Navigating Kentucky Payroll: A Small Business Guide for 2025

Managing payroll in Kentucky can seem complex, but understanding your obligations is crucial for small business success and compliance. This guide provides an overview of federal and state payroll requirements for 2025, helping you stay informed and avoid potential penalties.

Key Federal Payroll Requirements for 2025

All Kentucky employers must comply with federal payroll laws and regulations. Here are the key components:

Federal Income Tax Withholding (FITW)

Employers are required to withhold federal income tax from employees' wages based on the information provided on their Form W-4. The IRS provides detailed guidance in Publication 15 (Circular E), Employer's Tax Guide, which is updated annually. Ensure you are using the 2025 version for accurate calculations.

Social Security and Medicare (FICA) Taxes

FICA taxes fund Social Security and Medicare programs. For 2025, these taxes are typically split between employers and employees.

Tax Component	Employee Rate (2025)	Employer Rate (2025)	2025 Wage Base Limit
Social Security	6.2%	6.2%	$177,900 (Projected for 2025 - verify with official IRS publications)
Medicare	1.45%	1.45%	No limit
Additional Medicare Tax	0.9% (on wages over $200,000 for single filers)	Not applicable	On employee earnings over $200,000 (single), $250,000 (MFJ), $125,000 (MFS)

Note: The Social Security wage base limit typically adjusts annually. Always refer to official IRS announcements for the final 2025 figures.

Federal Unemployment Tax Act (FUTA)

FUTA tax, along with state unemployment systems, provides unemployment benefits to workers who have lost their jobs. The FUTA tax rate is generally 6.0% on the first $7,000 of wages paid to each employee annually. However, employers usually receive a credit of up to 5.4% when they pay their state unemployment taxes on time, making the effective FUTA rate 0.6%. Some states may be FUTA credit reduction states; check with the IRS for Kentucky's status for 2025.

Fair Labor Standards Act (FLSA)

The FLSA establishes minimum wage, overtime pay, recordkeeping, and youth employment standards.

Minimum Wage

As of 2025, the federal minimum wage remains $7.25 per hour. Kentucky's state minimum wage is also $7.25 per hour, aligning with the federal rate. Certain cities or counties may have higher local minimum wage ordinances, though this is less common in Kentucky for broad application.

Overtime Pay

Non-exempt employees must be paid overtime at a rate of 1.5 times their regular rate of pay for all hours worked over 40 in a workweek. Kentucky overtime law generally follows the FLSA. Careful classification of employees as exempt or non-exempt is critical.

2025 FLSA Salary Threshold Update

The Department of Labor (DOL) has issued new rules significantly increasing the salary thresholds for executive, administrative, and professional (EAP) employees to be exempt from overtime. A new rule was announced with phased increases. Effective July 1, 2024, the threshold was set to increase. A subsequent increase is scheduled for January 1, 2025, raising the standard salary level to $1,128 per week (equivalent to $58,656 per year). The threshold for highly compensated employees (HCE) is also set to increase. Employers should review their employee classifications to ensure compliance with these new 2025 thresholds. For the latest updates, consult the Department of Labor.

Kentucky State Payroll Requirements for 2025

In addition to federal laws, Kentucky has its own set of payroll rules.

Kentucky State Income Tax Withholding

Employers must withhold Kentucky state income tax from employees' wages. Employees should complete Kentucky Form K-4. Kentucky has a flat income tax rate. For 2025, the rate is 4.0%. The withholding methods and tables are provided by the Kentucky Department of Revenue.

2025 Withholding Formula

The Kentucky Department of Revenue releases withholding instructions annually. For 2025, the withholding calculation will be based on the 4.0% tax rate. The standard deduction amount for 2025 is $3,160. Employers should refer to the official "2025 Kentucky Withholding Tax Formula" document from the Department of Revenue for precise calculation methods.

Kentucky State Unemployment Insurance (SUI)

Kentucky employers pay SUI taxes to fund unemployment benefits for eligible workers who lose their jobs through no fault of their own. These taxes are paid to the Kentucky Career Center, Office of Unemployment Insurance.

Taxable Wage Base and Rates for 2025

SUI Component	Details for 2025
Taxable Wage Base	$11,400 for 2024. (Expected to remain similar or adjust for 2025; verify with official KEWES announcements).
New Employer Rate	Typically 2.7% for most new employers (excluding construction). Check the latest KEWES Tax Rate Schedules.
Experienced Employer Rates	Varies based on the employer's experience rating. Rates are typically issued annually by the state. For 2025, Schedule E is in effect, with rates ranging from 0.30% to 9.0%.
Surcharge	A 0.075% surcharge (UI Surcharge Assessment) is in effect for 2025.

Always consult official notices from the Kentucky Office of Unemployment Insurance for the most current rates and wage base for 2025.

Local Payroll Taxes (Occupational Taxes)

Many Kentucky cities and counties impose occupational license taxes on gross wages earned by employees working within their jurisdictions. Employers are responsible for withholding and remitting these taxes. Rates and specific requirements vary significantly by locality. For example, Jeffersontown has an occupational tax. It is critical to identify all applicable local taxes based on your business location(s) and where your employees perform work. Check with specific city/county finance offices or the Kentucky Association of Counties (KACo) for more information.

New Hire Reporting

Kentucky employers must report all new hires and rehires to the Kentucky New Hire Reporting Center within 20 days of the employee's hire date. This information is used to enforce child support orders. Electronic reporting is encouraged.

Workers' Compensation Insurance

Most Kentucky employers are required to carry workers' compensation insurance to cover medical expenses and lost wages for employees who are injured or become ill on the job. This is regulated by the Kentucky Department of Workers' Claims. Failure to secure coverage can result in severe penalties. Coverage can be obtained through private insurers or, for eligible employers, through self-insurance programs.

Payday and Pay Statement Rules

Kentucky has specific laws regarding how and when employees must be paid.

Pay Frequency

Employees must be paid at least semi-monthly (twice a month). If paid twice a month, the pay periods must be as nearly equal in length as possible. Wages must be paid within 18 days of the end of the pay period in which they were earned.

Permissible Wage Deductions

Kentucky law (KRS 337.060) limits the types of deductions an employer can make from an employee's wages. Generally, deductions must be required by law (like taxes), authorized in writing by the employee for their benefit (like health insurance premiums), or for union dues when a collective bargaining agreement is in place. Other deductions are strictly regulated.

Pay Stub Requirements

While Kentucky does not have a state law mandating the provision of pay stubs, federal law (FLSA) requires employers to keep accurate records of hours worked and wages paid. It is best practice, and often expected by employees, to provide a clear statement of earnings and deductions each pay period. This statement should typically include:

• Employee's name
• Pay period dates
• Gross wages
• Itemized deductions (taxes, insurance, etc.)
• Net pay
• Hours worked (for non-exempt employees)
• Rate of pay

Final Pay

When an employee leaves employment (voluntarily or involuntarily), Kentucky law requires that all wages due must be paid by the next regular payday or within 14 days, whichever is later. Accrued vacation pay may also be due depending on company policy or employment agreement.

Differentiating Employees from Independent Contractors

Correctly classifying workers as employees (W-2) or independent contractors (1099) is crucial. Misclassification can lead to significant liabilities, including back taxes, penalties, and benefit obligations.

Importance of Correct Classification

Payroll tax, withholding, and labor law requirements generally apply to employees, not independent contractors. Misclassifying an employee as an independent contractor means the employer may fail to withhold taxes, pay employer-side payroll taxes, provide workers' compensation, or comply with minimum wage and overtime laws.

Kentucky and IRS Guidelines

Both the IRS and Kentucky agencies (like the Office of Unemployment Insurance and Department of Workers' Claims) have criteria for determining worker status. These generally revolve around the degree of control the business has over the worker. Key factors include:

• Behavioral Control: Does the company control or have the right to control what the worker does and how the worker does his or her job?
• Financial Control: Are the business aspects of the worker’s job controlled by the payer? (e.g., how worker is paid, whether expenses are reimbursed, who provides tools/supplies)
• Type of Relationship: Are there written contracts or employee-type benefits (pension plan, insurance, vacation pay)? Will the relationship continue and is the work performed a key aspect of the business?

Consult resources like the IRS website and the Kentucky Labor Cabinet's guide for detailed information. When in doubt, seek legal counsel.

Recordkeeping for Kentucky Payroll

Kentucky employers must maintain accurate payroll records. The FLSA requires records to be kept for at least three years (some records for two). Kentucky law generally aligns with federal requirements. Essential records include:

• Employee's full name, address, social security number, and occupation.
• Hours worked each day and workweek.
• Total wages paid each pay period, including regular and overtime earnings.
• Date of payment and pay period covered.
• Itemized deductions from wages.
• Copies of tax forms (W-4, K-4, I-9).

Stay Compliant: Key Forms and Deadlines

Staying on top of payroll forms and deadlines is essential.

Form	Purpose	Typical Deadline
Form W-4	Employee's Withholding Certificate (Federal)	Completed by employee upon hire and when changes occur.
Form K-4	Kentucky Withholding Certificate	Completed by employee upon hire and when changes occur.
Form I-9	Employment Eligibility Verification	Completed within 3 business days of hire.
Form 941	Employer's QUARTERLY Federal Tax Return	Quarterly: April 30, July 31, Oct 31, Jan 31.
Form 940	Employer's Annual Federal Unemployment (FUTA) Tax Return	January 31.
Form W-2	Wage and Tax Statement	To employees by Jan 31; To SSA by Jan 31.
Kentucky Withholding Tax Forms (e.g., K-1, K-3)	Reporting and paying Kentucky income tax withheld	Varies (monthly, quarterly, annually) based on withholding amount.
Kentucky SUI Tax Reports	Reporting wages and paying SUI taxes	Quarterly.

Tax deposit schedules (monthly or semi-weekly for federal taxes) depend on your tax liability. Consult IRS and Kentucky Department of Revenue guidelines.

Resources for Kentucky Small Businesses

Navigating payroll can be easier with the right support:

• Kentucky Small Business Development Center (SBDC): Offers no-cost coaching, training, and resources.
• Kentucky Business One Stop Portal: A central hub for business registration and information.
• Kentucky Department of Revenue: For state tax information and forms.
• Kentucky Career Center - Employer Services: Information on unemployment insurance and workforce development.
• IRS Small Business and Self-Employed Tax Center: Federal tax resources.
• Trade associations like the NFIB Kentucky often provide updates on legislative changes affecting small businesses.