The Breakdown of Local and State Kentucky Taxes

Kentucky’s tax structure blends traditional and uncommon elements, creating a system vastly different from other states. Whether you’re a resident, business owner, or someone considering this state home, it’s important to understand how taxes work in Kentucky.

The Bluegrass State charges a flat income tax, prohibits local sales taxes, and still enforces an inheritance tax—features that impact your paycheck and state planning.

What You Need to Know About Local and State Kentucky Taxes

In this article, we will break down Kentucky’s key taxes—including income, local occupational, sales, property, and more—to help you understand what to expect and plan accordingly.

Kentucky State Income Tax

Kentucky imposes a single-rate individual income tax rate on residents and anyone earning income. As of the 2024 tax year, Kentucky’s individual income tax rate is 4%.

This means everyone pays 4% of their taxable income, regardless of how much they earn. In other words, whether you’re single or jointly married filing, Kentucky applies the same flat income tax rate across the board.

On the federal side, by contrast, the federal income tax uses progressive brackets that rise with income.

Kentucky’s income tax law closely follows the federal Internal Revenue Code, so federal adjusted gross income is the starting point for state taxes. 

After federal-style deductions (standard or itemized) and state-specific credits, the 4% rate applies to your Kentucky taxable income.

The state has been reducing its individual income tax rate in recent years. It dropped from 5% to 4.5% in 2023 and 4% in 2024. Lawmakers plan further cuts—Kentucky is gradually lowering its individual income tax rate, intending to eventually eliminate it.

In the tax year 2026, the rate will decrease to 3.5%—contingent on budget triggers.

Keep in mind that state income taxes are separate from federal: you must still file a Kentucky income tax return (Form 740 for full-year residents) in addition to your federal return.

And while Kentucky’s state tax is flat, you’ll still owe the Internal Revenue Service (IRS) based on federal brackets, so don’t forget your federal income tax obligations when budgeting.

Local Occupational Taxes in Kentucky

One tax you’ll encounter in Kentucky—but not in many other states—is the local income or business license tax.

Kentucky does not allow cities or counties to add local sales tax, but it does allow local income taxes on wages and business profits. In fact, many Kentucky cities and counties levy an occupational tax (sometimes called a business license fee) on salaries, wages, or net profits.

These function as local income taxes dedicated to local government funding. There are jurisdictions in Kentucky that collect local income taxes, typically ranging from about 1% to 3% of wages or profits—rates vary by locality.

For example, Lexington-Fayette Urban County and Louisville Metro both impose an occupational tax in this range.

If you work in Kentucky, the city or county where your job is located might withhold a portion of your paycheck for these local taxes.

Similarly, business owners operating in a city may owe an annual business license tax on their net profits to that municipality.

Unlike the flat state tax, local occupational tax rates can differ across communities, so where you live or work in Kentucky influences what you’ll pay locally.

Self-employed individuals with Kentucky-based income are also subject to these local taxes. This means they must file and pay occupational license taxes directly to the city/county in addition to their state return, if applicable.

Always check the local requirements, as they add another layer on top of state and federal taxes.

Kentucky Sales Taxes

Kentucky keeps sales taxes simple and consistent. The state sales tax rate is a flat 6% on goods and certain services statewide.

There are no local sales taxes in Kentucky—local governments cannot add their own sales tax on top of the 6%, so shoppers everywhere in the Commonwealth pay the same total rate at the register.

This 6% applies to most retail purchases, but Kentucky provides exemptions for key necessities.

Notably, prescription medications are not subject to sales tax in Kentucky, which helps lower the tax burden on essentials.

Clothing is taxed at the full 6% rate, as are general consumer products.

Big-ticket items like automobiles are a special case: instead of the retail sales tax, Kentucky charges a motor vehicle usage tax of 6% on vehicle purchases.

This means that when you buy a car and pay the one-time 6% usage tax, you won’t pay the normal sales tax on that transaction.

With a uniform 6% statewide, Kentucky’s sales taxes are easy to understand and calculate at checkout. Adding to their simplicity, the sales tax rates do not vary by city or county. Together, this gives Kentucky one of the lowest combined sales tax burdens in the region.

Property Taxes in Kentucky

Property taxes in Kentucky are primarily a local matter and are relatively modest on average.

The effective property tax rate on owner-occupied homes is about 0.74% of the home’s value, which means that Kentucky homeowners tend to pay less than 1% of their home’s market value in property taxes each year.

However, property taxes can vary significantly across counties and municipalities. The state sets baseline rates (including a small state property tax), but the bulk of property tax rates are determined by local governments.

This means that what you pay depends on where the property is located. Urban counties with extensive services might have higher combined rates than rural counties.

In addition to real estate, Kentucky also taxes personal property. This includes things like motor vehicles, boats, and tangible business assets like machinery and equipment.

Inheritance and Estate Tax in Kentucky

Kentucky is one of 38 states that do not have a state estate tax. 

However, it does impose an inheritance tax, which applies to the beneficiaries—not the estate itself. The tax rate and exemption amount depend on the relationship to the deceased and the value of the inheritance.

Property owned by Kentucky residents is generally subject to this tax unless it’s real estate located out of state. Likewise, nonresidents may owe tax on Kentucky-based real or personal property.

Payroll and Unemployment Taxes in Kentucky

Kentucky’s state tax system does not include any additional state-level payroll taxes on wages beyond the income tax.

Employers in Kentucky withhold the 4% state income tax from employee paychecks, but federal payroll taxes (Social Security and Medicare) are the same in Kentucky as in any state.

The payroll tax rates for Social Security and Medicare—a combined 15.3% of wages split between employer and employee—are not affected by Kentucky and must be paid to the U.S. Treasury just like anywhere else.

Self-employed individuals have to cover the employee and employer portions of these federal payroll taxes themselves since no employer is contributing for them.

Kentucky does require employers to pay state unemployment insurance taxes. These are often called unemployment taxes, and they fund Kentucky’s unemployment insurance program for jobless benefits.

These state unemployment taxes are paid quarterly to Kentucky’s Office of Unemployment Insurance.

In addition, employers must pay the Federal Unemployment Tax (FUTA) to the IRS. FUTA is 6% on the first $7,000 of each employee’s wages, but employers generally receive a credit of up to 5.4% for state unemployment taxes paid, making the net federal rate effectively 0.6%.

Are you wondering what happens if you pay an employee incorrectly? Visit this article next. 

Summary: Navigating Kentucky Taxes

While some taxes are pretty straightforward—like the flat income tax and uniform sales tax—others, such as local occupational taxes and inheritance rules, might catch residents and business owners off guard. 

Do you need help with payroll, tax compliance, or reporting? Visit Symmetry’s resource center or get a demo to explore our tax tools to simplify your workflow and comply with Kentucky’s requirements.

Continue learning about tax compliance in these articles:

• IRS Updates on Paid Family and Medical Leave and Proposed Tax Relief for Tips and Overtime Pay
• Understanding What a PSD Code Is and Its Importance for Tax Filing
• The Breakdown of Local and State Ohio Taxes: A Comprehensive Guide

Kentucky Taxes: Frequently Asked Questions