Residents of Kentucky must pay federal income taxes and payroll taxes on the money they earn. In addition, those workers are subject to Kentucky's state income tax. If you work in Kentucky, you need to understand the tax rates and make sure your employer withholds the proper amount of tax.
Graduated Income Tax
The state of Kentucky uses a graduated income tax schedule, much the same way the federal government does. Workers at the lowest end of the economic scale pay a lesser percentage of their income in taxes than those who earn more. For instance, workers who make $3,000 a year or less in taxable income pay state taxes at a rate of 2 percent, while those who earn between $3,000 and $4,000 a year pay 3 percent. Workers with incomes between $4,000 and $5,000 pay a 4 percent tax rate, while those who earn between $5,000 and $8,000 pay taxes at a 5 percent rate.
Taxable income is defined as the federal adjusted gross income, minus either the itemized or standard deductions.
The income tax brackets in the state of Kentucky are fairly narrow, ranging from 2 percent for the lowest income workers to a high of 6 percent. But the income threshold for that highest level of taxation is very low. Workers in Kentucky who earn $8,000 or more pay 6 percent of their wages in the form of state taxes. That means a worker in Kentucky who earns $45,000 a year pays $2,700 in state income taxes.
Kentucky residents who work a full-time and a part-time job may want to provide each employer with information about their total annual earnings, so those employers can deduct the proper amount of taxes from each paycheck. For instance, a worker who earns $30,000 a year at one job would have the full 6 percent tax taken out of his paycheck. But if that same worker holds a par-time job and earns only $3,000, the second employer will withhold taxes at the lower rate. That can leave the worker owing additional taxes at the end of the year, since the tax rate is based on total income. By adjusting the withholding to the higher level, moonlighters can avoid that problem.
Residents and Non-Residents
All residents of Kentucky who earn income are subject to the state income tax. In addition, any non-resident who earns money in Kentucky must also pay the state income tax. That means if an individual lives in Ohio but crosses the border to work in Kentucky, that individual is subject to taxation in Kentucky. Workers who live in one state and work in another should check with their employers to ensure that the proper amount of tax is withheld.
Residents of Kentucky must also pay federal income taxes, along with payroll taxes for Social Security and Medicare. The rate for Federal income tax varies along with adjusted gross income, from a low of 10 percent to a high of 35 percent for top earners. Payroll taxes for Social Security are assessed at a flat rate, with 4.2 percent for Social Security and another 1.45 percent for Medicare. The 4.2 percent Social Security rate is slated to go back up to 6.2 percent in 2012 when the current tax cut deal expires. Depending on where they live, Kentucky residents may also be subject to local and county taxes. The average of those taxes is 0.76 percent.