If your small business has employees working in Kentucky, you’ll need to pay Kentucky unemployment insurance (UI) tax. The UI tax funds unemployment compensation programs for eligible employees. In Kentucky, state UI tax is just one of several taxes that employers must pay. Other important employer taxes, not covered here, include federal UI tax, and state and federal withholding taxes.
Different states have different rules and rates for UI taxes. Here are the basic rules for Kentucky’s UI tax.
As a Kentucky employer subject to UI tax, your small business must establish a Kentucky UI tax account with the Division of Unemployment Insurance (DUI; also sometimes known as the Kentucky Career Center). You should register as soon as possible after you have met one of the UI tax liability requirements (see below). When you register, DUI will make an official determination of whether your business is liable. If so, they’ll assign you a Kentucky employer identification number (KEIN).
Note: DUI is closely associated with another state agency, the Kentucky Career Center (KCC). Broadly speaking, KCC is more concerned than DUI with assisting the unemployed. However, KCC does handle some employer-related matters including producing certain employer publications.
You can register for an account with DUI either online or on paper. To register online, use Kentucky's Electronic Workplace for Employment Services (KEWES). Click on the link for Employer Electronic Services, and then on the link for Account Registration.
To register on paper, use Form UI-1, Application for Unemployment Insurance Employer Reserve Account. Blank forms are available for download from the Employer Account Registration section of the KEWES website. If you are registering because you purchased an existing business, you must use the paper form. There is no fee to register your business with DUI.
Note: To establish your Kentucky UI tax account, you’ll need a federal employer identification number (EIN). You can apply for an EIN at IRS.gov. Generally, if you apply online, you will receive your EIN immediately.
As a Kentucky for-profit employer, you generally are liable for state UI taxes if you meet any of the following conditions:
The first three listed items are effectively the same rules that apply for liability under FUTA. Therefore, if you’re liable under FUTA, you’re likely liable for Kentucky UI taxes, and vice versa. Different rules, not covered here, apply to agricultural (farm) workers, domestic (in-home) workers, and employees of some (but not all) non-profit organizations.
One piece of good news is that state UI tax payments generally can be credited against your FUTA taxes. However, Kentucky borrowed federal funds to pay UI benefits in the wake of the Great Recession. The state is still in the process of paying back that loan. Therefore, the amount of state UI taxes that currently can be credited against FUTA taxes is lower than it otherwise would be. You can find more details on the FUTA Offset page of the KEWES website.
UI tax is paid on each employee’s wages up to a maximum annual amount. That amount, known as the taxable wage base, increases slightly every year in Kentucky. In recent years it has approached and then exceeded $10,000.
The state UI tax rate for new employers also is subject to change from one year to the next. In recent years, however, the rate has been stable at 2.7%. Established employers are subject to a lower or higher rate than new employers depending on an “experience rating.” This means, among other things, whether your business has ever had any employees who made claims for state unemployment benefits.
In Kentucky, UI tax reports and payments are due by the last day of the month following the end of each quarter. In other words:
If the due date falls on a weekend or a holiday when state offices, or the post office, are closed, the due date is moved forward to the next day that offices are open.
Large employers (10 or more employees) must file electronically. This means filing either online or by uploading an electronic file. (The file upload option is not covered here.) Small employers can file electronically or on paper.
For online filings, use the KEWES website. To file your report, click on Submit Quarterly Report. To make a payment, click on Pay by EFT/Credit Card. To file on paper, use Form UI-3, Employer Quarterly Unemployment Wage and Tax Report. DUI mails forms to all Kentucky employers with active accounts at the end of each quarter. If you file online, DUI will automatically send you a payment coupon. If you file on paper, DUI will send you a preprinted report that you should receive by the middle of the month following the end of the quarter.
Unlike other states, it is not easily possible to download blank forms from the DUI website. If you lose a form or cannot locate it, you should contact the Tax Enforcement Branch of DUI to get a replacement. It is your responsibility to file a report even if you do not receive a form from the division.
You must file quarterly reports even if you have no payroll, all wages are excess wages (beyond the taxable wage base), or no tax is due. Once you are liable for UI taxes, you must file reports every quarter unless and until you make a request and DUI inactivates your account. You will be subject to a penalty if you fail to file.
You are required to post a notice (poster) regarding state unemployment claims in a conspicuous place on the premises where you maintain payroll records. The poster provides basic information to employees on who may qualify for unemployment benefits and how to file an unemployment claim. You can download a notice that meets all legal requirements (Form UI-5, Unemployment Insurance Benefits Poster) from the Publications section of the KCC website.
Employers who use independent contractors rather than hiring employees are not subject to the UI tax. However, it’s important that you do not misclassify an employee as an independent contractor. If you do misclassify an employee, you could be subject to penalties or fines.
You may decide that it’s easiest to hand over responsibility for payroll, including UI taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on only the most basic elements of Kentucky UI taxes. Avoid possible penalties for making mistakes by checking the IRS, DUI, and KCC websites for the latest information. KCC also has a helpful publication,Unemployment Insurance: Employer Guide, that you can download from the KCC website. In addition to state UI tax, employers have other responsibilities not covered in this article such as federal UI tax, state and federal withholding taxes, and required reporting of new hires. You can get more information about other small businesstax issues in other articles here on Nolo.