Operational Gaze:
How to Run Payroll in Tennessee?

January 23rd 2024

Are you wondering how to run payroll in Tennessee? Whether you’re a new business owner or an experienced employer, the intricacies of payroll management can often seem overwhelming. In Tennessee, where state-specific regulations and tax requirements come into play, it’s crucial to stay informed and compliant. This article is tailored to demystify the payroll process for employers and employees alike in the Volunteer State. So, without further ado, read on. 

This Article Covers

Laws That Affect Payroll Procedures in Tennessee
Worker Classifications in Tennessee
Payroll Forms and Relevant Bodies in Tennessee
Key Pay Elements That Impact Payroll in Tennessee
Step-by-Step Guide to Payroll in Tennessee

Laws That Affect Payroll Procedures in Tennessee

Tennessee Laws

  • Tennessee Wage Regulation Act: This law mandates that employers pay wages at least semi-monthly and outlines the procedures for final paycheck disbursement. It also specifies permissible wage deductions, providing a framework for employers to manage payroll effectively while ensuring employees receive their due compensation in a timely manner.
  • Tennessee Child Labor Law: Regulates the employment of minors, stipulating allowable work hours, job types, and work permit requirements for individuals under 18. This law aims to protect minors from exploitation in the workforce, ensuring their safety and well-being while balancing educational needs.
  • Prevailing Wage Act: Ensures fair compensation for workers on state-funded highway construction projects. This act requires employers to pay the prevailing wage rates, promoting equitable pay for laborers and mechanics in these sectors, thus maintaining industry standards.
  • Illegal Alien Act: Addresses illegal employment practices by prohibiting the hiring of unauthorized workers. It mandates employers to comply with federal employment eligibility verification requirements, ensuring a lawful workforce and reducing illegal employment practices.
  • Tennessee Lawful Employment Act: Requires private employers with six or more employees to use the E-Verify system for employment verification. This act is aimed at preventing the hiring of unauthorized workers and ensuring compliance with federal and state employment eligibility requirements.
  • Non-Smoker Protection Act: Prohibits smoking in most enclosed public places, including workplaces. This act aims to protect employee health by ensuring smoke-free environments, thereby contributing to a safer and healthier workplace.

Federal Laws

As compared to state-mandated laws, federal laws provide a nationwide framework for payroll procedures that must be adhered to by employers in Tennessee and across the United States.

  • Fair Labor Standards Act (FLSA): The FLSA is a federal law that sets standards for minimum wage, overtime pay, recordkeeping, and youth employment. As of the last update, the federal minimum wage is $7.25 per hour, although employers in Tennessee must comply if state minimum wage laws dictate a higher amount. Overtime must be paid at a rate of at least one and one-half times the employee’s regular rate for hours worked beyond 40 in a workweek.
  • Family and Medical Leave Act (FMLA): The FMLA sets out provisions for leave entitlement. Eligible employees have the right to take up to 12 weeks of unpaid leave for events such as childbirth, adoption, or the care of a family member with a serious health condition.
  • Federal Insurance Contributions Act (FICA): The FICA requires that employers deduct Social Security and Medicare taxes from paychecks and also make a matching contribution. As of the current information available, the Social Security tax rate was 6.2% for the employer and 6.2% for the employee on earnings up to the applicable taxable maximum amount. Medicare tax was 1.45% each for both employer and employee, with an additional 0.9% for high earners.
  • Federal Unemployment Tax Act (FUTA): FUTA imposes a federal payroll tax on employers to help fund state unemployment agencies. Employers pay this tax annually, and it is calculated at 6% of the first $7,000 paid to each employee as wages during the fiscal year. Significantly, employers can receive a credit of up to 5.4% for making timely and full payments of state unemployment taxes, effectively reducing the FUTA rate to a more manageable 0.6%.

HR Laws

  • Tennessee Maternity Leave Act: Provides up to four months of leave for pregnancy, childbirth, adoption, and nursing. Applicable to companies with 100 or more employees, it ensures job security and adequate time for childbearing and early child care, promoting a family-friendly workplace.
  • Tennessee Healthy Workplace Act: Encourages the adoption of policies to prevent abusive behavior in the workplace. It aims to create safe, respectful, and harassment-free work environments, thereby enhancing employee well-being and productivity.
  • Equal Pay Act: Prohibits wage discrimination based on sex for comparable work. This law ensures that employees are paid equally for work requiring similar skill, effort, and responsibility under similar working conditions, regardless of gender.
  • Paychecks and Wage Payment Timing: Regulates the frequency and methods of wage payments. This includes provisions for direct deposit and specifies the timing of payments after pay periods, ensuring timely and convenient wage disbursement.
  • Deductions from Pay: Details permissible paycheck deductions, requiring explicit employee consent for specific deductions. This law aims to protect employees from unauthorized wage deductions while allowing employers to withhold amounts for legally permissible reasons.
  • Overtime Pay: Adheres to federal overtime laws as outlined in the Fair Labor Standards Act. Employers must pay eligible employees overtime wages, ensuring fair compensation for hours worked beyond the standard workweek.
  • Meals and Breaks: Mandates a 30-minute unpaid meal or rest period for employees working six consecutive hours, with provisions for breastfeeding breaks. This law aims to ensure adequate rest periods for employees, promoting their health and well-being.
  • Tennessee “Mini-COBRA”/State Health Care Continuation: Offers a continuation of health coverage for employees of smaller businesses not covered by federal COBRA. This act provides a safety net for healthcare coverage, bridging gaps during transitions in employment.
  • Leave, Absence, and Time Off Laws: Includes laws for emergency responder leave, jury duty leave, military leave, maternity leave, and voting leave. Emphasizes compliance with the Family and Medical Leave Act, ensuring adequate time off for various personal and civic responsibilities.
  • Military Veterans Leave: Requires employers to grant leave for veterans on Veterans Day, subject to advance notice and proof of veteran status. This law recognizes the service of veterans, providing them with dedicated time off to observe Veterans Day.
  • Tennessee Health & Safety Laws: Encompasses the Tennessee Occupational Safety and Health Act (TOSHA) and regulations related to smoke-free workplaces and weapons in the workplace. These laws aim to ensure safe and healthy working conditions for all employees.

Worker Classifications in Tennessee

In Tennessee, the classification of workers as either employees or independent contractors has undergone significant changes, especially in how these classifications are determined for wage and hour laws, the Occupational Safety and Health Act of 1972, and Tennessee Employment Security law.

Employees and Independent Contractors

An employee typically works under the employer’s control, where the employer dictates work hours, methods, and conditions. In contrast, an independent contractor operates under a more autonomous arrangement, usually with a focus on delivering a specific result or service, without the client controlling the execution details. The classification impacts how individuals are taxed, their eligibility for benefits, and their rights under employment laws. 

Tennessee’s adoption of the 20-factor test, aligned with IRS guidelines, offers a more nuanced approach to this classification, considering factors such as control over work, investment in equipment, and the opportunity for profit or loss. This shift underscores the importance for businesses and workers in Tennessee to carefully assess and correctly classify work relationships to ensure compliance with state and federal regulations.

The ABC Test

Prior to January 1, 2020, the state utilized the “ABC” test to determine a worker’s status. Under the ABC test, a service performed by an individual was considered employment unless it was demonstrated that the individual was free from control and direction in the performance of the service (both under any contract and in fact), the service was performed outside the usual course of the business or outside all the places of business of the enterprise, and the individual was customarily engaged in an independently established trade, occupation, profession, or business.

However, from January 1, 2020, Tennessee adopted a new standard based on a 20-factor test, as per the Internal Revenue Service Revenue Ruling 87-41. This test provides a more comprehensive and nuanced approach to determining worker status. It considers various aspects of the worker-employer relationship, such as the degree of control over the work, the provision of tools and materials, the worker’s investment in their facilities, the ability to realize profit or loss, and the permanency of the relationship.

Some key factors of the 20-factor test include:

  • The requirement for the worker to comply with instructions about when, where, and how to work.
  • The need for training from the employer.
  • Integration of the worker’s services into the business operations.
  • Necessity for the services to be rendered personally.
  • Whether the business provides assistants.
  • Existence of a continuing relationship.
  • Setting of work hours by the employer.
  • Requirement for the worker to devote full time to the business.
  • Performance of work on the employer’s premises.
  • Order or sequence of work set by the employer.

It’s important to note that under the 20-factor test, no single factor is determinative of employment status, and there’s no presumption that an individual performing services is an employee. This totality-of-the-circumstances approach requires a careful examination of all relevant factors to determine the appropriate classification of a worker.

To learn more about the rights of salaried and hourly employees, you can read our guides on your rights as a salaried employee in Tennessee and your rights as an hourly employee in Tennessee.

Payroll Forms and Relevant Bodies in Tennessee

Tennessee Payroll Forms

  • TNPAWS (Tennessee Premium and Wage Reporting System): TNPAWS is used for filing payroll reports and paying Unemployment Insurance Premiums in Tennessee. It allows employers to enter employee information and wages electronically.
  • State Unemployment Insurance (SUI) Tax Forms: These forms are used for reporting and paying state unemployment taxes in Tennessee. Employers are required to file quarterly wage reports and pay unemployment premiums.
  • University Payroll/Flexible Benefits Forms: These forms are specific to the University of Tennessee and include various forms related to employee compensation and benefits within the University system.
  • Wage and Premium Reports: Employers in Tennessee must submit these reports quarterly, detailing the number of employees on payroll and wages paid. These reports can be filed electronically through TNPAWS or via the Third Party Upload (TPU) method for larger employers.

Federal Payroll Forms

Alongside Tennessee-specific documentation, federal payroll forms are equally important:

  • Form W-4 (Employee’s Withholding Certificate): The Form W-4, or Employee’s Withholding Certificate, is a federal document that employees across the United States fill out to inform employers about how much federal income tax should be withheld from the wages. The Form W-4 takes into account various factors like marital status, dependents, and additional income to tailor the withholding to the employee’s unique tax situation. With periodic updates, especially after major life events or changes in financial circumstances, the W-4 ensures that employees neither overpay nor underpay the federal income taxes throughout the year.
  • Form W-2 (Wage and Tax Statement): Employers use the Form W-2, known as the Wage and Tax Statement, to report the annual wages paid to each of their employees and the specific amount of taxes withheld. This federal form, issued to every employee before the end of January each year, is vital for individuals when preparing their personal income tax returns. For the employee, it offers a clear summary of their earnings and tax withholdings, while for the IRS, it serves as a record of the individual’s employment-related earnings and tax obligations.
  • Form W-3 (Transmittal of Wage and Tax Statements): The Form W-3 is basically a document used by employers to submit the total of all W-2 forms to the Social Security Administration. This form summarizes the total earnings, Social Security wages, Medicare wages, and withholding for all employees for the year. The W-3, which must accompany the W-2 forms, is an essential tool for the SSA to verify an employee’s income and tax information.
  • Form 940 (Federal Unemployment Tax Act Return): Form 940 is a federal form that employers utilize to report annual Federal Unemployment Tax Act (FUTA) tax. This tax provides funds for state unemployment agencies and supports unemployed workers. The form calculates the employer’s federal unemployment tax liability, considering any state unemployment tax they’ve already paid. By accurately completing and submitting this form, employers contribute to a system that offers financial support to individuals during periods of joblessness.
  • Form 941 (Employer’s Quarterly Federal Tax Return): Used by employers, Form 941, titled the Employer’s Quarterly Federal Tax Return, reports the wages they’ve paid and the corresponding taxes withheld every quarter. It captures details related to federal income tax, Social Security, and Medicare withholdings. By submitting this form quarterly, employers maintain a consistent record with the IRS, ensuring they meet tax obligations as required.
  • Form 944 (Employer’s Annual Federal Tax Return): Designed for smaller employers, the Form 944 allows them to report income and FICA taxes withheld from employees’ paychecks just once a year instead of quarterly. This form simplifies the reporting process for eligible small businesses by reducing the number of times they must submit tax withholding information, easing the administrative burden and allowing them to focus on running their business.
  • Form 1099 (Miscellaneous Income): The 1099 forms are a series of documents the IRS uses to account for various types of non-employment income. There are many different types of 1099 forms, but one of the most common is the 1099-MISC, which is given to independent contractors or freelancers to report payments made to them for services rendered in the course of trade or business. This form is critical for the IRS to track income that might otherwise go unreported and for contractors to accurately report their income and calculate the taxes.

Federal and Tennessee Payroll/Tax Bodies

  • Tennessee Department of Labor and Workforce Development: This state agency oversees labor and workforce-related matters in Tennessee, including wage regulations, unemployment insurance, and workplace safety. Employers interact with this department for compliance with state labor laws and regulations.
  • Tennessee Department of Revenue: Responsible for collecting state taxes, including sales tax, use tax, and business taxes. Employers in Tennessee need to adhere to state tax regulations and may interact with this department for tax-related matters.
  • Tennessee Department of Commerce and Insurance (TDCI): TDCI regulates insurance, securities, and professional standards. Employers may need to engage with this department for insurance-related compliance, especially in the context of employee benefits and coverage.
  • Tennessee Division of Workers’ Compensation: This division administers workers’ compensation laws in the state. Employers are required to provide workers’ compensation coverage for their employees, and this division ensures that injured workers receive the benefits they are entitled to.
  • Tennessee Department of Economic and Community Development: This department plays a role in economic development and may offer incentives and support for businesses operating in Tennessee. Employers seeking to expand or relocate may find resources and assistance through this department.
  • Tennessee Secretary of State – Business Services: For business registration, filing annual reports, and related matters, employers may need to interact with the Secretary of State’s office. This is especially relevant for businesses establishing their presence in Tennessee.
  • Internal Revenue Service (IRS): The IRS stands as the United States’ primary federal tax authority. Its mandate covers the vast spectrum of federal tax matters, inclusive of payroll taxes. By providing regulatory guidelines, tax codes, and essential resources, the IRS facilitates nationwide tax compliance. It is important to note that both employers and employees rely on the IRS’s directives to understand their federal tax obligations and ensure adherence.
  • U.S. Department of Labor (DOL): Believe it or not, theU.S. DOL has a broad role, impacting various facets of employment across the nation. Among its chief responsibilities are the formulation and enforcement of wage and hour standards. The DOL ensures fair labor practices, safeguards employee rights, and fosters a balanced work environment. This guidance assists employers in aligning the operations with federal employment norms and standards.
  • Social Security Administration (SSA): The Social Security Administration (SSA) runs programs for retirement, disability, survivor benefits, and family support. They also assist people in signing up for Medicare. The SSA is also the government body responsible for issuing Social Security Numbers— crucial for employment, finances, and accessing government services.
  • Wage and Hour Division (WHD): The WHD is a part of the U.S. DOL, whose main job is to ensure employers follow labor standards to protect workers’ rights. The WHD enforces laws like the Fair Labor Standards Act (FLSA), which covers things like minimum wage, overtime pay, recordkeeping, and child labor rules. It also enforces other laws like the Migrant and Seasonal Agricultural Worker Protection Act, Employee Polygraph Protection Act, and the FMLA.

Applicable Taxes in Tennessee

State Taxes

  • Tennessee Sales Tax (7%): Tennessee imposes a state sales tax on the retail sale of tangible personal property and certain services. The current statewide tax rate is 7%. However, it’s important to note that local jurisdictions in Tennessee may impose additional sales taxes, which can result in varying total sales tax rates depending on the location. The sales tax is collected at the point of sale, affecting a wide range of consumer purchases, from everyday goods to big-ticket items.
  • Tennessee Use Tax: The Use Tax complements the Sales Tax and is designed to ensure that purchases made outside of Tennessee but used or consumed within the state are subject to taxation. This tax applies when individuals or businesses buy items from out-of-state vendors or make online purchases that are not subject to the Sales Tax. By imposing the Use Tax, Tennessee prevents tax evasion and maintains fairness in the tax system.
  • Tennessee Franchise and Excise Tax: The Franchise and Excise Tax is a significant tax for businesses operating in Tennessee. It is based on a combination of a business’s net earnings and the value of its tangible property in the state. The tax rate varies based on the type of business entity, including corporations, limited liability companies (LLCs), and partnerships. Businesses are required to report their financial information to calculate the tax accurately. Revenue generated from this tax contributes to the state’s budget and funding for various programs.
  • Tennessee Hall Income Tax: The Hall Income Tax is a unique tax in Tennessee that applies to interest and dividend income from investments. While it was previously applied at a higher rate, there are plans to gradually reduce and eventually phase out this tax. This tax affects individuals who earn income from investments, such as stocks, bonds, and dividends, and the reduction in rates aims to make Tennessee more tax-friendly for retirees and investors.
  • Tennessee Professional Privilege Tax: Licensed professionals, including doctors, lawyers, accountants, and other practitioners, are subject to the Professional Privilege Tax in Tennessee. This tax is essentially a fee for the privilege of practicing their respective professions within the state. It helps regulate and license these professionals while providing revenue to the state government.
  • Tennessee Tobacco Tax: Tennessee imposes taxes on the sale and use of tobacco products, including cigarettes, cigars, and smokeless tobacco. These taxes serve multiple purposes, including generating revenue for the state and discouraging tobacco use to promote public health.
  • Tennessee Alcoholic Beverage Tax: Alcoholic beverages, including beer, wine, and spirits, are subject to taxation in Tennessee. The state levies a tax on the sale of these products, and the revenue collected contributes to various state initiatives and services. This tax is part of the state’s regulatory framework for alcohol distribution.
  • Tennessee Gross Receipts Tax: The Gross Receipts Tax in Tennessee applies to specific industries and activities. It is calculated as a percentage of a business’s gross revenues and is different from traditional income taxes. This tax is specific to certain types of businesses and aims to generate revenue while minimizing the complexity of the tax system.

Federal Taxes

  • Federal Income Tax: Employers are obligated to withhold federal income tax from employees’ paychecks. The amount withheld is determined by the information the employee furnishes on Form W-4 and is calculated according to the IRS-provided tax tables. This tax is progressive, with the applicable rate escalating as the employee’s taxable income increases.
  • Social Security and Medicare Taxes (FICA): Both employers and employees are mandated to contribute to Social Security and Medicare through the Federal Insurance Contributions Act (FICA) tax. Employers are responsible for accurately withholding the specified amount from their employees’ wages and also for contributing a corresponding matching amount.
  • Federal Unemployment Tax Act (FUTA): Employers pay this federal tax separately from other taxes, and it is not withheld from employees’ wages. FUTA, working in conjunction with the state unemployment system, provides critical funds for workers who are unemployed.

Key Pay Elements That Impact Payroll in Tennessee

Here’s the key pay elements that impact payroll in Tennessee:

Minimum Wage

Tennessee follows the federal minimum wage rate, which is currently set at $7.25 per hour. This means that employers in Tennessee must pay their employees at least this minimum hourly rate. Certain exceptions may apply for specific industries or occupations, but in general, the federal minimum wage sets the baseline for employee compensation in the state. Ensuring compliance with minimum wage laws is essential to provide fair compensation to workers.

Overtime

Overtime pay in Tennessee is governed by federal law. Non-exempt employees who work more than 40 hours in a workweek are entitled to receive overtime pay. Overtime pay is typically calculated at a rate of 1.5 times the employee’s regular hourly rate for each hour worked beyond 40 hours in a workweek. Employers must accurately track and compensate for overtime hours to comply with federal labor regulations.

Pay Stub Laws

Tennessee law requires employers to provide detailed pay stubs to employees with each paycheck. These pay stubs must include essential information such as the employee’s wages, deductions, hours worked, and other relevant details. Transparent pay stubs help employees understand their compensation and ensure that they are being paid accurately and in compliance with state laws.

Workers’ Compensation Insurance

Employers in Tennessee are mandated to carry workers’ compensation insurance coverage. This insurance provides benefits to employees who suffer work-related injuries or illnesses. It covers medical expenses, rehabilitation costs, and a portion of lost wages for injured workers. Workers’ compensation insurance is essential for protecting employees and ensuring that they receive support in case of on-the-job injuries or illnesses.

Wage Garnishments

Employers must adhere to federal and state laws when processing garnishments and deductions from employees’ wages. Garnishments may include child support payments, tax levies, or court-ordered deductions. Employers are responsible for accurately deducting and remitting these amounts to the appropriate authorities. Compliance with garnishment and deduction laws is crucial to avoid legal complications and ensure that employees’ financial obligations are met.

Final Paycheck

When an employee’s employment is terminated, whether by resignation or termination by the employer, Tennessee law requires employers to provide the employee’s final paycheck promptly. This final paycheck should include any accrued but unused vacation or paid time off. The timing of the final paycheck typically aligns with the next regular payday. Ensuring timely and accurate final paychecks is essential to fulfill legal obligations and maintain a positive employer-employee relationship.

Step-by-Step Guide to Payroll in Tennessee

  • Step 1: Determine Employee Classification: To start payroll processing, it’s crucial to classify employees correctly as exempt or non-exempt based on their job duties. Exempt employees are typically salaried and not eligible for overtime pay under federal and state labor laws. Non-exempt employees are typically paid hourly and are entitled to overtime pay for hours worked beyond 40 in a workweek.
  • Step 2: Set Up Payroll System: Selecting the right payroll software or service is essential for efficient payroll management. Ensure that the chosen system complies with Tennessee’s tax regulations and provides detailed pay stubs that include wage breakdowns and deductions. A reliable system streamlines payroll processing, reduces errors, and ensures accurate record-keeping.
  • Step 3: Employee Onboarding: During the onboarding process, gather essential employee information, including completed W-4 forms for tax withholding, direct deposit details for payment, and personal data required for payroll records. Additionally, verify employment eligibility by completing Form I-9 in compliance with federal immigration laws.
  • Step 4: Calculate Gross Pay: Calculate employees’ gross pay accurately. For non-exempt employees, multiply their hourly rate by the number of hours worked in a pay period. For exempt employees, pay them their predetermined salary without regard to hours worked, as they are not eligible for overtime pay.
  • Step 5: Deductions and Withholdings: Deduct federal and state income taxes, Social Security, and Medicare contributions from employees’ paychecks based on the information provided on their W-4 forms. Ensure compliance with garnishments and other legally mandated deductions, such as child support payments.
  • Step 6: Calculate Overtime (If Applicable): For non-exempt employees who work more than 40 hours in a workweek, calculate overtime pay. Overtime pay is typically 1.5 times the employee’s regular hourly rate for each additional hour worked beyond the standard 40 hours. Accurate tracking and calculation of overtime hours are critical to ensure compliance with labor laws.
  • Step 7: Verify Workers’ Compensation Coverage: Ensure that your business has adequate workers’ compensation insurance coverage to provide benefits to employees in case of work-related injuries or illnesses. Compliance with workers’ compensation laws is essential to protect both employees and employers.
  • Step 8: Distribute Pay Stubs: Provide employees with detailed pay stubs for each pay period. Pay stubs should include a breakdown of wages, deductions, and net pay. Compliance with Tennessee’s pay stub laws is necessary to keep employees informed about their compensation and deductions.
  • Step 9: File State Taxes: Report and remit state income tax and unemployment insurance taxes to the Tennessee Department of Revenue and the Tennessee Department of Labor and Workforce Development in accordance with state tax regulations. Timely and accurate tax filing is essential to avoid penalties and maintain compliance.
  • Step 10: Document and Retain Records: Maintain accurate records of payroll calculations, tax filings, and employee documentation for at least three years. Compliance with state record-keeping requirements ensures transparency and enables audits if necessary.
  • Step 11: Final Paychecks: Issue final paychecks promptly when an employee’s employment is terminated, whether due to resignation or termination by the employer. Ensure that final paychecks include any accrued but unused vacation or paid time off, following state guidelines for timing and payment.
  • Step 12: Stay Informed: Continuously update your knowledge of Tennessee’s payroll laws and regulations. Staying informed helps ensure ongoing compliance and accuracy in payroll processing, protecting both employees and employers from legal issues.

Final Thoughts

Managing payroll in Tennessee can be a particularly challenging task. Employees must ensure they diligently adhere to Tennessee’s strict payroll regulations. To simplify the often complex process of managing payroll, consider exploring our comprehensive list of the top 6 applications tailored to streamline payroll responsibilities in the United States. If you’ve already established a payroll system, we’ve provided ten tips to enhance your payroll procedure within the United States.

Important Cautionary Note

When making this guide, we have tried to make it accurate, but we do not give any guarantee that the information provided is correct or up-to-date. We therefore strongly advise you to seek advice from qualified professionals before acting on any information provided in this guide. We do not accept any liability for any damages or risks incurred for the use of this guide.