Kentucky Tax and CPA Services: State, County and City Taxes

Kentucky combines a flat state income tax and a business tax on gross receipts with something many newcomers do not expect: local occupational license taxes charged by cities, counties and school districts on wages and business profits. There is no local sales tax, which keeps retail simple, but employers and the self-employed often owe tax to a city as well as the state. This page covers the main Kentucky rules for residents, remote workers, business owners and employers. We help Kentucky clients remotely from our Naperville, Illinois office.

Individual income tax

The Kentucky Department of Revenue says the tax rate is 4 percent, and that the law is based on the Internal Revenue Code in effect as of December 31, 2024. A full-year resident files Form 740, and a full-year nonresident, or someone who moves into or out of Kentucky during the year, files Form 740-NP. Kentucky taxes nonresidents on all income earned from Kentucky sources. Filers can use the state's KY File portal as an electronic version of the paper forms, in addition to commercial software and free filing options.

For employees, the Department states that the Kentucky withholding rate will be 3.5 percent for tax year 2026, so the rate is stepping down. That makes it important to confirm the rate used on the final 2026 return rather than assuming 4 percent.

Selected rules for planning:

• Pension exclusion: people retired from the federal government, the Commonwealth or a Kentucky local government with service performed before January 1, 1998 may be able to exclude more than $31,110, using Schedule P.
• Education credit: 25 percent of the federal American Opportunity Credit and Lifetime Learning Credit, applying to undergraduate studies and phasing out for higher incomes.
• Child and dependent care credit: 20 percent of the federal credit.
• Indiana reciprocity: Indiana's Department of Revenue lists Kentucky among the states whose residents file only in their home state on Indiana wages, so a Kentucky resident working in Indiana generally uses Indiana's reciprocal form.

Social Security and retirement treatment depend on the source and year, so confirm in the Department's current instructions. Our multi-state tax service can review a split-state situation.

Business taxes

For tax years beginning on or after January 1, 2018, Kentucky replaced its corporate brackets with a flat 5 percent rate on taxable net income, which applies to the corporation income tax. Corporations also face the limited liability entity tax (LLET), which applies to corporations, LLCs, partnerships and S corporations. A business that does not qualify for the small-business exemption and has gross receipts or gross profits above $6 million multiplies Kentucky gross receipts by 0.095 percent and Kentucky gross profits by 0.75 percent to figure the tax. Estimated payments are due in four 25 percent installments on April 15, June 15, September 15 and December 15. Combined group filing requires 50 percent voting stock ownership, and the state adopts the federal 80 percent limit on net operating losses generated after January 1, 2018.

Pass-through entities can elect to have tax imposed at the entity level (PTET), with the owner receiving a refundable credit. Kentucky uses Form 740-PTET and Form NRWH, and the Department notes that business tax credits are not claimed on those forms but passed through to the owners. Entity-level tax is a common federal SALT planning move; see SALT deduction and property taxes and LLC tax classification.

Sales and use tax

Kentucky's sales and use tax is 6 percent of gross receipts or purchase price, and the Department states that there are no local sales and use taxes in Kentucky. That makes the rate the same in Louisville, Lexington and rural counties, although exemptions and what counts as a taxable service still require attention. See our sales tax service.

Payroll in Kentucky

• Withholding: Kentucky requires employers to withhold income tax for both resident and nonresident employees unless exempted by law. All employer filing frequencies must file and pay electronically through the MyTaxes portal, using Form K-5 unless wages are submitted as an EFW2 or Publication 1220 file. W-2, W-2G and 1099 statements are due to the Department by January 31.
• Unemployment insurance: run by the Education and Labor Cabinet, which publishes the taxable wage base and rate notices annually. See state unemployment insurance.
• Local occupational taxes: see the next section, because these often require separate city registration and filing.

For general rules see state income tax withholding.

Cities, counties and occupational license taxes

Kentucky cities, counties and school districts are allowed to levy occupational license taxes, and employers typically withhold the tax from employees' pay and file with the local government. As an example, the Lexington-Fayette Urban County Government assesses a 2.25 percent occupational license fee on individual compensation and net profits, and businesses submit the fees and taxes to its Revenue Division, which launched online payment options for net profit payers in 2025. Louisville Metro and other jurisdictions have their own license taxes, rates and forms, so an employer with staff in more than one jurisdiction must check each one. A self-employed person may owe local tax on net profits even without employees. See local payroll taxes by city and county.

Property tax is administered locally; the Department of Revenue directs taxpayers to their local officials. For neighbors, see Indiana and Illinois.

How we can help

We prepare Kentucky resident, part-year and nonresident returns, review LLET exposure for growing businesses, advise on the PTET election, and register employers for state and local withholding. If you receive a notice from the Kentucky Department of Revenue or a local revenue office, see state tax notices and representation. Contact us to begin; this page is general information.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.