Unemployment Compensation Taxes

Unemployment compensation taxes are collected by both the federal and state government, with Tennessee's portion of the tax serving as a credit against a portion of the federal taxes owed. The tax is paid solely by employers and cannot be deducted from an employee's wages.

The first $7,000 in wages paid to each employee is subject to the unemployment compensation tax. Taxable wages include tips, meals, lodging, and other payments in kind. Payments made by the employer for insurance, retirement, or annuities are not considered wages.

The rates for employers vary. For most new employers to Tennessee, the state tax rate is 2.7%. New employers in high negative reserve industry groups (construction and mining) will be assigned the industry average rate. After an employer has been liable for three full calendar years, the employer is evaluated and a tax rate based on that evaluation, called an experience rating, is assigned. The experience rating considers each employer's history of taxes paid and employees laid off. The minimum rate is 0% with a maximum rate of 10%.

Unemployment compensation taxes are paid on a calendar year basis regardless of the employer's fiscal year. New employers must file an initial report to determine their taxpaying status and to receive their Tennessee account number.

Thereafter, a wage report and contribution report must be filed quarterly.

As of January 1, 1997, all employers, or agents, who report wages on two hundred fifty or more employees must do so on magnetic media (tape or diskette). The agency also has initiated electronic reporting and payment of taxes which satisfies this requirement.