If your small business has employees working in Kentucky, you’ll need to withhold and pay Kentucky income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on Kentucky state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you’ll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you’ll need one first and foremost for federal taxes. In addition, some states use the federal EIN for state withholding tax purposes. Other states (like Kentucky) issue separate state tax ID numbers. You’ll need an EIN to register with the state (see below). You can apply for an EIN at IRS.gov. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish a Kentucky withholding tax account with the Kentucky Department of Revenue (DOR). You set up your account by registering your business with the DOR either online or on paper. To register online, go to Kentucky’s One Stop Business Portal. If you register online, you should receive an account number within 48 hours. To register on paper, use Form 10A100, Kentucky Tax Registration Application. You can download blank forms including instructions from the Register a Business section of the DOR website. You can submit the completed form by regular mail or fax. If you register on paper, your account number should be assigned in 5-10 busines days. There is no fee to register your business with the DOR.
All new employees for your business must complete a federal Form W-4 and the related Kentucky Form K-4,Employee's Withholding Exemption Certificate. If an employee does not properly complete the K-4, you must withhold the tax as if no exemptions were claimed. You can download blank Form K-4s from the withholding tax forms section of the DOR website. You should keep the completed forms on file at your business and update them as necessary.
In Kentucky, there are four primary payment schedules for withholding taxes: twice-monthly, monthly, quarterly, or annually. There is also a next-banking-day payment schedule—not covered here—that only applies when there is very high withholding. Your payment schedule will depend on the average amount you withhold from employee wages over time. The more you withhold, the more frequently you’ll need to make withholding tax payments.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, may change over time, so you should check with the DOR at least once a year for the latest information.
Here are the due dates for the various payment schedules:
For the final quarter (October – December), payment is due January 31.
If a payment is due on a weekend or legal holiday, the due date is extended to the next business day.
All withholding tax payments must be submitted with a withholding tax return. For all payment schedules, the withholding tax return used for all payments—except the final payment of the year—is Form K-1, Kentucky Employer’s Return of Income Tax Withheld. For the final payment of the year only, use Form K-3, Kentucky Employer’s Return of Income Tax Withheld (often known as the annual reconciliation). The DOR will send you preprinted forms at the end of each reporting period. The forms contain personalized information and are not available in blank form. Unlike other states, you cannot download blank copies from the DOR website. If you misplace or do not receive forms, you must request new ones from the DOR.
You can file withholding tax payments and returns online or on paper. Employers with high amounts of withholding must pay using electronic funds transfer (EFT). The DOR will notify you if you reach this threshold. When paying by EFT, use Form K-1E instead of K-1. Other businesses may voluntarily pay by EFT. To pay by EFT you must register with the DOR’s EFT group.
To file online, use the DOR’s Withholding Return and Payment System (WRAPS). Check the DOR’s homepage for a link to WRAPS. To file on paper, attach your payment check to the correct Form K-1 and mail to the DOR by the due date.
For the final payment of each year, twice-monthly, monthly, quarterly, and annual payers all must use Form K-3 instead of K-1. It is due by January 31. See below for more information.
You must file a return for each reporting/payment period even if no Kentucky income tax was withheld.
The DOR provides several different methods for calculating how much tax to withhold. For more information, check Form 42A003, Withholding Kentucky Income Tax: Instructions for Employers. The publication is updated every year. You can download a copy from the withholding tax forms section of the DOR website
After the end of the year, you must file an annual reconciliation with the DOR that summarizes the employee taxes you’ve withheld during the year. The annual reconciliation is in addition to providing each of your employees with a federal Form W-2 and Kentucky Form K-2, Wage and Tax Statement, summarizing the employee’s withholding for the year. As mentioned above, instead of the Form K-1 used for all other payments, employers on all payment schedules will file an annual reconciliation as their final withholding tax return for the year. For annual payers, who make only one, annual payment, the annual reconciliation is the form they’ll use for making that payment. Use Form K-3, Kentucky Employer’s Return of Income Tax Withheld (name is the same as for Form K-1). As mentioned above, Form K-3 is always due by January 31.
In addition, you must transmit to the DOR copies of the federal W-2s and Kentucky K-2s sent to all of your employees working in Kentucky. The DOR provides a six-part packet of wage and tax statements, which contains the federal Form W-2 and Kentucky Form K-2, for reporting income tax withheld to DOR and the IRS. Employers may order the official form or use an approved commercially printed form. Transmit your W-2s and K-2s using Form 42A806, Transmitter Report. Larger employers (with many K-2s) must file using magnetic media (such as CDs) or the DOR’s web filing system. Copies of W-2s and K-2s are due by January 31. As with payments, if the due date falls on a weekend or legal holiday, it is extended to the next business day
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it’s easiest to hand over responsibility for payroll, including withholding 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 employee withholding taxes. Avoid possible penalties for making mistakes by checking both the IRS and DOR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.com.