Tennessee LLC Taxes

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

A Tennessee LLC can also elect to be taxed as an S-corp or C-corp. Here’s what those tax statuses mean for your LLC:

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.

Learn how to apply for C-corp status as an LLC.

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 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.

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.

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.

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.

Industry Taxes 

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

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.