How Your LLC Will Be Taxed
In this guide, we’ll cover the main business taxes required in Kentucky, including self-employment, payroll, federal and sales tax. The profits of an LLC aren’t taxed at the business level like
C Corporations. Instead, taxes are as follows:
State Taxes for LLCs
There are three main types of state tax you must pay to the Kentucky Department of Revenue: income, sales and franchise tax (actually called the Kentucky Limited Liability Entity Tax; more information below).
Kentucky Income Tax
As a business owner, you’ll need to pay Kentucky income tax on any money you pay to yourself. These earnings flow through to your personal tax return. You’ll be taxed at the standard rate for Kentucky, and you’ll be able to apply regular allowances and deductions.
Any employees you have will also need to pay Kentucky income tax.
The Kentucky income tax rate is a flat 5 percent.
Kentucky Sales Tax
If you sell physical products or certain types of services, you may need to collect sales tax and then pay it to the Kentucky Department of Revenue. Sales tax is collected at the point of purchase and is a flat 6 percent. There are no local sales taxes in Kentucky.
Most states don’t levy sales tax on goods that are considered necessities, such as food, medications, clothing or gas. Use our sales tax calculator to get an idea of how much you might need to pay, but also check with your accountant and the Department of Revenue to find out whether your business will be required to collect Kentucky sales tax, and to ensure you collect and pay the right amount.
Kentucky Franchise Tax
Some states levy a tax on certain businesses for the right to exist as a legal entity and do business in the state. It's often called a transaction privilege tax or a privilege tax. The Kentucky Limited Liability Entity Tax (KY LLET) serves the same purpose.
The tax is calculated using the lesser of $0.095/$100 of Kentucky gross receipts or $0.75/$100 of Kentucky gross profits. Regardless of which calculation method is used, business owners are required to pay a minimum Kentucky LLET of $175.
Federal Taxes for LLCs
As the owner of an LLC, you’re required to pay self-employment tax and federal income tax, both of which are levied as "pass-through taxation."
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Kentucky LLC is paying the correct amount.
Federal Self-Employment Tax
All members or managers who take profits out of the LLC must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA), and covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3 percent.
You'll be able to deduct your business expenses from your income when calculating how much self-employment tax you owe.
Pay Less Self-Employment Tax by Treating Your LLC as an S Corporation
The Internal Revenue Service allows an LLC to be treated as an
S Corporation for tax purposes, provided your business meets a few requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals.
Speak to your accountant or professional tax preparer for more information.
You can do this by making an “S Corporation Tax Election” with the IRS using Form 2553. We can file your Form 2553 with the IRS on your behalf.
Federal Income Tax
You’re required to also pay regular federal income tax on any earnings you withdraw from your LLC. This amount depends on your earnings, current income tax bracket, deductions and filing status.
You only pay federal income tax on profits you take out of the business, minus certain deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions in areas such as healthcare and some retirement plans.
Speak to your accountant for more information.
Employee and Employer Taxes
There are some slightly different tax implications if you pay employees. Speak to your accountant to get clear guidance for your unique situation.
Employees May Need to File Tax Returns
Your employees may need to file their own tax returns regardless of whether you withhold federal and state income tax.
Employee Insurance and Other Requirements
You may also be required to pay insurance for any employees, such as employee compensation insurance or unemployment tax.
Other Taxes and Duties
Depending on what industry you operate in, you may be responsible for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, if you import or export goods, you may need to pay certain duties.
Speak to your accountant about any other taxes you may need to withhold or pay.
Most LLCs must pay estimated taxes throughout the year, depending on the amount of profit and income you expect to make. The most common types of estimated tax are: