TN · Payroll tax 2026
The true cost of hiring in Tennessee
What a W-2 employee actually costs an employer in Tennessee— and how that compares to a 1099 contractor — with the state's real 2026 unemployment-insurance rates built in.
Tennessee's economy runs on automotive manufacturing in Middle Tennessee (Volkswagen, Nissan, GM's Spring Hill plant), a fast-growing healthcare and logistics corridor anchored by Nashville, and a distribution network that stretches from Memphis across the mid-South. When a Nashville-area employer brings on a W-2 worker, the state's tax structure is notably employer-friendly — but federal payroll obligations still apply, and the state's own unemployment insurance system adds cost from day one. A new Tennessee employer pays SUI at 2.7% on the first $7,000 of each worker's wages, a maximum SUI exposure of $189 per employee per year. On top of that come FUTA (0.6% after credit on the same $7,000 federal wage base), FICA employer share (7.65% on all wages, uncapped for Medicare), and any workers' compensation premium. Tennessee imposes no state income tax on wages, which eliminates withholding complexity and removes one line item from the employer's compliance burden entirely. Contractors appear cheaper at first, but misclassification carries material exposure under Tennessee's ABC test.
Estimate a Tennessee hire
Pre-filled with Tennessee's 2.7% new-employer SUI rate. Adjust salary, benefits, and the 1099 rate to fit your hire.
Tennessee employer tax facts
| Item | TN |
|---|---|
| New-employer SUI rate | 2.7% |
| SUI taxable wage base | $7,000 |
| Federal FICA (employer) | 7.65% |
| FUTA | 0.6% |
| State income tax on wages | None |
| Worker classification test | ABC test |
Extra employer taxes: No state income tax on wages.
Example: a $75,000 hire in Tennessee
At a $75,000 base salary with typical benefits, a W-2 employee in Tennessee costs an employer $99,269 per year — $24,269 above base pay. An equivalent 1099 contract at $75,000 would cost $24,269 less; the breakeven contract rate is $99,269.
Misclassification risk in Tennessee
Test: ABC test
ABC test; back UI taxes; no separate penalty statute.
Penalties by stateCompare nearby rates
Tennessee's 2.7% new-employer SUI rate sits near Alabama (2.7%), District of Columbia (2.7%), Florida (2.7%), Georgia (2.7%). See the full 51-state comparison or the 2026 employer payroll tax reference.
Tennessee hiring-cost FAQ
- What SUI rate does a new Tennessee employer pay, and how much does it cost per worker?
- New employers in Tennessee pay state unemployment insurance (SUI) at 2.7% on the first $7,000 of each employee's wages, for a maximum cost of $189 per worker per year. That rate holds until the employer builds enough claims history to receive an experience-rated rate from the Tennessee Department of Labor.
- Does Tennessee withhold state income tax from employee wages?
- No. Tennessee does not levy a state income tax on wages, so employers have no state income-tax withholding obligation and no corresponding employer-side state income-tax contribution. Federal withholding and FICA still apply in full.
- What happens if a Tennessee employer misclassifies a W-2 worker as an independent contractor?
- Tennessee applies the ABC test to determine worker status, and a misclassified worker triggers liability for all back unemployment insurance taxes that were not paid. The state does not have a separate penalty statute on top of that, but the unpaid UI taxes can compound over multiple years and may include interest.