Employer's Guide to Unemployment Insurance Tax in Kentucky

If your small business has employees working in Kentucky, you must 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.

Register With the Division of Unemployment Insurance

As a Kentucky employer subject to UI tax, your small business must establish a Kentucky UI tax account with the Office of Unemployment Insurance (OUI). OUI is closely associated with another state agency, the Kentucky Career Center (KCC).

Generally, KCC is more concerned than OUI with assisting the unemployed. However, KCC does handle some employer-related matters, including producing certain employer publications.

You should register as soon as possible after you have met one of the UI tax liability requirements (see below). When you register, OUI will make an official determination of whether your business is liable. If so, they'll assign you a Kentucky employer identification number (KEIN).

How to Register for an Account With OUI

You can register for an account with OUI 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 Employer 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.

There is no fee to register your business with OUI.

Rules for UI Tax Liability

As a Kentucky for-profit employer, you're generally liable for state UI taxes if you meet any of the following conditions:

• you pay at least $1,500 in gross wages in a single calendar quarter
• you have at least one worker performing service in any part of 20 different weeks out of a calendar year (it doesn't have to be the same workers in each week and the weeks don't have to be consecutive)
• you acquire all or part of an existing business that is already liable for UI, or
• you are liable for federal UI tax under the Federal Unemployment Tax Act (FUTA).

The first three listed items are effectively the same rules that apply for liability under FUTA. So, 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. So, 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.

Wage Base and Tax Rates

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 in Kentucky each year. In 2024, it is $11,400.

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.

File Quarterly UI Tax Reports and Payments

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:

• 1st quarter reports and payments due on or before April 30
• 2nd quarter reports and payments due on or before July 31
• 3rd quarter reports and payments due on or before October 31, and
• 4th quarter reports and payments due on or before January 31.

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.

All employers are encouraged to file their reports and pay online.

How to File

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.

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 OUI inactivates your account. You will be subject to a penalty if you fail to file.

Post a Notice (Poster)

You must 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.

Do Not Misclassify Employees as Independent Contractors

Employers who use independent contractors rather than hiring employees are not subject to the UI tax. However, it's important that you don't misclassify an employee as an independent contractor.

If you misclassify an employee, you could be penalized or fined.

Using Payroll Service Companies

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 an outside payroll company makes.

Additional Information

This article touches on only the most basic elements of Kentucky UI taxes. Avoid possible penalties for making mistakes by checking the IRS, OUI, 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. Talk to a tax lawyer or employment attorney to learn more.