Kentucky Occupational License Tax: Rates, Rules, and Filing

Overview

What Is the Kentucky Occupational License Tax?

The Kentucky occupational license tax is a local tax that cities and counties impose on wages, salaries, commissions, and net profits earned within their boundaries. Despite the name, it is not a fee for a professional license. It functions as a local income tax collected by individual jurisdictions rather than the state of Kentucky.

Both cities and counties can levy it. As of January 2025, 87 counties levied the tax on payroll, and 170 cities levy it on gross earnings, according to the Kentucky Association of Counties and the Kentucky League of Cities. County rates range from 0.50% to 2.5%, with a median of 1%. The revenue generated is critical for local governments, funding police, fire, road maintenance, and other essential services.

The legal authority comes from Kentucky Revised Statutes including KRS 92.281, which allows cities and counties to levy the tax, KRS 68.180 for counties with 300,000 or more residents, and KRS 68.197 for counties with 30,000 or more residents. KRS 67.750 to 67.790 set uniform definitions and rules for occupational license taxes on net profits and gross receipts.

Applicability

Who Pays the Kentucky Occupational License Tax?

The tax applies to anyone who earns wages or generates net profits from work performed inside a taxing jurisdiction, regardless of where the person lives. A commuter who lives in Indiana but works in Louisville still owes the Louisville Metro occupational license tax on compensation earned there.

For employees, the employer withholds the tax from each paycheck and remits it to the local jurisdiction, similar to federal income tax withholding. The tax base includes wages, salaries, commissions, bonuses, and certain fringe benefits. Self-employed individuals and business owners pay the tax on their net profits from activities conducted within the jurisdiction, calculated using federal tax definitions under the Internal Revenue Code.

Kentucky local jurisdictions generally do not tax purely remote workers who never physically enter the taxing district. If you split time between a home office and a Kentucky office, the tax applies only to wages earned during days you are physically present in the jurisdiction. Employers typically apportion the tax based on the ratio of days worked in the district to total days worked everywhere.

Rate Table

What Are the Rates in Major Kentucky Cities and Counties?

Rates vary widely by jurisdiction. Below are the occupational license tax rates for several major Kentucky cities and counties. Louisville Metro and Lexington-Fayette are merged city-county governments with a single combined rate.

Louisville Metro's 2.2% resident rate breaks down into three components: 1.25% for Metro Government, 0.2% for the Transit Authority of River City (TARC), and 0.75% for the local school board.

Some jurisdictions impose a wage cap. Always check your specific jurisdiction for the current rate and any caps, because individual cities and counties set their own rules. Under KRS 67.766, the Kentucky Secretary of State posts occupational license tax forms for each taxing district at web.sos.ky.gov/occupationaltax/.

Double Taxation

How Does City-County Tax Stacking Work?

Because cities and counties levy the tax independently, a worker could owe both a city and a county occupational license tax on the same income. Kentucky law partially addresses this through KRS 68.197, which requires a credit in counties with a population of 30,000 or more. In those counties, taxpayers receive a credit against the county tax for amounts already paid to a city within that county on the same income.

For example, if a city in such a county charges 2.0% and the county levies 1.0%, the city tax paid is credited against the county tax. Because the city rate exceeds the county rate in this case, you owe nothing extra to the county.

The KRS 68.197 credit rule applies to counties with 30,000 or more residents, so workers in smaller counties should check local ordinances. This distinction matters for workers in rural areas of the state.

Employer Duties

How Do Employers Withhold the Occupational License Tax?

Employers with workers in a Kentucky taxing jurisdiction must register with that jurisdiction, withhold the correct percentage from each employee's gross pay, and remit the amounts on a schedule set by the jurisdiction. Louisville Metro, for example, uses Form W-1 for quarterly withholding returns and Form W-3 for the annual reconciliation.

Lexington uses Form 220-221 for the employer's return of license fee withheld and Form 222 for the annual reconciliation. Each jurisdiction sets its own thresholds and deadlines.

Multi-jurisdiction employers face a compliance burden because Kentucky has no centralized collector. Each of the 200-plus tax districts operates independently, with its own forms, deadlines, and registration requirements. The Secretary of State's occupational tax page lists forms for each taxing district.

Louisville Metro Resident Earning $60,000

Annual occupational license tax calculation for a resident employee in Louisville Metro (2025 rate)

Exemptions

What Exemptions Apply to the Occupational License Tax?

Kentucky law carves out a few narrow exemptions from local occupational license taxes:

• National Guard training pay - Income received by Kentucky National Guard members for active duty training, unit training assemblies, and annual field training is exempt under KRS 68.197.
• Election worker pay - Compensation paid to precinct workers for election training or work at election booths in state, county, and local elections is exempt.
• Ministers

Social Security benefits, pensions, investment income, and other non-wage income generally fall outside the tax because it applies specifically to compensation for work performed or net profits from business activity, not to all forms of income.

Filing

How Do You File and Pay the Occupational License Tax?

If your employer withholds the tax correctly, you may not need to file a separate return for wages. However, some jurisdictions require an annual reconciliation to verify that the correct amount was withheld throughout the year.

Self-employed individuals and business owners must file a net profit return directly with each jurisdiction where they conduct business. The standard forms are the OL-S (Single Tax District Return) and the OL-D (Multiple Tax District Return). Due dates vary by district: Louisville Metro follows the IRS filing dates, and Lexington publishes its own due-date schedule. Louisville Metro's Form OL-3EXT requests an automatic six-month extension to file its net profit return.

Louisville filers can use the EMINTS electronic system. Lexington accepts online filings through its tax portal. For other jurisdictions, check the Secretary of State's occupational tax database for applicable forms and contact information. This is general information, not tax advice.

Total Tax Impact

How Does the Occupational License Tax Affect Your Total Kentucky Tax Bill?

The occupational license tax stacks on top of Kentucky's flat state income tax, which dropped to 3.5% for the 2026 tax year (down from 4.0% in 2025). A Louisville Metro resident earning wages faces a combined state-plus-local rate of roughly 5.7% (3.5% state plus 2.2% local) before federal income taxes apply.

Kentucky does not reduce your state income tax liability based on occupational license taxes paid. You can, however, include the occupational license tax as part of your state and local tax (SALT) deduction on your federal return if you itemize. For 2026, the SALT cap is $40,400 for most filers, raised from the prior $10,000 limit under the One Big Beautiful Bill Act.

Self-employed individuals can generally deduct the occupational license tax as a business expense on their federal return, which reduces both federal and state taxable income. This deduction is separate from the SALT cap and applies on Schedule C or the applicable business return. Consult a tax professional for advice on your specific situation.