If your small business has employees working in Tennessee, you’ll need to pay Tennessee unemployment insurance (UI) tax. The UI tax funds unemployment compensation programs for eligible employees. In Tennessee, state UI tax is one of the primary taxes that employers must pay. Unlike most other states, Tennessee does not have state withholding taxes. However, other important employer taxes, not covered here, include federal UI and withholding taxes.
Different states have different rules and rates for UI taxes. Here are the basic rules for Tennessee’s UI tax.
As a Tennessee employer, your small business must register with the state’s Department of Labor & Workforce Development (LWD). When you register, LWD will determine whether your business is liable for Tennessee UI taxes (premiums), and, if so, assign you an employer account number.
To register, use Form LB-0441, Report To Determine Status, Application For Employer Number. Blank forms are available for download from the UI Tax section of the LWD website. There is no fee to register your business with LWD.
Note: To establish your Tennessee UI tax account, you’ll need a federal employer identification number (EIN). You can apply for an EIN at IRS.gov. Generally, if you apply online, you will receive your EIN immediately.
As a regular business employer in Tennessee, you generally are liable for state UI taxes if you meet one of the following conditions:
The first three of these rules are effectively the same as those that apply for liability under FUTA. Therefore, if you are liable under FUTA, you likely are liable for Tennessee UI taxes, and vice versa. Different rules, not covered here, apply to agricultural (farm) workers, domestic (in-home) workers, and employees of some (but not all) non-profit organizations.
One piece of good news is that state UI tax payments generally can be credited against your FUTA taxes.
UI tax is paid on each employee’s wages up to a maximum annual amount. Under current Tennessee law, that amount, known as the taxable wage base, can’t be less than $7,000 or more than $9,000, and the exact amount each year can vary depending on the balance in the state’s Unemployment Trust Fund. In recent years the wage base has been $9,000.
The state UI tax rate for new employers, also known as the standard beginning tax rate, also can change from one year to the next. New employer premium rates are based on the North American Industry Classification System (NAICS). The NAICS originally was created by the federal government to classify and analyze statistics for different kinds of businesses. Tennessee, however, uses the average tax rate for each of these kinds of businesses (industries) as part of the process of assigning a UI tax rate to new employers. The details are complicated, but for most new employers in recent years, the net result is a beginning rate of 2.7%. Established employers are subject to a lower or higher rate than new employers depending on an “experience rating.” This means, among other things, whether your business has ever had any employees who made claims for state unemployment benefits.
In Tennessee, UI tax reports and payments (also known in Tennessee as premiums) are due within one month after the end of each calendar quarter. In other words, reports and payments are due by the following dates:
Most employers can file reports online, electronically, or on paper. Large employers are required to file electronically. To file online, use the Tennessee Premium and Wage Reporting System (TNPAWS). To file electronically, you must use magnetic tape, a diskette, or a CD — or you can use TNPAWS. To file on paper, use Form LB-0851, Wage Report, and Form LB-0456, Premium Report. Copies of the paper forms are mailed to employers each calendar quarter. Because of concerns regarding the precise format of the paper reports for computer scanning purposes, blank copies of the forms are not available to download from government websites.
You can pay your quarterly premiums electronically by Automated Clearing House (ACH) Credit. You can also pay on paper by sending in a check with your Premium Report, or, if you file a report online, by sending in a check with a paper payment coupon.
As an employer subject to UI tax, you must file a Wage Report and Premium Report each calendar quarter. If your business is temporarily closed or did not pay any wages during the calendar quarter, you still must file the report for that calendar quarter. In such instances, you should write “No Payroll” in a conspicuous place on both the Wage Report and Premium Report. Failure to file “no payroll” reports on time will result in penalty charges and also could result in an additional assessment of taxes.
You are required to post a notice (poster) regarding state unemployment claims in a conspicuous place for all employees. The poster tells employees when they may be eligible for UI benefits, how to continue to receive benefits, and how to make a claim for benefits. You can download a poster (Unemployment Insurance Poster) from the Required Posters section of the LWD website that meets all legal requirements.
Employers who use independent contractors rather than hiring employees are not subject to the UI tax. However, it’s important that you do not misclassify an employee as an independent contractor. If you do misclassify an employee, you could be subject to penalties or fines.
You may decide that it’s easiest to hand over responsibility for payroll, including UI taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on only the most basic elements of Tennessee UI taxes. Avoid possible penalties for making mistakes by checking both the IRS and LWD websites for the latest information. LWD also has a helpful publication, Handbook for Employers, that you can download from the LWD website. In addition to state UI tax, employers have other responsibilities not covered in this article such as federal UI tax, state and federal withholding taxes, and required reporting of new hires. You can get more information about other small business tax issues in other articles on Nolo.