Key figures
Kentucky advisory
2026, with sources
The local layer
Kentucky’s distinctive feature is its local occupational license taxes. Cities, counties and many school districts tax wages earned within their boundaries, withheld by the employer, and the net profits of businesses operating there, apportioned under state rules. The state sets the framework in KRS 67.750 to 67.790, but each jurisdiction sets its own rate and collects it itself.
HB 757 (2026) prohibits school districts from increasing their occupational license tax rates on or after January 1, 2027. That caps one layer; the city and county rates remain local decisions.
An example
A Louisville startup with eight employees, two of whom live and work in Lexington, withholds Kentucky income tax at 3.5% for all eight, Louisville Metro occupational tax for the six who work there, and Lexington-Fayette occupational tax for the two who work there. It files a net profits return in each jurisdiction where it does business, pays the $175 minimum LLET on its Form 720, and charges sales tax on the SaaS it sells to Kentucky customers.
Where founders go wrong
Kentucky’s state taxes are simple; the work is in the local layer and in a handful of decoupling rules.
- Running payroll with state withholding only and no local occupational tax.
- Assuming SaaS is exempt: prewritten computer software access services are taxable.
- Copying federal Section 174A expensing to the Kentucky return.
- Filing only for the Kentucky subsidiary when the unitary group must file combined.
The federal baseline
This page covers what Kentucky adds. The federal rules underneath it apply here too.
Common questions
What makes Kentucky harder to operate in than its tax rates suggest?
Mostly local. A company with employees in Kentucky withholds the 3.5% state income tax and, separately, the occupational license taxes levied by the city, county and sometimes school district where each employee works, and files net profits returns in the jurisdictions where it does business. Those local layers are what make Kentucky payroll and compliance heavier than its flat state rate suggests.
What does one remote hire in Kentucky trigger?
Its people do, and the company usually does too. An employee working in Kentucky brings state withholding, unemployment insurance, workers’ compensation from the first employee and the local occupational tax where they work; and a corporation with an employee in the state is generally doing business there, so it qualifies, pays at least the $175 LLET and files Form 720, joining the unitary combined return if it has related companies.
Advisory next door
- ILIllinois advisoryIllinois offers a nonrefundable 6.5% R&D credit, caps net loss deductions, and from 2026 taxes QSBS gain the IRS excludes; most founder mistakes come from Chicago’s extra layer.
- INIndiana advisoryIndiana offers a nonrefundable research credit and fixed-date conformity that the legislature updates selectively; the remote-hire question is always which county.
- MOMissouri advisoryMissouri’s research credit is capped and allocated by the Department of Economic Development. Since 2025, individuals pay no Missouri tax on capital gains.
- OHOhio advisoryOhio’s 7% R&D credit offsets only the CAT, which most startups no longer owe; the advice that matters is about cities, remote hires and the state-run workers’ comp fund.
- TNTennessee advisoryTennessee has no tax on wages and a lighter franchise tax since 2024, but entities still pay franchise, excise and gross-receipts business tax, and SaaS is subject to sales tax.
- VAVirginia advisoryVirginia’s R&D credit is refundable but small and capped. The bigger planning items are scheduled minimum wage increases through 2028 and a new paid family leave program collecting from April 2028.
- WVWest Virginia advisoryWest Virginia’s income tax keeps falling, its R&D credit requires certification before the work, and its 14-day new-hire rule, covering contractors too, catches out-of-state employers.
Founder guides on this
- Sales taxSales tax nexus for startups: when you owe tax in a stateSince Wayfair, selling into a state can create a sales tax obligation. How economic nexus works, why SaaS is taxable in some states and when to register.
- R&D taxThe R&D tax credit and Section 174A for startupsEngineering salaries can earn a federal R&D credit against payroll tax, and Section 174A lets you deduct US research again. What qualifies, what to track.
- PeopleContractor or employee? Classification for startupsContractor or employee depends on control, not the contract. The IRS test, state rules, 1099s, payroll registration and the cost of getting it wrong.
More of the Kentucky guide
- AccountingAccounting and state tax in KentuckyCorporate tax, conformity to federal rules, apportionment and what it does to your books
- ReceivablesReceivables and sales tax in KentuckySales tax registration, economic nexus, whether SaaS is taxable, and collecting from customers
- PayablesPayables and contractors in KentuckyPaying vendors and contractors: 1099 filing, use tax, contractor tests and withholding
- PayrollPayroll taxes and employer rules in KentuckyWithholding, unemployment insurance, paid leave, minimum wage and the rules on paydays
- ComplianceCompliance and filings in KentuckyRegistering to do business, annual reports, franchise tax and the filing calendar
Sources
Checked against each agency’s own page on . Rates and thresholds change, usually on January 1.
- Kentucky Department of Revenue — Employer Payroll Withholding
- KRS 67.750 to 67.790 — local occupational license taxes
- KRS 139.200 — imposition of sales tax (taxable services)
- Kentucky Department of Revenue — Corporation Income and Limited Liability Entity Tax
- Kentucky General Assembly — HB 757 (2026 Regular Session)
General information for US companies, not tax, legal or accounting advice for yours. Rules and thresholds change; confirm the specifics with a CPA or the agency before you act on them.