How to File LLC Taxes in Kentucky? (A Complete Guide)
One of the easiest ways to prevent compliance fallouts with the Kentucky Secretary of State is by reporting your business taxes correctly.
To help point you in the right direction, we teamed up with our licensed team of certified accountants and business advisors who've been in the LLC sector for more than ten years.
We spent the past three weeks reviewing the Kentucky Department of Revenue website, and here's a summary of everything you should know regarding LLC taxes there.
Quick Summary
- If your LLC is taxed like a corporation, it must submit an annual corporate tax of 5%.
- LLCs in Kentucky that sell tangible products and services must collect a sales tax of 6%.
- LLCs operating in the cigarette, liquor, and rental sectors must pay industry taxes to the Kentucky Department of Revenue.
How Are LLCs Taxed in Kentucky?
LLCs are taxed in Kentucky by the number of members or owners. If you are the lone owner of a single-member LLC, you must file taxes as a sole proprietorship.
If your LLC has more than one shareholder, it is categorized as a multi-member LLC and is automatically taxed as a partnership.
During your Kentucky tax registration application, the Internal Revenue Service allows you to select an S or C corporation filing status.
State Taxes for Kentucky LLCs
The structure of your limited liability company will dictate the state taxes you pay. Here's how:
1. Single-Member LLCs
Taxes are often not levied on a single-member LLC because this type of business structure is frequently referred to as a disregarded entity.
The single-member LLC's owner or sole proprietor is responsible for filing estimated tax on their personal return.
The LLC owner is also regarded as the LLC's sole proprietor and must file self-employment taxes on any LLC profits.
2. Multi-Member LLCs
A multi-member LLC is one with several members and is treated like a partnership for taxation purposes.
In Kentucky, a multi-member LLC is taxed as pass-through entity; all the income and losses flow to the members.
The members file individual state and federal income taxes on their salaries.
3. LLCs Taxed as S-corp
If you meet the requirements, you can request that your Kentucky LLC be taxed as an S corporation by submitting Form 2553 [1].
In contrast to default status, S corporation status exempts member payouts from the 15.3% self-employment tax.
Dividends are exempt from the self-employment tax, although salaries are still subject to it.
You must submit Form 1120-S to file LLC business taxes as an S-corp [2].
4. LLCs Taxed as C-corp
Kentucky business owners can choose to have their limited liability companies taxed as C-corps.
Once the application is approved and you have the C-corp status, you'll be subject to two taxes; at the federal and state levels.
Although your entity is exempt from paying self-employment tax, you will be responsible for paying both the 21% federal corporate tax rate and the 5% state corporate tax rate in Kentucky.
"One benefit of a C-corp is that you qualify for multiple tax breaks, and even though you'll pay more in state income taxes, legally speaking, this can make your company more appealing to investors. "
- Theodore Allison, LLC Attorney
Federal Taxes for Kentucky LLCs
Here are the federal income taxes your Kentucky LLC must report to maintain compliance, including any applicable corporation income tax obligations if your LLC is taxed as a corporation.
1. Federal Self-Employment Tax
If you work as a freelancer, independent contractor, or small-business owner, the Kentucky Department of Revenue mandates you to pay employer taxes, including the federal self-employment tax.
The 15.3% self-employment tax comprises Medicare and Social Security benefits.
Read our article to learn how to reduce self-employment tax.
2. Kentucky State Income Tax
Because an LLC is a pass-through entity, shareholders must pay a Kentucky income tax rate of 5% of the taxable net income.
Corporations and LLCs with the C-corp status are likewise subject to the flat rate of 5% corporate tax.
Kentucky also levies a Limited Liability Entity Tax (LLET) which applies to C-corps and LLCs.
The Limited Liability Entity Tax is determined at $0.095 per $100 of Kentucky's total revenue or $0.75 per $100 of Kentucky gross profits, whichever is lower.
Other Taxes
Other taxes that your Kentucky LLC may pay include the following:
1. Sales Tax
Businesses must pay sales tax rate of 6% of Kentucky gross receipts. The Kentucky sales tax is levied on physical and intangible goods and some services offered in Kentucky.
These services include landscape design, tree trimming, pruning, and lawn care.
Unlike most states, the sales tax is standard because Kentucky doesn't collect local sales and use taxes at the county or municipal level.
2. Workers' Compensation
Most businesses must have workers' compensation insurance in Kentucky to protect their staff from accidents and illnesses that may arise at work.
The cost of workers' compensation insurance varies, among other things, based on the LLC sector, region of transaction, and amount of risk involved.
3. Unemployment Insurance (UI)
In Kentucky, the tax on unemployment insurance is determined by the employer's experience and expertise in the industry.
The amount of taxes paid by the employer is used to determine experience.
Kentucky first-time employers are subject to a 2.70% unemployment insurance tax rate.
The Kentucky Office of Unemployment Insurance determines your subsequent rate after the first year.
4. Industry Taxes
The Kentucky Department of Revenue levies the following industry taxes on LLCs:
- Cigarette Tax
- Rental Tax
- Rural Cooperative Annual Tax
- Race Track Admission Tax
- Banking Tax
- Controlled Substance Tax
- Legal Process Tax
- Alcoholic and Wine Consumer Taxes
- Transient Room Tax
- Farming Tax
What Is Tax-Deductible for an LLC in Kentucky?
Tax-deductible for an LLC in Kentucky includes child and dependent care credits, angel investor credits, flowthrough credits, and education tuition tax credits.
1. Child and Dependent Care Credit
Parents or taxpayers claiming a child can apply for the child and dependent care credit by completing Form 740 or 740-NP. You can claim the credit by filling out the total sum of the federal credit and multiplying by 20%.
2. Education Tuition Tax Credit
A credit is available that is equivalent to 25% of the combined federal American Opportunity Credit and Lifetime Learning Credit amount.
Only undergraduate studies are eligible for the credit, which can be carried over for up to five years.
3. Angel Investor Credit
The Kentucky Angel Investment Act Tax Credit enables angel investors who contribute money to start-up businesses to earn tax benefits to promote economic development and job creation.
In areas with high unemployment rates, qualified investors may be eligible for a tax credit of up to 40% of their investment.
4. Employer GED Incentive Tax Credit
This credit may be available to employers that help workers complete learning contracts that commit them to achieving a high school equivalency diploma.
Related Articles:
- How to Set Up an LLC in Kentucky
- Premium Registered Agent Services in Kentucky
- High-Quality LLC Formation Services in Kentucky
5. Other Deductions
Other tax deductibles that your LLC can claim include:
- Economic development tax credit
- Decontamination tax credit
- Coal incentive tax credit
- Energy-efficient products tax credit
- Film industry tax credit
- Ethanol tax credit
- Food donation tax credit
- Qualified research facility tax credit
FAQs
Do Foreign LLCs Pay Kentucky Income Tax?
Yes, foreign LLCs pay Kentucky income tax, provided they earn revenue from transacting within state boundaries. LLCs must also pay other taxes, including the limited liability entity tax, federal income tax, and the Kentucky sales tax if they sell tangible property there.
Does Kentucky Have a State Income Tax?
Yes, Kentucky has a state income tax of 5% that all LLC members must pay on their reports.
Does Kentucky Have a Payroll Tax?
Yes, Kentucky has payroll tax where the employer and employee pay 7.65% of the taxable income.
