The City of Elizabethtown, Kentucky announced that under Ordinance No. 13-2023, and effective January 1, 2024, its Occupational License Tax (OLT) will increase from 1.35% to 1.95% of taxable wages.

Background

Employers are required to withhold the Elizabethtown OLT from taxable wages paid to resident and nonresident employees providing services within the Elizabethtown city limits. (Elizabethtown Ordinance, Section 110.03)

For the purposes of the OLT, taxable wages are defined as any form of remuneration that is subject to federal income tax, adjusted by adding the following:

• Amounts contributed by an employee to any retirement, profit sharing or deferred compensation plan
• Amounts contributed by an employee on a pretax basis to any welfare benefit, fringe benefit or other benefit plan, including, but not limited to arrangements under IRC Sections 125 and 132 (Elizabethtown Ordinance Section 110.01)

OLT withholding is reported and remitted to the City using the Employer's Quarterly Return of License Fee Withheld form and is due at the end of the month following the close of each calendar year.

Employers must file with the City, on or before February 28, the Annual Reconciliation of Elizabethtown License Fees Withheld form together with copies of federal Forms W-2 or a detailed employee listing containing the same information as the Form W-2.

Employers must furnish to employees, by January 31, a Form W-2 showing the amount of compensation and OLT withheld for the previous calendar year. (Elizabethtown Ordinance, Section 110.05)

Ernst & Young LLP insights

Employers should note that taxable wages for OLT purposes differ from taxable wages for Kentucky state income tax withholding purposes. Specifically, employee contributions to deferred compensation, profit sharing and retirement plans and pretax deductions under IRC Sections 125 and 132 are exempt from wages subject to Kentucky state income tax withholding but are included in wages subject to the Kentucky local OLT.¹

Although the definition of taxable wages for OLT purposes is uniformly defined under Kentucky state law, local ordinances may vary in other areas such as which apportionment methods apply and when employees are exempt from the withholding tax. For instance:

• Elizabethtown imposes the OLT on wages paid to residents and nonresidents for services performed within Elizabethtown; however, Lexington exempts from OLT those wages paid to employees who provide services entirely outside of Lexington but who work within Lexington performing services that are incidental to their services outside of Lexington (e.g., reporting, receiving instructions) if their time in Lexington is two or less hours per week or one week or less per year (Lexington Ordinance 14.4, Section 2.2)
• Some jurisdictions include other taxes in their OLT ordinances; for example, Louisville's OLT ordinance includes transit and school board taxes

Complying with Kentucky local OLT taxes requires a careful review of each jurisdiction's ordinance, which can be an overwhelming task considering there are more than 100 Kentucky localities that impose the tax. For this reason, employers with operations throughout Kentucky should consider reaching out to their employment tax advisor to confirm that their payroll system tax configurations and procedures properly address Kentucky local OLT taxes.

For more information on challenges in complying with Kentucky local OLT taxes, see the September 2023 issue of EY's Payroll Month in Review.

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor

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ENDNOTE

¹ For Kentucky state income tax purposes, tax year 2023 taxable wages conform to the Internal Revenue Code in effect on December 31, 2022. (KRS Section 141.010(21)). Under the Kentucky Local Tax Enabling Act, taxable wages conform to the Internal Revenue Code in effect December 31, 2008, as amended, with the exception that employee contributions to deferred compensation, profit sharing and retirement plans and pretax contributions under IRC Sections 125 and 132 are subject to the OLT. (Kentucky Local Tax Enabling Act, Section 67.750(2)). Some Kentucky locals have not updated their references to the federal Internal Revenue Code to comply with the Kentucky Local Tax Enabling Act. For instance, Scott County defines the Internal Revenue Code as "in effect on December 31, 2003, exclusive of any amendments made subsequent to that date."