Taxes & Insurance

Understanding What Needs to be Paid:
When, Where, How and Why

Your business plan is in place. You've decided on your business' legal form of existence. Now you need to get down to the nuts and bolts: taxes and unemployment insurance premiums.

When you start or expand a business in Tennessee, it is important for you to understand the taxes you are liable for with your particular business.

Chapter Three provides a basic understanding of what local, state and federal taxes need to be paid: when, where, how and why. This information is provided to assist you in estimating tax payments to include in cash flow projections of the business plan. (It does not include such taxes as local property taxes, special excise taxes, or taxes due on the sale of arms or ammunition. Those taxes can normally be identified by regulating entities. See Chapter Four for details.)

Local Tax

Business Tax - Business License
The Tennessee General Assembly authorizes counties and municipalities to levy a privilege tax, that is, a tax for the privilege of operating a business in their jurisdictions. All counties with the exception of Clay, Morgan and Macon levy the tax. Incorporated cities can also impose the tax.

This tax is based on a percentage of sales or gross receipts in succeeding years. If your company operates in several different cities or counties, you would be liable to each city or county based on sales or receipts accumulated in each location.

If you are a vendor operating on a temporary basis, such as a booth operator at flea markets, gun shows and the like, you can purchase annual or daily licenses. Contact the Tennessee Department of Revenue regional offices for further information and a copy of its booklet, Business Tax Act.
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General Liability. All businesses (sole proprietorships, partnerships and corporations) generally are subject to this tax. Exempt businesses include manufacturers, businesses with less than $3,000 in annual sales and professionals such as doctors and lawyers. You should contact one of the help lines listed at the end of this chapter if you have questions regarding your tax liability.

Tax Rate. A minimum tax of $15 and a recording fee is due. Variable amounts are based on gross sales and company classification. Tax rates range from 1/10 of 1% for small retail stores to 3/80 of 1% for food wholesalers.

Due Dates. Local taxes are due within 20 days of opening a business, and annually thereafter based on assigned classification.

How to Pay. Taxes are paid to your county clerk and designated city clerk where applicable.

Forms. There is a county and/or city form that must accompany your payment.

State Tax
State Tax Forms

Excise Tax
The excise tax is based upon the net earnings of taxable entities conducted within Tennessee.

General Liability. Most businesses (except general partnerships, sole proprietorships and those businesses exempt in T.C.A. 67-4-2008) organized for profit and doing business in Tennessee are subject to the state's excise tax. Out-of-state companies doing business in Tennessee are liable even if they are not domiciled in Tennessee, but they may apportion their tax base. If you have a question concerning whether or not your business is exempt from this tax, please contact the Tennessee Department of Revenue.

Tax Rate. The tax rate is 6.5%.

Due Dates. The tax is due annually. Estimated taxes are due the 15th day of the fourth, sixth and ninth months of the firm's fiscal year, and the first month of succeeding year.

How to Pay. Taxes are paid to the Tennessee Department of Revenue.

Forms To Be Filed:

Franchise Tax

This tax is based upon the higher of 2 bases on either net worth, or book value of real and tangible property owned or used in the state plus rental values.

General Liability. Most businesses (except general partnerships, sole proprietorships and those businesses exempt in T.C.A. 67-4-2008) organized for profit and doing business in Tennessee are subject to the state's franchise tax. Out-of-state companies doing business in Tennessee are liable even if they are not domiciled in Tennessee, but they may apportion their tax base. If you have a question concerning whether or not your business is exempt from this tax, please contact the Tennessee Department of Revenue.
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Tax Rate. The tax rate is 25 cents per $100 of taxpayer's value.

Due Dates. The tax is due the fifteenth day of the fourth month of the taxpayer's fiscal closing date. (The franchise tax should be filed with your annual excise tax return.)

How to Pay. Taxes are paid to the Tennessee Department of Revenue.

Forms To Be Filed. Franchise and Excise Tax Return.

Sales and Use Tax and Resale Certificates

The sales and use tax is a consumer-oriented tax imposed on the manufacture, distribution or retail sale of tangible personal property within the state. It also is imposed on many forms of services.

General Liability. Any business that sells, leases or rents tangible personal property or services (unless it is a business that is specifically exempt) is liable.

Tax Rate. Retail sales are taxed at the 7% state rate, plus a 1 to 2.75% local tax rate.

Due Dates. The tax is due the 20th of each month for the preceding month.

How to Pay. Taxes are paid to the Tennessee Department of Revenue.

Forms To Be Filed:

Note: Resalers of merchandise are not required to pay sales tax to suppliers for goods purchased. Resalers can furnish suppliers a "Certificate of Resale" with their Taxpayer Account Number (the account number assigned by the Tennessee Department of Revenue when firms open a sales tax account) relieving them of this additional cost. Certificates are obtained from the state Department of Revenue.

Agricultural Exemptions. There are numerous exemptions afforded the farmer and nurseryman in Tennessee. Farmers have their own exemption certificates. See the contact list at the end of this chapter for more information.

Manufacturers. A qualified manufacturer enjoys substantial benefits in the manufacturing operation. Many types of industrial machinery, pollution control equipment, energy fuel and water companies enjoy various tax benefits. See the contact list at the end of this chapter for more information.

Some other taxes you might be liable for include:

Tax	Business
Alcoholic Beverage Tax	Liquor Wholesalers
Beer Tax	Beer Wholesalers
Coin Operated Amusement Devices Tax	Video/Pin Ball Operators
Gasoline Tax	Gas Distributors/Dealers
Highway User Fuel Tax	Freight Companies
Income Tax	Dividend/Interest Income
Mixed Drink Tax	Servers of Alcoholic Beverages Consumed on Premises

All taxes listed previously in this chapter constitute most of the taxes common to businesses. However, your business may be liable for other taxes ranging from mortgage registration taxes to auto license taxes. Additionally, the Tennessee General Assembly considers exemptions and adjusts rates in virtually every session. As a business owner, you are encouraged to contact the Tennessee Department of Revenue for the most current information. See the contact list at the end of this chapter for more information.

Unemployment Insurance

Unemployment insurance provides benefits to unemployed workers who have lost their jobs through no fault of their own. The Tennessee Department of Employment Security administers the Unemployment Insurance Program in Tennessee. All state premiums go into the Tennessee Unemployment Trust Fund.

General Liability. All employers doing business in Tennessee are subject to the provisions of the Tennessee Employment Security Law and Regulations. You, as an employer, are liable for premiums if you meet one of the following conditions:

There are additional qualifications under the statutes covering governmental employers and certain nonprofit, agricultural and domestic enterprises.

Definition of employee: An officer of a corporation; any individual who, under the usual common law rules applicable in determining the employer/ employee relationship, has the status of an employee, agent drivers or commission drivers who receive remuneration from their employers, sales staff, and employees on whose earnings employers are required to pay Federal Unemployment Tax (FUTA).

There are other qualifications, as well as exclusions, for such employees as certain commission-only sales staff and certain employees at nonprofit institutions. Contact the department for further clarification.

Who is NOT Liable: if you are self-employed, and also the sole employee; a sole proprietorship without employees; general partners without employees; or general partners in a limited liability company without employees.

Premium Rate. The premium rate currently is based on the first $7,000 paid per employee during a calendar year. Premium rates are calculated every calendar year with notices of premium rates sent every August. Premium rates range from 0% to 10% of the first $7,000 paid to each employee during a calendar year. Premium rates become effective July 1. Rates can change again on January 1 if there has been a significant change in the Unemployment Insurance Trust Fund balance. New employers are assessed rates based on a standard new employer rate schedule categorized by industry. Most new employers will have a rate of 2.7%.

Note: Premium rates other than the new employer rate are based on the cumulative premiums paid by the employer and the cumulative benefits drawn by the employer's laid-off or separated employees. Employment practices are a key factor in premium rates of businesses.

Due Dates. Most employers pay their unemployment insurance premium in two parts: one to the state and one to the federal government. Premium payments are due on a quarterly basis, along with your Wage and Premium Report.

How to Pay.

Forms. Wage and Premium Reports. These are due on a quarterly basis and contain the name and Social Security Number of each employee and wages paid. Premium payments are due with the report on a quarterly basis.

Employment Security publishes a booklet, Handbook for Employers, which provides more details in this important area. See the contact list at the end of this chapter for more information.

Petroleum Storage Tank Fee

If your company owns a petroleum storage tank, you must pay this annual tax.

General Liability. All owners of petroleum storage tanks.

Tax Rate. $125 per tank per year.

Due Dates. The tax is due annually.

How to Pay. The tax is due upon registration of your storage tank with the Tennessee Department of Environment and Conservation, Division of Underground Storage Tanks.

Federal Tax

The U.S. Treasury collects taxes through the Internal Revenue Service to fund the operations of the federal government. The legal form of your organization determines what taxes are due and payable. There are four general kinds of business taxes:

Income Tax

Every business must file an annual income tax return. Which form you use depends on how you are organized.

Business	Income Tax Form
Sole Proprietorship	Schedule C, Form 1040
Farming	Schedule F, Form 1040
Partnership	Form 1065 (Information Return)
Corporation	Form 1120 or 1120-A
S Corporation	Form 1120S

Corporations. Corporations must have taxpayer identification numbers so the Internal Revenue Service can process your returns. This is called an Employer Identification Number (EIN), Form SS-4. If your company requires an EIN, you can acquire Form SS-4 from the IRS or from the Social Security Administration. After completing Form SS-4, you may forward it to the IRS or call the Memphis Regional Office at 901-365-5970 for immediate response. (Callers must have the completed form SS-4 when they use this service.)

Sole Proprietorships, Partners and S Corporations. Generally, sole proprietors, partners and shareholders of S Corporations pay tax on income by making regular payments of estimated tax during the year using IRS Form 1040-ES, Estimated Tax for Individuals.

If you are a sole proprietor you can use your Social Security number unless:

Self-Employment Tax

Self-employment tax is the Social Security and Medicare tax for individuals who work for themselves, including sole proprietors, self-employed farmers and fishermen and members of a partnership. See Publication 533, Schedule SE.

Employment Tax

Businesses having employees are liable for employment taxes. These include:

Federal Income, Social Security and Medicare Taxes. To pay these taxes, you withhold federal income tax from your employees' wages. For Social Security and Medicare taxes, you pay a matching amount using Form 941, Employer's Quarterly Federal Tax Return. (You report and pay Social Security and Medicare taxes and withheld income tax together.) You can use IRS Publication 15 to calculate the amount of taxes to be withheld and paid to the IRS.

Federal Unemployment (FUTA) Tax. You must report and pay FUTA tax separately from Social Security and Medicare taxes and withheld income tax. You pay FUTA only from your own funds. Your employees do not pay this tax or have it withheld from their pay. The tax is due quarterly using IRS Form 8109, Federal Tax Deposit Coupon. The net FUTA rate is 0.8% (after the 5.4% offset credit you receive if you have paid your state unemployment taxes in full and on time). The FUTA tax is paid on the first $7,000 in wages paid to each employee during a calendar year. You can make payments with the preprinted IRS Form 8109 through your commercial bank.

Annually, your business is required to file Form 940 with the IRS. If you have accurately computed and made your payments during the past year, you should pay no more than $100 with this filing.

Excise Tax

If your company manufactures or sells certain products, you may have to pay excise taxes. Companies producing, selling or importing guns, tobacco or alcohol products or manufacturing equipment for their production may be liable for one or more excise taxes. (See Publication 510). There are also excise taxes on certain kinds of businesses, certain transactions, and the use of various kinds of equipment, facilities and products. (See Publication 510 and Form 720).

Depositing Taxes

In some cases, you may have to deposit the taxes you owe before filing a return. Mail or deliver deposits with completed deposit coupons to an authorized financial institution (generally a commercial bank) or a Federal Reserve Bank serving your area. Form 8109, Federal Tax Deposit Coupon Book, contains coupons for depositing taxes.

General Information

Publications and Forms

As an entrepreneur and/or business owner, you should request a packet with the appropriate publications and forms from the following list:

Circular E,
Employer's Tax Guide:

Publication 334, Tax Guide for Small Business
Publication 463, Travel, Entertainment, and Gift Expenses
Publication 505, Tax Withholding and Estimated Tax
Publication 509, General Tax Calendar
Publication 533, Self-Employment Tax
Publication 535, Business Expenses
Publication 538, Accounting Periods and Methods
Publication 541, Tax Information on Partnerships
Publication 542, Tax Information on Corporations
Publication 560, Retirement Plans for the Self-Employed
Publication 583, Taxpayers Starting a Business
Publication 587, Business Use of Your Home
Publication 589, Tax Information on S Corporations
Publication 590, Individual Retirement Account (IRA)
Publication 917, Business Use of a Car
Publication 937, Employment Taxes and Information Returns
Publication 946, How to Begin Depreciating Your Property
Publication 1544, Reporting Cash Payments of Over $10,000

Form W-2
Wage and Tax Statement

Form W-3
Tax Reconciliation

Form W-4
Employee Withholding

Form SS-4
Application for Employer Identification Number

Form 940
(with instructions) Employer Annual Federal Unemployment Tax Return

Form 941
Employer's Quarterly Federal Tax Return

Form 1040
U.S. Individual Income Tax Return
Schedule C, Profit or Loss from Business
Schedule C-EZ, Net Profit from Business
Schedule SE, Self-Employment Tax

Form 1040-ES
Estimated Tax for Individuals

Form 1065
U.S. Partnership Return of Income Schedule K-1, Partner's Share of Income, Credits, Deductions, Etc.

Form 1120
U.S. Corporation Income Tax Return

Form 1120S
U.S. Income Tax Return for an S Corporation Schedule K-1,
Shareholder's Share of Income, Credits, Deductions, Etc.

Form 4562
Depreciation and Amortization

Form 8300
Report of Cash Payments over $10,000 Received in a Trade or Business.

Tax Liability Summary Chart

Form of Organization	Liable for
Sole Proprietor	County / Municipal Business License Federal Income Tax (Personal)    Estimated Tax Self-employment Tax Employment Taxes    State Unemployment Insurance    Social Security, Medicare    Income Tax Withholding
Partnership	County/Municipal Business License Annual Return of Income (Information) Employment Tax
Partners in a Partnership	Federal Income Tax (Personal)    Estimated Tax Self-Employment Tax
Corporations & S Corporations	County/Municipal Business License (If not exempt)    Franchise and Excise Tax Income Tax (Corporate)    Estimated Tax Employment Taxes    State Unemployment Insurance    Social Security, Medicare    Income Tax Withholding
S Corporation Shareholders	Hall Income Tax (Tennessee Department of Revenue) Income Tax (Personal)    Estimated Tax

Note: This tax chart identifies taxes common to virtually all businesses. Tennessee levies taxes on micellaneous business operations. The federal government levies taxes on some types of operations in the areas of firearms and tobacco products. You are urged to contact both the Tennessee Department of Revenue and the Internal Revenue Service to determine your actual tax liabilities.

This chart does not cover fees and special tax stamps on such things as ammunition and firearms. Specific industries such as energy, entertainment and hazardous waste handling may be liable for special fees, taxes or royalties.

Limited Liability Companies are not covered in the above chart. While they are generally treated as sole proprietorships for state taxes, their possible ownership structures (members can be individuals or corporations) require customized treatment regarding tax liabilities, especially on distributed income.

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