Kentucky payroll taxes: Your 2026 guide to staying compliant

Kentucky's economy is a dynamic blend, known for its strong manufacturing base, particularly in automotive and aerospace, as well as significant contributions from agriculture, healthcare, and tourism. The state's strategic location, robust logistics infrastructure, and skilled workforce make it an attractive place for businesses. In 2024, Kentucky set an all-time record for products shipped globally, with $47.7 billion in exports, an 18.7% increase over the previous year, highlighting its growing economic reach. As businesses thrive in the Bluegrass State, understanding payroll taxes becomes crucial for sustained success and compliance. These taxes are an integral part of operating any business with employees, ensuring that funds are collected for various state and federal programs.

This guide will walk you through the complexities of payroll taxes in Kentucky, from federal obligations to state-specific requirements, helping you navigate your responsibilities.

Jump to:

• What are payroll taxes?
• Understanding Kentucky state payroll taxes
• Other important tax considerations
• Employer responsibilities for payroll taxes in Kentucky
• Filing payroll tax returns in Kentucky
• Common payroll tax mistakes in Kentucky (and how to avoid them)
• How to manage your small business payroll obligations
• Leverage payroll software for compliance in Kentucky

What are payroll taxes?

Payroll taxes are taxes based on wages, salaries, or other compensation that both employers and employees must pay. While income taxes are also withheld through payroll, payroll taxes specifically fund programs like Social Security, Medicare, and unemployment insurance.

Understanding Kentucky state payroll taxes

When starting a business in Kentucky, you need to understand both federal and state payroll taxes to ensure your business remains compliant.

Federal payroll taxes

Payroll taxes are mandatory and encompass both federal and state requirements.

Federal payroll taxes include:

• Federal income tax: This is withheld from each employee's paycheck based on their W-4 form and the current IRS tax brackets. You'll be responsible for calculating the correct amount, withholding it, and then sending it to the IRS.
• Social Security and Medicare taxes: Both of these taxes have a portion paid by the employee and a matching portion paid by you, the employer. For Social Security, the combined rate is 12.4% on the first $176,100 of wages in 2025. For Medicare, it's 2.9% on all wages, with an extra 0.9% for higher earners. You'll withhold the employee's portion and match it.
• Federal Unemployment Tax (FUTA): This is paid solely by you at a rate of 6% on the first $7,000 of each employee's wages. However, most employers get a 5.4% credit, reducing the rate to 0.6%. The graphic below lists some best practices for managing your FUTA obligations.

Kentucky state payroll taxes

In addition to federal payroll taxes, Kentucky employers must also account for state-specific payroll taxes. These primarily include:

• State Income Tax: Kentucky has a flat individual income tax rate. For 2025, the rate is 4.0% of taxable income. Legislation is in place to further reduce this to 3.5% effective January 1, 2026. This tax is withheld from employee wages. For a deeper understanding of the difference between payroll tax and income tax, explore this resource.
• State Unemployment Insurance (SUI): Employers in Kentucky are responsible for paying SUI taxes, which fund unemployment benefits for eligible workers. For 2025, the taxable wage base for SUI is $11,700 per worker. New employers (non-construction) typically pay a flat rate of 2.7%. Established employers' rates vary based on their experience rating, ranging from 0.3% to 9.0%. A Surcharge for Unemployment Insurance Fund (SCUF) assessment also continues in 2025. You can find updated information on the Kentucky Office of Unemployment Insurance website.
• Paid Family and Medical Leave (PFML): A new wage and payroll tax on employees and employers took effect in Kentucky in January 2025 to fund Paid Family and Medical Leave (PFML) benefits for employees, which begin in May 2026. Specific rates and detailed regulations are still being finalized, but employers should be aware of this upcoming obligation.

Kentucky local payroll taxes

When operating a business in Kentucky, it's crucial to consider potential local payroll taxes in addition to state and federal obligations. Many cities and counties in Kentucky levy occupational license taxes, also known as local payroll taxes or "gross receipts licenses," on wages earned by employees working within their jurisdictions, as well as on net profits of businesses.

1. Check with your local government to learn more about rates and specific regulations, because these local taxes vary significantly from one city or county to another. It is essential for businesses to contact the local government where their employees work or where their business operates to understand their specific obligations. The Kentucky Secretary of State's website may provide a list of tax districts, but direct contact with the city or county revenue or tax office is recommended.
2. Consult a tax professional to help you navigate the complexity and variation of local payroll taxes across Kentucky. It's highly recommended to consult with an accountant specializing in Kentucky payroll taxes to ensure full compliance. They can help identify all applicable local taxes for your business locations and advise on proper calculation, withholding, and remittance.

Other important tax considerations

Multiple locations

If your business has employees working in multiple cities or counties, you may be subject to different local payroll taxes for each location.

Changing rates

Local payroll tax rates can change over time, so it's important to stay informed about any updates that may affect your business.

Employer responsibilities for payroll taxes in Kentucky

As a Kentucky employer, you're responsible for managing a complex array of federal and state payroll taxes, which involves careful calculation, timely withholding, and accurate reporting to various government agencies. Here’s an overview of what you should know. 

Registering for payroll taxes

To legally operate and pay employees in Kentucky, you must register your business with the appropriate state agencies. This process generally involves:

• Establishing your business entity: If you are forming a sole proprietorship or general partnership, contact your County Clerk. For all other business structures (e.g., LLC, Corporation), you must register with the Kentucky Secretary of State.
• Obtaining a Federal Employer Identification Number (EIN): Even if not federally required, the IRS encourages all businesses to obtain an EIN, which is essential for federal tax purposes and often required for state registrations. You can apply for an EIN online through the IRS website.
• Registering With the Kentucky Department of Revenue: You will need to register for a Kentucky withholding tax account, which can be done online through the MyTaxes.ky.gov portal. This is necessary for remitting state income tax withheld from employee wages.
• Registering With the Kentucky Office of Unemployment Insurance: Employers must register for a State Unemployment Insurance (SUI) account to pay unemployment taxes. This can be done through the Kentucky Employer's Self-Service (KEWES) website.
• Registering With the Kentucky Office of Unemployment Insurance: If your business operates in a locality that imposes occupational license taxes, you will also need to register with the relevant city or county government.

Calculating payroll taxes

Once registered, accurately calculating payroll taxes is a critical ongoing responsibility.

• Check government websites: Kentucky provides resources to help employers determine the correct amounts for state payroll taxes. The Kentucky Department of Revenue offers withholding tax tables and formulas on its website to assist with calculating state income tax. Similarly, the Kentucky Office of Unemployment Insurance provides information on SUI rates and the taxable wage base.
• Payroll software: Some small business software payroll programs have built-in Kentucky tax tables that automate calculations, saving you time and minimizing the chance for errors.
• Professional services: If you prefer to outsource payroll, a professional payroll service can handle everything for you.

Whichever method you choose, make sure you stay updated on the current tax rates and wage limits, as these can change every year.

Withholding state payroll taxes

Once you've calculated the correct amounts, you'll need to withhold these taxes from your employees’ wages and remit them to the appropriate authorities. Follow Kentucky’s guidelines for withholding and remittance timelines to avoid penalties.

Kentucky Income Tax: Employers are required to withhold Kentucky individual income tax from their employees' wages. The amount to withhold is based on the employee's Form K-4, "Kentucky Withholding Certificate," and the applicable tax tables or calculation methods provided by the Kentucky Department of Revenue.

• Example: If an employee earns $2,000 bi-weekly and claims no allowances on their K-4, you would use the state's withholding tables or formulas to determine the appropriate amount of Kentucky income tax to withhold. For 2025, with a flat rate of 4.0%, you would generally withhold 4.0% of their taxable wages, or $80, though other factors and specific tables would be used for precise calculation.

Kentucky Paid Family and Medical Leave (PFML): While specific withholding details are still being finalized, employers will likely be responsible for withholding the employee portion of the PFML tax once it fully takes effect in 2025. This will involve deducting a percentage of wages as stipulated by law.

• Example: If the PFML rate for employees is set at 0.5% and an employee earns $1,000, you would withhold $5 for PFML.

By applying these calculations to each paycheck, you ensure accurate withholdings and compliance with state requirements.

Remitting state payroll taxes

Businesses in Kentucky are required to remit payroll taxes to the state on a regular schedule, typically monthly or quarterly, depending on the total amount of tax withheld. These payments are generally made electronically through the MyTaxes.ky.gov portal.

Filing payroll tax returns in Kentucky

In Kentucky, employers must comply with quarterly and annual payroll tax return requirements to meet state and federal obligations. Here's a breakdown of 2025 requirements:

Quarterly requirements