repeal of the professional privilege tax on certain licensed professions (which had been a $400 annual tax on professionals including lawyers, doctors, and engineers) and ongoing franchise tax reform legislation addressing property valuations.

Tennessee has been a leader in opposing the convenience rule at the federal level, joining a coalition of no-income-tax states (Florida, Texas, Nevada, South Dakota, Washington, and Wyoming) in supporting the Mobile Workforce State Income Tax Simplification Act, which would preempt state convenience rules for short-term and remote workers. The bill has been introduced in multiple Congresses but has not yet been enacted. Tennessee's congressional delegation has been active in pushing for federal legislation that would protect Tennessee residents from the convenience-rule trap in New York, Connecticut, and Oregon. The state has also been actively recruiting remote workers through the Tennessee Department of Economic and Community Development's remote worker incentive programs.

Common Tennessee Payroll Mistakes

The most common Tennessee payroll mistake is assuming that no state income tax means no state payroll tax obligations at all. Employers still need to register for SUI with the TDLWD, file quarterly wage reports, and remit SUI contributions on the first $7,000 of wages per employee per year. The second common mistake is mishandling the convenience-rule trap for Tennessee residents working for New York, Connecticut, or Oregon employers. The employer should consult the work-state's convenience-rule guidance and withhold work-state tax on 100% of wages if the convenience rule applies, even though the employee works entirely in Tennessee.

The third common mistake is failing to apply the Tennessee-Kentucky reciprocity agreement for Tennessee residents commuting to Kentucky. The employer should not withhold Kentucky income tax from a Tennessee resident who has filed Form K-4 claiming the reciprocity exemption. The fourth common mistake is failing to track days worked in other states by Tennessee employees who travel for work, which creates work-state-source income and withholding obligations. The fifth common mistake is failing to update the employee's federal tax address when they relocate to Tennessee, which can trigger an audit by the prior state of residence. The sixth common mistake is failing to file quarterly SUI wage reports on time, which can trigger FUTA credit reductions. The seventh common mistake is failing to register for Tennessee franchise and excise tax when the remote employee creates substantial business nexus, particularly for corporations and LLCs with significant Tennessee operations.

What to Do Next

Audit your Tennessee payroll compliance using the seven common mistakes above. Verify that your TDLWD SUI account is active and that quarterly wage reports are filed on time, including zero returns for no-wage quarters. Confirm that SUI contributions stop at the current $7,000 wage base per employee and that the new employer rate is correctly applied in your payroll system. Verify that the Tennessee minimum wage of $7.25 per hour is correctly applied in your payroll system, and that final paychecks are issued within the Tennessee statutory deadlines (three business days for discharged employees, next regular payday for employees who quit). If you have a Tennessee resident working for a New York, Connecticut, or Oregon employer, consult the work-state's convenience-rule guidance and confirm that work-state withholding is being applied correctly. If the employee relocated to Tennessee from another state, ensure that the prior state's driver's license, voter registration, and vehicle registration have been canceled and that the federal tax address has been updated. Run our multi-state withholding calculator for each Tennessee employee to verify the full federal and state payroll picture.