Is Kentucky reducing its income tax rate to 0%?

Yes. Kentucky enacted HB 8 in 2022, creating a mechanism to reduce the state income tax rate by 0.5% each year when revenue triggers are met. The rate dropped from 5% (2022) to 4.5% (2023) to 4.0% (2025) to 3.5% (2026). If the triggers continue to be met, the rate will eventually reach 0%, making Kentucky a no-income-tax state like Tennessee.

What is Kentucky's occupational tax?

Many Kentucky cities and counties levy an occupational license tax (sometimes called a payroll tax or net profits tax) on gross wages. Unlike Ohio's municipal income tax, Kentucky calls it an 'occupational' tax. Louisville Metro charges 1.45% and Lexington-Fayette charges 2.50%. The tax applies to gross wages with no deductions or exemptions.

How does Louisville's occupational tax compare to Lexington's?

Louisville Metro's occupational tax rate is 1.45%, while Lexington-Fayette's is 2.50% — nearly double. On an $80,000 salary, Louisville's tax is $1,160 versus Lexington's $2,000. The difference is $840/year. Lexington's higher rate is one of the highest local taxes in Kentucky.

How does Kentucky compare to Indiana and Tennessee for taxes?

On an $80,000 salary filing single: Kentucky charges 3.5% flat state tax ($2,689 on taxable income), Indiana charges 3.05% flat ($2,440), and Tennessee has no state income tax on wages ($0). However, Kentucky's rate is declining toward 0%. Tennessee has higher sales tax (7% vs KY's 6%), and Indiana has county income taxes of 0.5-3.4%. The total tax burden depends on your full financial picture.

Kentucky Paycheck Calculator 2026

Flat 3.5% — dropped from 5% in 2022 with a path to 0%. Lexington adds 2.5% occupational tax.

Gross annual salary

Pay frequency

Filing status

City occupational taxLouisville and Lexington levy occupational taxes on gross wages

Take-home per paycheck (biweekly)

$2,390.06

Gross pay (annual)$80,000

Deductions (annual)

Federal income tax−$9,049

KY state tax (3.5% flat)−$2,689

Social Security (6.2%)−$4,960

Medicare (1.45%)−$1,160

Summary

Annual take-home$62,142

Effective total tax rate22.3%

You keep per dollar78 cents

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2026 federal + KY state tax rates · Updated April 2026

How to Use This Calculator

Tab "Take-Home Pay"

Enter your gross annual salary, pay frequency, and filing status. Select your city occupational tax from the dropdown — Louisville Metro charges 1.45%, Lexington-Fayette charges 2.50%. If your city isn't listed, choose "Other (enter rate)" and type your local rate. Under "More options," add 401(k) contributions and health insurance premiums to see the impact of pre-tax deductions.

Tab "Tax Breakdown"

See a visual pie chart showing exactly where your money goes — federal tax, Kentucky's 3.5% flat state tax, occupational tax, Social Security, and Medicare. The chart updates instantly as you change inputs.

Tab "Compare Filing Status"

Compare Single vs Married Filing Jointly vs Head of Household side by side. Kentucky's flat 3.5% rate is the same for all filers, but the KY standard deduction differs ($3,160 single vs $6,320 MFJ). The bigger difference comes from federal brackets and standard deductions.

The Formulas

Federal Income Tax (2026 brackets):
1. Taxable income = Gross salary - Pre-tax deductions - Standard deduction ($15,750 Single / $31,500 MFJ / $23,500 HoH)
2. Apply progressive brackets (10% to 37%)

Kentucky State Income Tax:
KY taxable = Gross - KY standard deduction ($3,160 Single or HoH / $6,320 MFJ est.)
KY tax = KY taxable x 3.5%
Rate reduced from 5% (2022) to 4.5% (2023) to 4.0% (2025) to 3.5% (2026).

Occupational Tax (city/county):
Occupational tax = Gross salary x City rate
Louisville Metro: 1.45% | Lexington-Fayette: 2.50%
Occupational tax applies to gross wages — no deductions or exemptions.

FICA (Federal Insurance Contributions Act):
Social Security = 6.2% x min(Wages, $184,500)
Medicare = 1.45% x Wages
Additional Medicare = 0.9% x max(0, Wages - $200,000)

All figures use 2026 IRS rates. Kentucky rate from revenue.ky.gov (3.5% effective 2026 per HB 8 trigger mechanism). City rates from respective local government ordinances.

Example

$80,000 salary, Single, no city occupational tax

Filing Single. No pre-tax deductions. KY taxable income = $80,000 - $3,160 std deduction = $76,840. KY state tax = $76,840 x 3.5% = $2,689. Federal taxable = $80,000 - $15,750 = $64,250.

Gross annual salary$80,000

Federal income tax-$9,049

Kentucky state tax (3.5%)-$2,689

Social Security (6.2%)-$4,960

Medicare (1.45%)-$1,160

Annual take-home$62,142

Biweekly paycheck$2,390

With Lexington's 2.50% occupational tax: add $2,000 occupational tax, take-home drops to $60,142 — a $2,000/year difference. The occupational tax is on gross wages with no deductions.

Frequently Asked Questions

How does Kentucky's path to 0% income tax work?▼

Kentucky enacted HB 8 in 2022, which allows the state income tax rate to drop by 0.5 percentage points each year when specific revenue triggers are met. The rate started at 5% in 2022 and has fallen to 4.5% (2023), 4.0% (2025), and 3.5% (2026). If the General Fund revenue continues to exceed the trigger thresholds, the rate will keep declining until it reaches 0%. This would make Kentucky a no-income-tax state, similar to Tennessee and Florida.

What is the Kentucky occupational tax and who pays it?▼

Kentucky cities and counties can levy an occupational license tax on wages earned within their jurisdiction. It is sometimes called a payroll tax. The tax is calculated on gross wages with no deductions, exemptions, or standard deduction applied. Louisville Metro charges 1.45% and Lexington-Fayette charges 2.50%. You pay the tax based on where you work, not where you live. Employers typically withhold it from your paycheck automatically.

Why is Lexington's occupational tax so much higher than Louisville's?▼

Lexington-Fayette Urban County Government sets its own occupational tax rate independently from Louisville Metro. Lexington's 2.50% rate is one of the highest local payroll taxes in Kentucky and is nearly double Louisville's 1.45%. On an $80,000 salary, this means Lexington workers pay $2,000 vs $1,160 in Louisville — an $840/year difference. The rate reflects Lexington's consolidated city-county government structure and local budget needs.

How does Kentucky compare to Indiana and Tennessee?▼

On $80,000 single: Kentucky charges $2,689 state tax (3.5% flat), Indiana charges about $2,440 (3.05% flat), and Tennessee charges $0 on wages. But the picture is more complex: Tennessee has a 7% state sales tax (vs KY's 6%), Indiana has county income taxes of 0.5-3.4%, and Kentucky's rate is declining toward 0%. If you work in Lexington, you also face 2.5% occupational tax. For border workers, the total tax burden depends on where you live, work, shop, and own property.

Does Kentucky have a standard deduction?▼

Yes. Kentucky allows a standard deduction of $3,160 for single and head of household filers (2026). Married filing jointly filers get an estimated $6,320 (double the single amount). This deduction reduces your Kentucky taxable income before the 3.5% flat rate is applied. For example, on $80,000 single: KY taxable = $80,000 - $3,160 = $76,840, and KY tax = $76,840 x 3.5% = $2,689.

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