Kentucky local occupational license taxes

Layers: city, county, school district

Kentucky does not have one local income tax. It has many, stacked by place. An employee working in one spot can owe a city tax, a county tax and a school district tax at the same time, each with its own rate. Some jurisdictions cap the wages they tax; we did not verify which ones. And the general rule that you withhold for the place where the work is performed is a pattern, not a statewide statute we read, so confirm it with each jurisdiction.

For budgeting, treat Kentucky as a state where every new work location needs its own lookup, the same way you would handle Ohio city income taxes across the river.

The rates and rules

Lexington-Fayette: 2.25%

LFUCG's Division of Revenue charges an occupational license fee of 2.25% on compensation and on business net profits. The page we read does not describe employer withholding mechanics or a filing schedule. It also does not cover the Fayette County school board's occupational tax or any wage cap, so ask the Division of Revenue about both when you register.

Louisville Metro: what we could confirm

• Who withholds: employers with employees, including paid family members, must withhold and remit the tax on wages.
• Quarterly: the W-1 withholding return.
• Annual: the OL-3, for anyone with compensation that was not withheld or with business activity.
• Nonresident sole proprietors: file if they work four or more days, or have $3,000 or more in gross receipts, in Louisville.

The Louisville rate is made of Metro, TARC (transit) and school board components, and the split differs for residents and nonresidents. Those figures were not on the pages we read on October 16, 2026. Get them from the Louisville Metro Revenue Commission.

A $60,000 employee in Lexington

• Lexington-Fayette occupational license fee: $60,000 x 2.25% = $1,350.00
• Kentucky state income tax (flat 3.5%, $3,360 standard deduction): ($60,000 minus $3,360) x 3.5% = $1,982.40
• Total state and local withholding: $3,332.40, before any school board tax

On the employer side, Kentucky's new employer unemployment rate is 2.70% on $12,000 of wages, $324.00 a year. The rest of your costs are on the Kentucky payroll tax page, and the employee cost calculator adds them up.

Mistakes with Kentucky local taxes

• Using the home address. These are mostly work-location taxes. An employee who lives in Lexington and works in Louisville is usually a Louisville question; confirm with both.
• Stopping at the city. County and school district taxes can apply on top.
• Ignoring caps. Where a jurisdiction caps the wage base, you stop withholding at the cap; keep track per employee.
• Remote staff. An employee who works from home in a different county may shift the tax to that county. Ask each jurisdiction how it treats home offices.

Payroll software in Kentucky

The provider has to know every jurisdiction your staff work in, and file with each. OnPay's pricing page says local tax filings are included at $49 a month plus $6 per worker; SurePayroll lists local tax areas as an unpriced extra (both checked October 16, 2026). Ask any provider for its list of Kentucky jurisdictions before you sign. Compare options in our payroll software rankings, read how payroll taxes work, see SUTA rates by state and the payroll tax hub.