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Local tax refunds may be available to some Kentucky employees

By: Dean Dorton | February 17, 2021

Kentucky is one of a handful of states where local taxing jurisdictions, such as cities, counties, and school districts, impose income taxes. Kentucky law permits employees to file for a refund from a local jurisdiction if their employer withheld taxes for that jurisdiction while they worked in another jurisdiction, either within or outside Kentucky.

2021 Spring Edition | News & Views | Tax

Kentucky is one of a handful of states where local taxing jurisdictions, such as cities, counties, and school districts, impose income taxes. These local taxes, called “occupational license fees,” generally are imposed on a business’s net profits and employee salaries, wages, or other compensation. Employers must withhold local taxes from employees’ pay for work performed within the local jurisdiction. Tax rates vary and generally range from about 0.5 to 2.5 percent.

Kentucky law permits employees to file for a refund from a local jurisdiction if their employer withheld taxes for that jurisdiction while they worked in another jurisdiction, either within or outside Kentucky. For example, suppose an employee lives and works in Louisville Metro, which imposes a tax of 2.2 percent on resident employees’ compensation. However, the employee spends one month of the year on an assignment in Tennessee. The employee might apply for a refund from Louisville Metro if the employer continued withholding Louisville Metro taxes while the employee worked in Tennessee.

Note that if employees work in another Kentucky locality during the period for which they are seeking a refund, taxes would be owed to the other local jurisdiction. This scenario could arise with greater frequency this year due to the large number of employees working from home because of the pandemic.

For example, suppose the employee normally works in Woodford County but has been working from home in Jessamine County for most of the year. Woodford County levies an occupational license fee of 1.5 percent, while Jessamine County’s rate is 1 percent. The employee owes Jessamine County tax on the compensation earned while working from home. If the employer continues withholding tax for Woodford County, the employee could seek a refund.

Refund claims must be filed within two years from the due date of the employer’s tax return, which in many localities is February 28. Some of the larger jurisdictions, such as Louisville and Lexington, have refund application forms available on their websites. The refund application for Louisville Metro is available here and for Lexington is available here.

Refund application for Louisville Metro
Refund application for Lexington

This article was originally published in News & Views (Dean Dorton’s quarterly newsletter).

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