A resident is defined as a full-year Kentucky resident or a part-year resident who has Kentucky gross income in excess of the modified gross income for their family size. Nonresidents are all other persons. Military personnel on active duty in the Kentucky National Guard are also considered residents for tax purposes until they establish a new domicile.

A nonresident of Kentucky is taxable on income derived from sources within the state if the taxpayer meets certain requirements. For example, wages and salaries paid to a nonresident employee by a Kentucky employer must be reported to the state, as are dividends and interest earned from Kentucky investments. The state also taxes the gross receipts of some retail sales of tangible personal property and digital property.

Every pass-through entity doing business in Kentucky, except publicly traded partnerships, must withhold income tax at the rate of 5% from the distributive share income of each nonresident individual partner, member, or shareholder. These entities file Form 740NP-WH, “Kentucky Nonresident Income Tax Withholding on Distributive Share Income Transmittal Report and Composite Income Tax Return,” for each reporting period (quarterly filers submit Form K-1 for the first three quarters of the year; quarterly and monthly filers submit Form K-3), along with a declaration and payment of tax.

Nonresident individuals with gross income from Kentucky sources in excess of the modified gross income limits for their family size must file an income tax return (Form 740-NP, Kentucky Nonresident and Part-Year Resident Individual Income Tax Return) to avoid a late filing penalty. Kentucky has reciprocal agreements with Indiana, Ohio, West Virginia, and Wisconsin that allow residents of those states to claim a credit on their Kentucky income tax return for income tax withheld by those states.

How to Pay Kentucky Nonresident Withholding Tax?

The Kentucky nonresident withholding tax applies to individuals who earned wages or salaries in the state of Kentucky as well as those with Kentucky income from a pass-through entity. These individuals should file an individual Kentucky income tax return (Form 740-NP, Kentucky Nonresident and Part-Year Resident Individual Income Tax Return) if their combined gross income from all sources exceeds their family size’s modified gross income limits.

Employers withholding Kentucky income tax must file and remit the taxes on a quarterly basis. Quarterly filers must submit Form K-1 for the first three quarters of the year by the last day of the month following the end of the quarter, with payment of the withheld tax included with the return. Monthly filers submit Form K-3 for the last reporting period of the calendar year.

A commutation credit is available to individuals who commute on a regular basis to work in the state of Kentucky from another location outside the state. If the individual’s employer withheld Kentucky income tax from their paycheck in error, they may be entitled to a refund of that amount.

Owners of electing entities that do business in the states of Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia and Wisconsin must file a Kentucky income tax return (Form 740-NP-R) if their combined gross income from all source exceeds the modified gross income limits for their size category. The Kentucky income tax withholding is based on the distributive share of each owner’s item of income, loss, deduction and credit.