July 17, 2020
Kentucky issues guidance concerning income tax withholding and nexus for employees temporarily working in Kentucky due to COVID-19
The Kentucky Department of Revenue has published frequently asked questions (FAQs) concerning the income tax withholding requirements and the assertion of nexus for employees temporarily working in the state due to the COVID-19 emergency.
The guidance is limited to state personal income and state business taxes, because the Department does not administer license, occupational or other excise taxes imposed by local Kentucky taxing jurisdictions.
Income tax withholding
The requirements for Kentucky income tax withholding remain unchanged by restrictions related to the COVID-19 emergency.
Regulation 103 KAR 18:010 requires that every employer incorporated in Kentucky, qualified to do business in Kentucky, doing business in Kentucky, or subject to the jurisdiction of Kentucky in any manner is subject to the state's income tax withholding and reporting requirements.
Wages paid to a Kentucky resident are subject to income tax and income tax withholding on wages paid for services provided both within and outside of the state.
Wages paid to a Kentucky nonresident are subject to income tax and income tax withholding for services provided within the state with the exception of employees who are residents of those states with which Kentucky has a reciprocal agreement and that have completed and submitted to the employer Form 42A804, Kentucky's Withholding Certificate. Form 42A804 must be retained in the employer's files. (Withholding Kentucky income tax: Instructions for employers, rev. February 2019, pg. 1)
Kentucky has reciprocal agreements with Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia and Wisconsin. For Virginia, the employee must commute daily for the reciprocal agreement to apply and, for Ohio, the employee cannot be a shareholder employee with 20% or greater direct or indirect equity investment in an S corporation.
Assertion of nexus
The Department will continue reviewing state income tax nexus determinations on a case-by-case basis.
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