Kentucky Withholding laws & HR compliance analysis

Kentucky Withholding: What you need to know

Kentucky employers obligated to withhold federal income taxes must withhold Kentucky income taxes from all wages paid to residents (whether working in or out of Kentucky) who are regularly employed in the employer's usual course of business. Wages of nonresidents are also subject to withholding to the extent that the wages are for personal services rendered in Kentucky by a regular employee in the employer's usual course of business. Wages subject to federal withholding are generally subject to Kentucky withholding. Taxes must be withheld each payroll period based on tables or a computer formula provided by the Department of Revenue (DOR).
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Reciprocal tax agreements. Under reciprocal tax agreements, salaries or wages earned in Kentucky are exempt from Kentucky withholding tax if the employee:
• Is a resident of Illinois, Indiana, Michigan, West Virginia, or Wisconsin;
• Resides in Virginia and commutes daily to a place of employment in Kentucky; or
• Resides in Ohio and is not a shareholder-employee owning 20 percent or more of an S corporation.
A completed Form K-4 must be on file for each such employee.
Employee forms. Since 2018, Kentucky wage earners have been taxed at a flat 5 percent rate, with a standard deduction allowance annually adjusted by the DOR. Form K-4 is only required to document that an employee has requested an exemption from withholding or to document that an employee has requested additional withholding in excess of the amounts calculated using the formula or tables. If neither situation applies, then an employer is not required to maintain Form K-4.
Cost of dependent health care. Kentucky has conformed its income tax law with the federal law so that the cost of healthcare coverage for ...

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