Tennessee Has No Personal Income Tax — What It Means for LLCs

Tennessee has zero personal income tax. No tax on wages, no tax on LLC pass-through income, no tax on investment income (Hall Tax fully repealed 2021). For LLC owners, this means pass-through distributions to members are not taxed at the individual level by Tennessee. For the full tax guide. For formation, see how to form a Tennessee LLC.

What Tennessee Does NOT Tax (Individuals)

• Wages and salary: $0 state tax
• LLC/business pass-through income: $0 state tax
• Dividends: $0 (Hall Tax repealed 2021)
• Interest income: $0 (Hall Tax repealed 2021)
• Capital gains: $0
• Rental income: $0 at individual level (but F&E applies at LLC level)

The Trade-Off

Tennessee compensates for zero income tax through:

• Franchise & excise tax on entities ($300 minimum)
• Higher sales tax (7% state + up to 2.75% local = up to 9.75%)
• Higher formation fees ($300 per member)
• Annual Report fee ($300)

Who Benefits Most

Tennessee LLC's zero income tax favors:

• High-income individuals (no progressive brackets eating into high earnings)
• LLC owners with significant W-2 income (untouched by the F&E tax)
• Investors with dividend/capital gains income
• Multi-income-source households

It may NOT favor:

• Low-income LLCs
• LLCs with high net worth/property (franchise tax escalates)
• Businesses that would have near-zero income tax in other states anyway

Compared to Other No-Income-Tax States

State	Income Tax	Entity Fee/Tax	LLC Formation	Annual Maintenance
Tennessee	0%	F&E: $100+ min	$300/member	$400+ min
Florida	0%	None	$125	$138.75
Wyoming	0%	None	$100	$60
Texas	0%	Margins tax (variable)	$300	$0
Nevada	0%	$200 business license	$75	$350+

Tennessee's zero income tax comes with the highest entity-level minimum ($600/year) among no-income-tax states.

FAQ

Is Tennessee really a zero income tax state?

Yes, for individuals. No tax on any form of personal income. The entity-level F&E tax is the only "income-like" tax, and it applies to the LLC, not to members personally.

Did Tennessee recently eliminate its income tax?

The Hall Tax (which taxed interest and dividends over $1,250/$2,500) was phased out 2016-2020 and fully repealed January 1, 2021. Tennessee never had a general income tax on wages or business income.

Does zero income tax help if I also live in Tennessee?

Enormously. Your W-2 income, investment income, and LLC distributions are all untaxed at the state level. Only the LLC itself pays the F&E tax. Your total state tax burden is potentially much lower than in income-tax states.