Operational Gaze:
How to Run Payroll in Kentucky?

April 10th 2024

When managing payroll in Kentucky, employers must adhere to specific guidelines to ensure they meet state and federal requirements. From obtaining an Employer Identification Number (EIN) to understanding the complexities of withholding and unemployment taxes, this process requires attention to detail and timely action. With electronic filing now mandatory, the submission of taxes has become more streamlined. This guide aims to provide you with a clear roadmap for navigating the payroll process efficiently and in compliance with all relevant laws​​​.

This Article Covers

Laws That Affect Payroll Procedures in Kentucky
Worker Classifications in Kentucky
Payroll Forms and Relevant Bodies in Kentucky
Applicable Taxes in Kentucky
Key Pay Elements That Impact Payroll in Kentucky
Step-by-Step Guide to Payroll in Kentucky

Laws That Affect Payroll Procedures in Kentucky

Kentucky Laws

  • Minimum Wage Law: Kentucky adheres to the federal minimum wage standard, requiring a $7.25 hourly rate minimum. All workers—salaried or hourly—are entitled to this rate. Different employee categories might have varying wages. Tipped employees, for example, may receive a lower base wage, but their total income with tips must meet the minimum wage standard. Compliance with these regulations is mandatory for all employers within the state.
  • Overtime Law: Kentucky overtime laws mandate that overtime compensation is mandatory for non-exempt employees at 1.5 times the standard rate for work exceeding 40 hours weekly. However, unlike some states, Kentucky does not necessitate overtime pay for extensive workdays. Employers must meticulously record accurate hours to ensure lawful compliance and to avoid any legal repercussions associated with failure to adequately compensate employees for overtime labor.
  • Child Labor Laws: Kentucky enforces strict child labor laws, barring most employment for those under 14, except in select situations, such as agricultural or domestic work. This legal framework is designed to protect minors and ensure their work does not interfere with education or rest. Employers must follow these laws to avoid any legal consequences.
  • Meal and Rest Breaks: Kentucky’s regulations stipulate that workers are entitled to a meal break of at least 30 minutes after working five continuous hours. This state mandate does not extend to rest breaks; however, the federal Fair Labor Standards Act (FLSA) compensates for this by requiring paid breaks of reasonable lengths for non-exempt employees. Thus, employers must strictly observe these break periods to maintain compliance with labor standards.
  • Pay Periods & Paydays: The state of Kentucky obligates employers to compensate employees at least bi-monthly. Employers are responsible for establishing consistent pay periods and paydays and must effectively communicate this schedule to their workforce. Employers’ adherence to these payment timelines is crucial for avoiding penalties and ensuring transparent business operations. Failure to comply with these regulations can result in penalties, emphasizing the importance of these payment timelines for lawful business operations.
  • Unemployment Insurance: Kentucky employers must contribute to unemployment insurance—a safety net for individuals who become jobless through no fault of their own. The Kentucky Department of Workforce Investment oversees this program, enforcing strict adherence to reporting and contribution regulations. This insurance ensures that displaced workers receive temporary financial assistance during periods of involuntary unemployment.
  • Workers’ Compensation Law: Kentucky requires all employers to procure workers’ compensation insurance, which provides benefits to employees suffering from severe job-related injuries or medical illnesses. The Kentucky Department of Workers’ Claims administers this program, ensuring that both employers and employees are protected under this law. This insurance is a critical aspect of Kentucky’s commitment to workplace safety and health.
  • Regulating Body for Kentucky Payroll: The Kentucky Labor Cabinet is the primary authority overseeing labor laws within the state, including those pertaining to payroll. They work in conjunction with the Kentucky Department of Labor and the U.S. Department of Labor to ensure that employers comply with both state and federal labor regulations. This collaborative enforcement between the two departments aims to maintain fair and legal employment practices across Kentucky, safeguarding worker rights and promoting equitable workplace standards.
  • Sick Leave: In Kentucky, full-time employees who work a minimum of 100 hours per month are entitled to accumulate one full day of sick leave each month. This ensures that employees can address their respective health needs without compromising their employment status, fostering a supportive work environment that values and prioritizes the well-being of its workforce.
  • Payroll Taxes: Kentucky imposes a flat income tax rate on employees, which employers are tasked with withholding from wages and remitting to the Kentucky Department of Revenue. Furthermore, employers pay an unemployment tax to the Office of Unemployment Insurance, funding temporary relief for workers who have lost jobs unexpectedly. These payroll taxes are fundamentally pivotal for maintaining the state’s vital public services and infrastructure.
  • Payroll Tax Due Dates: The timelines for submitting payroll taxes in Kentucky are contingent on the total amount withheld. Employers must adhere to the stipulated due dates, which vary for income and unemployment taxes. These regulations ensure timely funding for state services and benefits, and compliance is enforced to maintain the integrity of Kentucky’s tax system.

Federal Laws

As compared to state-mandated laws, federal laws provide a nationwide framework for payroll procedures that must be adhered to by employers in Kentucky and across the United States.

  • Fair Labor Standards Act (FLSA): The FLSA is a federal law that sets standards for minimum wage, overtime pay, recordkeeping, and youth employment. As of the last update, the federal minimum wage is $7.25 per hour, although employers in Kentucky must comply if state minimum wage laws dictate a higher amount. Overtime must be paid at a rate of at least one and one-half times the employee’s regular rate for hours worked beyond 40 in a workweek.
  • Family and Medical Leave Act (FMLA): The FMLA sets out provisions for leave entitlement. Eligible employees have the right to take up to 12 weeks of unpaid leave for events such as childbirth, adoption, or the care of a family member with a serious health condition.
  • Federal Insurance Contributions Act (FICA): The FICA requires that employers deduct Social Security and Medicare taxes from paychecks and also make a matching contribution. As of the current information available, the Social Security tax rate was 6.2% for the employer and 6.2% for the employee on earnings up to the applicable taxable maximum amount. Medicare tax was 1.45% each for both employer and employee, with an additional 0.9% for high earners.
  • Federal Unemployment Tax Act (FUTA): FUTA imposes a federal payroll tax on employers to help fund state unemployment agencies. Employers pay this tax annually, and it is calculated at 6% of the first $7,000 paid to each employee as wages during the fiscal year. Significantly, employers can receive a credit of up to 5.4% for making timely and full payments of state unemployment taxes, effectively reducing the FUTA rate to a more manageable 0.6%.

HR Laws

  • Payment Upon Separation from Employment: Kentucky requires employers to pay discharged or laid-off employees all due wages by the next regular payday or within 14 days, whichever is later. This law ensures timely compensation for employees who are involuntarily separated from their jobs, providing financial security during their transition period​.
  • Wages in Dispute: Kentucky does not have specific laws mandating employers to pay disputed wages. In the absence of such a law, employers and employees must resolve wage disputes through negotiation or legal action, underscoring the importance of clear agreements​.
  • Deductions from Wages: Kentucky law prevents employers from withholding wages for various reasons, such as fines, cash shortages, breakages, bad checks, faulty workmanship, or lost property, unless the loss is due to the employee’s willful or intentional actions. This protects employees from unfair wage practices and ensures they receive their full earnings​.
  • Uniforms, Tools, and Equipment: Kentucky does not prohibit employers from requiring employees to pay for uniforms, tools, or other equipment necessary related to the job. While this may place a financial burden on employees, it allows employers to maintain a consistent professional appearance and necessary work tools without assuming the cost themselves​.
  • Frequency of Wage Payments: Kentucky statute dictates that employers must pay employees at least semi-monthly. Employees must be paid within 18 days after the end of the pay period. This ensures employees receive earnings regularly and promptly, aiding in effective financial planning and stability, and helps prevent potential cash flow issues for the workforce​.
  • Direct Deposit: Employers in Kentucky may pay wages via direct deposit if the employee can withdraw the paycheck in full without deductions. Kentucky labor regulations allow employers to require direct deposit as a payment method, facilitating a more streamlined payroll process​.

Worker Classifications in Kentucky

Employees and Independent Contractors

Kentucky’s Supreme Court has established criteria to distinguish between employees and independent contractors. The six-factor test assesses the permanency of the relationship, skill level, investment in equipment, profit or loss opportunity, degree of control by the employer, and whether the service is integral to the business. An individual who is economically dependent on a business is classified as an employee. Conversely, independent contractors usually have the opportunity to profit based on their own business acumen and lack such economic dependence.

Common Law

The “Common Law” rules in Kentucky revolve around the degree of control an employer has over the worker and the independence the worker has from the business. If the business has the right to control the work performed, they are likely an employee. However, if the worker has freedom from control and operates an independent business, they may be classified as an independent contractor. These distinctions are crucial for tax purposes and legal responsibilities.

To learn more about the rights of salaried and hourly employees, you can read our guides on your rights as a salaried employee in Kentucky and your rights as an hourly employee in Kentucky.

Payroll Forms and Relevant Bodies in Kentucky

Kentucky Payroll Forms

  • Form K-1E (Electronic Filing Requirement): Kentucky Revised Statute Chapter 141 requires employers to withhold income tax from both resident and nonresident employees. All employers file and pay these withholdings electronically. The paper version of Form K-1E is no longer available, signifying the shift to a more modern, digital approach to tax compliance​​.
  • Withholding Statements (Forms W-2, W-2G, 1099 Series): Employers must report withholding statement information, including Forms W-2, W-2G, and the 1099 series, to the Kentucky Department of Revenue by January 31 each year. Adhering to this deadline ensures that all income is reported accurately for tax purposes, facilitating organized financial records for both employers and employees and supporting compliance with state tax regulations.

Federal Payroll Forms

Alongside Kentucky-specific documentation, federal payroll forms are equally important:

  • Form W-4 (Employee’s Withholding Certificate): The Form W-4, or Employee’s Withholding Certificate, is a federal document that employees across the United States fill out to inform employers about how much federal income tax should be withheld from their wages. The Form W-4 takes into account various factors like marital status, dependents, and additional income to tailor the withholding to the employee’s unique tax situation. With periodic updates, especially after major life events or changes in financial circumstances, the W-4 ensures that employees neither overpay nor underpay the federal income taxes throughout the year.
  • Form W-2 (Wage and Tax Statement): Employers use the Form W-2, known as the Wage and Tax Statement, to report the annual wages paid to each of their employees and the specific amount of taxes withheld. This federal form, issued to every employee before the end of January each year, is vital for individuals when preparing their personal income tax returns. For the employee, it offers a clear summary of their earnings and tax withholdings, while for the IRS, it serves as a record of the individual’s employment-related earnings and tax obligations.
  • Form W-3 (Transmittal of Wage and Tax Statements): The Form W-3 is basically a document used by employers to submit the total of all W-2 forms to the Social Security Administration. This form summarizes the total earnings, Social Security wages, Medicare wages, and withholding for all employees for the year. The W-3, which must accompany the W-2 forms, is an essential tool for the SSA to verify an employee’s income and tax information.
  • Form 940 (Federal Unemployment Tax Act Return): Form 940 is a federal form that employers utilize to report the annual Federal Unemployment Tax Act (FUTA) tax. This tax provides funds for state unemployment agencies and supports unemployed workers. The form calculates the employer’s federal unemployment tax liability, considering any state unemployment tax they’ve already paid. By accurately completing and submitting this form, employers contribute to a system that offers financial support to individuals during periods of joblessness.
  • Form 941 (Employer’s Quarterly Federal Tax Return): Used by employers, Form 941, titled the Employer’s Quarterly Federal Tax Return, reports the wages they’ve paid and the corresponding taxes withheld every quarter. It captures details related to federal income tax, Social Security, and Medicare withholdings. By submitting this form quarterly, employers maintain a consistent record with the IRS, ensuring they meet tax obligations as required.
  • Form 944 (Employer’s Annual Federal Tax Return): Designed for smaller employers, the Form 944 allows them to report income and FICA taxes withheld from employees’ paychecks just once a year instead of quarterly. This form simplifies the reporting process for eligible small businesses by reducing the number of times they must submit tax withholding information, easing the administrative burden and allowing them to focus on running their business.
  • Form 1099 (Miscellaneous Income): The 1099 forms are a series of documents the IRS uses to account for various types of non-employment income. There are many different types of 1099 forms, but one of the most common is the 1099-MISC, which is given to independent contractors or freelancers to report payments made to them for services rendered in the course of trade or business. This form is critical for the IRS to track income that might otherwise go unreported and for contractors to accurately report their income and calculate the taxes.

Federal and Kentucky Payroll/Tax Bodies

  • Kentucky Department of Revenue: Responsible for collecting state income tax, the Kentucky Department of Revenue mandates employers to withhold taxes from employees’ regular wages. Employers are required to remit these withholdings to the revenue department. The state has a flat income tax rate, simplifying the calculation process for employers​.
  • Kentucky Office of Unemployment Insurance (OUI): This office administers unemployment tax, also known as State Unemployment Insurance (SUI), paid by employers/companies, not employees. It provides temporary assistance to those who lose jobs without fault. Rates and taxable wage bases are determined annually by the state legislature​.
  • Internal Revenue Service (IRS): The IRS stands as the United States’ primary federal tax authority. Its mandate covers the vast spectrum of federal tax matters, inclusive of payroll taxes. By providing regulatory guidelines, tax codes, and essential resources, the IRS facilitates nationwide tax compliance. It is important to note that both employers and employees rely on the IRS’s directives to understand their federal tax obligations and ensure adherence.
  • U.S. Department of Labor (DOL): Believe it or not, the U.S. DOL has a broad role, impacting various facets of employment across the nation. Among its chief responsibilities are the formulation and enforcement of wage and hour standards. The DOL ensures fair labor practices, safeguards employee rights, and fosters a balanced work environment. This guidance assists employers in aligning their operations with federal employment norms and standards.
  • Social Security Administration (SSA): The Social Security Administration (SSA) runs programs for retirement, disability, survivor benefits, and family support. They also assist people in signing up for Medicare. The SSA is also the government body responsible for issuing Social Security Numbers— crucial for employment, finances, and accessing government services.
  • Wage and Hour Division (WHD): The WHD is a part of the U.S. DOL, whose main job is to ensure employers follow labor standards to protect workers’ rights. The WHD enforces laws like the Fair Labor Standards Act (FLSA), which covers things like minimum wage, overtime pay, recordkeeping, and child labor rules. It also enforces other laws like the Migrant and Seasonal Agricultural Worker Protection Act, Employee Polygraph Protection Act, and the FMLA.

Applicable Taxes in Kentucky

State Taxes

  • Kentucky Income Tax: Employers in Kentucky are obligated to withhold state income tax from the employee’s regular wages. The state uses a flat tax rate system, which simplifies the payroll process. The Kentucky Department of Revenue provides a formula to calculate withholding tax, which involves the state’s standard deduction and the employee’s gross wages​.
  • Kentucky Unemployment Insurance Tax: Employers fund the unemployment insurance tax, not employees. It offers temporary support to eligible individuals who have lost their jobs without fault. The tax rate varies and is determined annually by the Kentucky State Legislature​.

Federal Taxes

  • Federal Income Tax: Employers are obligated to withhold federal income tax from employees’ paychecks. The amount withheld is determined by the information the employee furnishes on Form W-4 and is calculated according to the IRS-provided tax tables. This tax is progressive, with the applicable rate escalating as the employee’s taxable income increases.
  • Social Security and Medicare Taxes (FICA): Both employers and employees are mandated to contribute to Social Security and Medicare through the Federal Insurance Contributions Act (FICA) tax. Employers are responsible for accurately withholding the specified amount from their employees’ wages and also for contributing a corresponding matching amount.
  • Federal Unemployment Tax Act (FUTA): Employers pay this federal tax separately from other taxes, and it is not withheld from employees’ wages. FUTA, working in conjunction with the state unemployment system, provides critical funds for workers who are unemployed.

Key Pay Elements That Impact Payroll in Kentucky

Minimum Wage

Kentucky upholds the federal minimum wage standard of $7.25 per hour for all employees. Employers must ensure they pay at least this amount, regardless of whether the employee is part-time or full-time. Different rates may apply for employees under certain conditions, such as being tipped workers, but the total hourly earnings must equal or surpass the minimum wage.

Overtime

In Kentucky, non-exempt employees are entitled to overtime pay at one and a half times the regular rate for hours worked beyond the standard 40 hours in a single workweek. No daily overtime is mandated. This rule necessitates that employers accurately track work hours weekly to comply with the law and avoid potential disputes or penalties associated with overtime pay.

Pay Stub Laws

Kentucky’s regulations require employers to provide detailed pay statements. It’s important to note that these statements must itemize gross wages, any deductions, and the resulting net pay. Providing this information helps employees understand the earnings and deductions clearly, fostering transparency in wage-related communications between employers and the staff.

Workers’ Compensation Insurance

Employers in Kentucky must provide workers’ compensation insurance to the employees. This insurance offers benefits to employees who suffer job-related injuries or medical illnesses. It is crucial for employers to maintain workers’ compensation to ensure employees are appropriately covered, reinforcing the state’s commitment to workplace safety and employee well-being.

Wage Garnishments

Kentucky permits wage garnishments and prescribes legal deductions from employees’ paychecks, such as for state taxes, federal obligations, and child support. Employers must process these deductions in compliance with the law, withholding and remitting the correct amounts to the designated authorities, ensuring all legal responsibilities are met without error.

Final Paycheck

Kentucky requires employers to issue the final paycheck by the next regular payday or within 14 days, whichever is later. This ensures that employees receive all due wages in a timely manner following the termination of their employment, whether they resign or are terminated.

Step-by-Step Guide to Payroll in Kentucky

Here’s a step-by-step guide to mastering payroll procedures in the Bluegrass State.

  • Step 1: Business Registration: Register your business with the Kentucky Secretary of State and obtain an Employer Identification Number (EIN) from the IRS. After that, set up accounts with the Kentucky Department of Revenue for withholding taxes and with the Kentucky Office of Employment and Training for unemployment insurance to fulfill state tax obligations.
  • Step 2: Employee Documentation: After registering your business, collect a completed Form W-4 from each new hire for federal tax withholding purposes. Also, gather the Kentucky state tax withholding form to ensure accurate state tax deductions from employee paychecks.
  • Step 3: Establishing Pay Schedules: Determine your business’s pay periods; Kentucky law requires that employees be paid at least semi-monthly. Communicate these established pay dates to your respective employees to ensure consistency and meet legal requirements.
  • Step 4: Calculating Gross Pay: Compute the gross pay for each employee for every pay period. It’s important to note that this calculation involves summing all pre-deduction earnings, whether it’s the total of hours worked at an hourly rate or a set (fixed) salary figure.
  • Step 5: Deductions and Withholdings: After calculating gross pay, subtract all required withholdings from the total. This includes federal income tax, Kentucky state tax, and contributions to FICA and Medicare. Also, consider any other voluntary deductions for benefits.
  • Step 6: Payroll Processing: Process payroll by issuing pay via approved methods (cash, checks, or deposits). Ensure each method is in accordance with Kentucky’s payment laws.
  • Step 7: Record Keeping: After processing payroll via approved methods keep comprehensive payroll records for at least three years as per Kentucky’s legal requirements. These records should accurately reflect each employee’s hours worked, wages paid, and deductions taken.
  • Step 8: Reporting and Compliance: Finally, ensure all payroll-related taxes are reported to the relevant federal and state agencies according to the required filing schedule. This includes both periodic filings and annual reconciliations to maintain compliance with tax laws.

Final Thoughts

Managing payroll in Kentucky can be a challenging task. Employees must ensure they diligently adhere to Kentucky’s strict payroll regulations. To simplify the often complex process of managing payroll, consider exploring our comprehensive list of the top 6 applications tailored to streamline payroll responsibilities in the United States. If you’ve already established a payroll system, we’ve provided ten tips to enhance your payroll procedure within the United States.

Important Cautionary Note

This content is provided for informational purposes only. While we make every effort to ensure the accuracy of the information presented, we cannot guarantee that it is free of errors or omissions. Users are advised to independently verify any critical information and should not solely rely on the content provided.