Tennessee LLC Taxes
By default, Tennessee LLCs are taxed as pass-through entities, which means the LLC does not pay federal taxes directly. Instead, the profits from the LLC pass through the business to the members of the LLC, who then pay federal income tax on their share of the profits. LLC members’ income is also taxed at the federal self-employment tax rate of 15.3% (12.4% for social security and 2.9% for Medicare). Tennessee LLC members will catch a break on state income tax, because there is none. There is a state franchise tax for LLCs, as well as sales and industry-specific taxes. We'll give you an insider’s view to the kind of taxes your LLC can expect to pay in Tennessee.
In this article, we’ll cover:
How Are Tennessee LLCs Taxed?
For federal income tax purposes, a single-member LLC (SMLLC) is classified as a sole proprietorship, and a multi-member LLC is classified as a partnership by default. To file federal taxes as either type of LLC, you’ll be expected to file one of these forms with the IRS:
- Single-member LLC—Form 1040 (usually Schedule C, but some SMLLCs file C-EZ, E, or F)
- Multi-member LLC—Form 1065
Tennessee LLCs taxed as S-corp
Just like LLCs, S-corps are taxed as pass-through entities be default. The difference between the two is how profits are distributed. When profits come into an LLC, they are distributed in a single sum. S-corps have the benefit of splitting income into two categories: dividends and a reasonable salary. Salary payments will need to pay self-employment taxes of 15.3%, but dividend distributions won’t.
In some cases, S-corp election can save LLC members significant money, but it’s always a good idea to run S-corp election by a tax professional before you make the move. To elect S-corp taxation, your LLC will need to meet certain IRS requirements and file IRS Form 2553. S-corps report their income to the IRS by filing Form 1120-S.
LLCs taxed as C-corp
LLCs don’t often elect to be treated as C-corps (the default tax status for corporations), but some LLC owners do find that they can benefit from C-corp tax status. An LLC taxed as a C-corp in Tennessee can be eligible for more tax deductions, and is also more attractive to investors. To elect C-corp status, LLCs will need to file Form 1120 with the IRS. C-corps will pay the 21% federal corporate income tax as well as Tennessee’s 6.5% corporate income tax.
Tennessee State Income Tax
Tennessee is one of the few states that doesn’t have a state income tax. This means that Tennessee LLC members will be able to keep some more of their hard earned money. However, Tennessee isn’t some free-for-all no-tax state. LLCs still need to pay attention to other state and local taxes like fuel taxes, property taxes, and even taxes on motels and short-term rental properties.
Tennessee Franchise Tax
Tennessee LLCs must pay an annual franchise tax, which is calculated by assessing the value of “real and tangible property in Tennessee.” For example, if the value of everything your LLC owns (warehouse, office furniture, computers, vehicles, tools, equipment, etc…) adds up to $100,000, you’ll multiply the value of the LLC’s property by 0.25%, which comes out to $250. In this case, the LLC pays a $250 franchise tax fee owed to Tennessee’s Department of Revenue. Even if your LLC owns no property or equipment, there is still a minimum franchise tax fee of $100.
Unless franchise tax filers receive a hardship exemption (no computer or internet access, or religious beliefs prohibit use of technology), you’ll need to file and pay the tax online through the Tennessee Taxpayer Access Point (TNTAP). The franchise tax is due on the 15th day of the fourth month following the end of your LLC’s fiscal year. For most LLCs, this means your payment must be submitted by April 15th.
Sales and Use Tax
Tennessee’s sales and use tax is 7% state-wide. Your LLC will need to register with the Tennessee Department of Revenue in order to collect and remit the state sales tax. There is no charge to register your LLC for a sales and use tax account. Once completed, the Department of Revenue will send your LLC a Certificate of Registration to be displayed at each business location.
Local Tennessee Taxes
91 of the 95 counties in Tennessee levy a 2.75% sales tax. One county (Moore) charges a 2.5% sales tax, while Union, Scott, and Claiborne levy a 2.25% rate. Local sales taxes are paid on a quarterly bass to the county tax authority.
Other Taxes in Tennessee
Now that we’ve covered income, franchise, and sales taxes, here are some other tax situations your LLC might face.
Tennessee State Employer Taxes
If you plan on hiring people to work for your business, you’ll need to budget for Tennessee’s unemployment insurance tax, as well as the cost of workers’ compensation insurance. Here’s the low down on both:
- Unemployment Insurance (UI) Tax— UI taxes are paid by employers, and are meant to offer financial assistance for workers who have lost their jobs. Tax rates range from 0.01% to 2.3% for positive-rated employers and from 5% to 10% for negative-rated employers. The standard unemployment tax rate for new employers is 2.7%. Whether your business has a negative or positive rating is based on the age of your business, the number of claims former employees have filed, and the turnover rate in the industry in which your business operates.
- Workers’ Compensation— In accordance with Tennessee law, if your business has five or more employees, you’ll need to obtain workers’ compensation insurance. If your LLC is involved in trade work (pipe fitting, electrical, metal fabrication, etc…) or construction, having one employee is enough to trigger the requirement to obtain workers’ compensation insurance. LLCs can purchase insurance from a private provider, or failing that, can obtain it through Tennessee’s insurer of last resort, the National Council on Compensation Insurance.
For more information on UI taxes or workers’ compensation rates and options, check out the Tennessee Department of Labor and Workforce Development website.
Depending on what kind of business your LLC is involved in, other taxes may be applicable to your business. Here’s a few specific taxes to keep your eye on:
- Agricultural Tax
- Alcohol Beverage Tax
- Contractors/Construction Tax
- Local Occupancy Tax
- Industrial Loan Tax
- Motor Vehicle Fuel Tax
- Natural Gas Tax
- Severance/Mineral Tax
- Tobacco Tax
Do foreign LLCs in Tennessee need to pay Tennessee taxes?
Yes. LLCs that were formed outside of Tennessee but do business in the state are considered foreign LLCs. A Tennessee foreign LLC will be expected to register to collect state and local sales taxes, as well as remit other taxes to state or local authorities.