Work in Kentucky, Live in Indiana: How Taxes Work

Reciprocity

Do Kentucky and Indiana Have a Tax Reciprocity Agreement?

Yes. Kentucky and Indiana maintain a reciprocity agreement for individual income tax on wage income. Under this agreement, wages, salaries, tips, and commissions that an Indiana resident earns in Kentucky are exempt from Kentucky state income tax. The taxing right stays with your home state of Indiana.

Kentucky's Form 42A809 lists five states whose residents qualify for full exemption: Illinois, Indiana, Michigan, West Virginia, and Wisconsin. Ohio residents qualify under a separate condition tied to S corporation ownership, and Virginia residents qualify only if they commute daily. Indiana falls in the first group, so an Indiana resident with only wage income from Kentucky owes nothing to Kentucky at the state level.

The reciprocity applies only to compensation from employment. Investment income, rental income from Kentucky property, business profits, gambling winnings, and Schedule K-1 distributive share income are not covered. If you earn any of those from Kentucky sources, you may still need to file a Kentucky nonresident return for that portion.

Reciprocity also does not extend to local taxes. Kentucky cities and counties impose occupational license taxes on anyone working within their boundaries, and those remain payable regardless of where you live. See the local tax section below.

Filing Obligations

Which Tax Return Do I File as an Indiana Resident Working in Kentucky?

File the Indiana IT-40 full-year resident return. Report your total income, including your Kentucky wages, on the Indiana return. The reciprocity agreement means the wages are treated the same as Indiana-source earnings for state tax purposes.

You do not file a Kentucky individual income tax return (Form 740-NP) as long as your only Kentucky income is wages covered by reciprocity. If Kentucky tax was withheld from your paycheck by mistake, you file Form 740-NP-R to recover it (see the withholding errors section below).

Indiana taxes individual income at a flat rate of 2.95 percent for tax year 2026, scheduled to drop to 2.90 percent for 2027. Your Kentucky wages are included in Indiana adjusted gross income and taxed at that rate. Indiana returns are due April 15.

In addition to state tax, Indiana residents pay a county income tax on Schedule CT-40 based on their county of residence as of January 1 of the tax year. That county tax applies to your Kentucky wages the same as any other earned income.

The Key Form

How Do I Stop Kentucky from Withholding State Tax?

File Kentucky Form 42A809, Certificate of Nonresidence, with your Kentucky employer. The form certifies that you live in a reciprocal state and authorizes the employer to stop Kentucky income tax withholding from your pay.

Fill out the form with your name, Social Security number, Indiana home address, and signature. Check the block that identifies your state of residence as Indiana. Submit the form at the start of employment or as soon as you establish Indiana residency. The form also carries a promise to notify your employer within ten days if your residency changes to a non-reciprocal state.

Once the employer processes Form 42A809, they should stop Kentucky state withholding on your paychecks. Many employers with operations near the Ohio River border are already registered to withhold Indiana state and county tax and will switch you over automatically. If your Kentucky employer is not registered to withhold Indiana tax, you should make quarterly estimated payments to Indiana using Form ES-40 to avoid an underpayment penalty when you file.

Keep a signed copy of Form 42A809 in your tax records. Verify on the pay stub after submission that Kentucky state withholding has stopped.

Local Taxes in Kentucky

Do I Still Owe Kentucky Local Occupational Tax?

Yes. Kentucky's local occupational license taxes apply to anyone who works within a Kentucky taxing jurisdiction, regardless of the employee's state of residence. The state reciprocity agreement covers only Kentucky state income tax and does not reach city and county occupational taxes.

Kentucky counties, cities, and school districts each set their own occupational tax rates. Rates and rules differ by locality, and multiple jurisdictions can layer on top of each other where a city sits inside a county that also imposes the tax. Your Kentucky employer normally withholds the local occupational tax from each paycheck and remits it to the correct jurisdiction on your behalf.

Because the tax is tied to the physical location of the work, it is not refundable through the reciprocity agreement. You cannot recover it on your Indiana state return either, because Indiana state tax is a separate computation from a Kentucky local tax.

Indiana residents who commute to jobs in Louisville, Northern Kentucky, or any other Kentucky city should confirm the local rate withheld on their pay stub and match it against the current rate published by the taxing jurisdiction. The Kentucky Occupational License Tax overview page linked in the sources lists how these local rates work.

Indiana County Tax

How Does Indiana County Income Tax Apply to My Kentucky Wages?

Indiana county income tax is separate from the state tax and applies to your total earned income, including wages you earned in Kentucky. County tax is based on your county of residence on January 1 of the tax year. The Indiana Department of Revenue publishes each county's rate in Departmental Notice #1, which is updated periodically.

Report county tax on Schedule CT-40 of the Indiana IT-40 return. If Kentucky tax was properly stopped and your employer did not withhold Indiana county tax for you, you owe the full county liability at filing time. To avoid a penalty, either ask your employer to withhold Indiana county tax voluntarily or make quarterly estimated payments to Indiana that include the county portion.

Nonresidents of Indiana are taxed on the county of principal employment as of January 1, not the county of residence. That rule does not affect an Indiana resident working in Kentucky. Your county of residence controls both the state and county tax obligations.

If Kentucky local occupational tax was withheld from your pay, check whether your Indiana county allows any offset. County-tax credits for local taxes paid outside Indiana are limited and vary by county rule, so review the current instructions.

Worked Example: Indiana Resident Earning $70,000 in Kentucky

Single filer, all wages from a Kentucky employer, 2026 verified rates, before personal exemption

Remote Work

What If I Work from Home in Indiana for a Kentucky Employer?

Kentucky does not apply a convenience of the employer rule to nonresidents. Kentucky taxes nonresident wages only for services physically performed within the state. Days you work from your Indiana home are Indiana-source income for state tax purposes, not Kentucky-source income.

The reciprocity agreement makes this distinction largely academic for state tax, because your wages are exempt from Kentucky state tax whether you work in Kentucky or in Indiana. The bigger effect is at the local level. Kentucky city and county occupational taxes apply only to compensation for work physically performed within their jurisdictions. Days you work from home in Indiana are not subject to Kentucky local occupational tax.

Track your work location daily. If you split time between a Kentucky office and your Indiana home, your Kentucky employer should apply the Kentucky local tax only to the portion of wages tied to Kentucky work days. Keep a calendar or log showing where you worked each day. Kentucky taxing jurisdictions may request that documentation during an audit or a refund review.

Mid-Year Move

What If I Moved Between Indiana and Kentucky During the Year?

If you changed your permanent residence from Kentucky to Indiana, or the reverse, during the tax year, file a part-year resident return in each state. In Indiana, that is Form IT-40PNR, showing income for the part of the year you were an Indiana resident. In Kentucky, use Form 740-NP for the part-year period plus any Kentucky-source non-wage income.

The reciprocity exemption only covers wages earned while you were an Indiana resident. Wages earned during the months you lived in Kentucky are Kentucky-resident income and taxed by Kentucky. Kentucky imposes a flat 3.5 percent state tax rate for 2026.

Document your exact move date with utility activation records, lease or closing documents, or the date on your new driver's license. Both states require you to identify the day residency changed, because each state's claim to your income depends on the days you lived there. Indiana county tax status is set by residence on January 1, so a mid-year move can shift your Indiana county assignment for the following year but not the current one.

Withholding Errors

What If My Employer Withheld Kentucky State Tax by Mistake?

File Kentucky Form 740-NP-R, Kentucky Income Tax Return, Nonresident, Reciprocal State, to request a refund of Kentucky state tax withheld from a reciprocal state resident. That form is designed specifically for residents of Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, and Wisconsin whose employer withheld Kentucky tax in error.

On your Indiana IT-40, report your Kentucky wages and pay Indiana state and county tax as normal. You do not claim a credit on Indiana for Kentucky state tax that was withheld in error, because you are recovering that amount separately through the 740-NP-R refund.

To stop the error from repeating, submit Form 42A809 to your employer immediately. Verify on your next pay stub that Kentucky state tax withholding has ended. If the employer still cannot switch you to Indiana withholding, arrange quarterly Indiana estimated payments through Form ES-40 to prevent an underpayment penalty. Confirm each quarter that your total Indiana withholding plus estimates meets the safe-harbor thresholds published in the current IT-40 instructions.