Kentucky LLC Taxes
Kentucky LLCs, like all LLCs, are taxed as pass-through entities by default, which means you report your LLC’s profits and losses on your individual tax returns. In Kentucky, the personal net income tax rate you’ll pay is a flat 5%. You and any other owner will also be taxed at the 15.3% federal self-employment tax rate (12.4% for social security and 2.9% for Medicare). LLCs, however, offer the flexibility of electing to be taxed as a corporation instead of a pass-through entity. Kentucky LLC taxes don’t just stop there. We cover it all below.
In this article, we’ll cover:
How Are Kentucky LLCs Taxed?
A Kentucky LLC is taxed based on the number of members, which is what owners of an LLC are called. Single-member LLCs (SMLLC), where you are the only owner, file taxes as a sole proprietorship. If your LLC is owned by multiple people, it is considered a multi-member LLC and is taxed as a partnership by default.
The forms you’ll file with the IRS are…
- Single-member LLC—Form 1040 (usually Schedule C, but some SMLLCsfile C-EZ, E, or F)
- Multi-member LLC—Form 1065
LLCs tax flexibility is one of the biggest perks of forming one. As an LLC, you can elect to have your business taxed as either an S-corp or C-corp. Picking corporate tax elections for your LLC is a bit complicated, so we’ve broken it down.
Kentucky LLCs taxed as S-corp
By filing Form 2553, you can apply to have your Kentucky LLC taxed as an S-corp. LLCs and corporations can both choose S-corp status, but your LLC must be approved by the IRS before qualifying. The difference between S-corp status and default status is you won’t have to pay the 15.3% self-employment tax on member distributions. You still have to pay the self-employment tax on salaries, just not on dividends. To submit your taxes as an S-corp, you’ll need to file Form 1120-S.If you’re unsure if S-corp election would benefit your business, consult with a CPA.
LLCs taxed as C-corp
Though it is rare, you can elect to have your Kentucky LLC taxed as a C-corp, which is the default tax status for corporations. Corporations and LLCs with C-corp status are, in a way, taxed twice. Your LLC won’t pay the self-employment tax, but you will need to pay the 21% federal corporate tax rate and the Kentucky corporate tax rate of 5%. While you’ll pay more taxes, technically, your LLC is eligible for more tax breaks as a C-corp—potentially making your business more attractive to investors. Before filing Form 1120 for your Kentucky LLC, meet with a CPA to see if C-corp election is right for your business.
Kentucky State Income Tax
In Kentucky, LLCs with pass-through taxation status must pay their state personal income tax when members file their taxes. Kentucky has a personal income tax rate of 5%. That 5% flat rate also extends to corporations. So, if you elect to have your Kentucky LLC taxed as a C-corp, you will still just pay the 5% Kentucky corporate tax. In Kentucky, C-corps and LLCs also are required to pay a Limited Liability Entity tax that is calculated at $0.095 per $100 of Kentucky gross receipts or $0.75 per $100 of Kentucky gross profits, whichever is lower.
Learn more about the Kentucky Department of Revenue Tax breakdown for businesses.
Sales and Use Tax
Kentucky businesses collect a 6% sales and use tax on gross receipts. Lucky for you, Kentucky does not have local sales and use taxes collected at the county or town level. Sales tax is a tax on property—both digital and tangible— and on certain services. The use tax applies in the same way except for property and services used in Kentucky. To learn more about how Kentucky collects sales and use tax, check out the Kentucky Department of Revenue Sales & Use Tax page.
Local Kentucky Taxes
While you won’t have to pay a sales and use tax on the local level, your LLC may be charged an occupational license tax on your net profits. The rate varies depending on your LLC’s location. For example, in Louisville Metro the rate is 2.2%. You’ll need to check with your county department of revenue or tax administration office to see what your local tax rate is for your Kentucky LLC.
Other Taxes in Kentucky
Your Kentucky LLC may need to pay additional taxes based on your industry and whether or not you have employees. Let’s get into them below.
Kentucky State Employer Taxes
All employers in Kentucky are required by law to get workers’ compensation insurance for their employees. You, however, don’t have to insure yourself if you own at least 10% of your LLC.
- Unemployment Insurance (UI) Tax—In Kentucky, the unemployment insurance tax is based on the experience of the employer. Experience is calculated by how much the employer has paid in taxes. First time Kentucky employers pay a 2.70% unemployment insurance tax rate. After the first year, your rate is calculated by the Kentucky Office of Unemployment Insurance.
- Workers’ Compensation—Kentucky requires most employers to have workers’ compensation insurance to cover their employees against any workplace injuries or illnesses. Rates for workers’ compensation insurance vary, depending on the level of risk, location, and industry among other factors.
To learn more about Kentucky employer taxes, visit the Kentucky Labor Cabinet website.
The Kentucky Department of Revenue collects taxes on certain industries based on legislative mandates. Some taxes affecting different industries are:
- Race Track Admission Tax
- Cigarette Paper Tax
- Distilled Spirits and Wine Consumer Taxes
- Transient Room Tax
- Loaner-Rental Tax
- Controlled Substance Tax
- Rural Cooperative Annual Tax
- Beer Consumer Tax
- Telecommunications Tax
- Legal Process Taxes
- Bank Franchise Tax
- Farm Machinery Used in Farming
Do foreign LLCs in Kentucky need to pay Kentucky taxes?
Yes. Kentucky foreign LLCs are subject to Kentucky’s use tax for doing business in Kentucky even if they do not have a physical address in the state. Your foreign LLC will also pay any other required state taxes. If your foreign LLC has a physical address in the state, you’ll need to check with your local county clerk to see if there are any taxes due on the local level.