If you do, or are planning to do, business in Kentucky, you’re probably wondering about the kind of tax obligations and liabilities you might face. Below you’ll find answers to some of the most common questions about the kinds of taxes Kentucky small businesses need to plan for.
How does Kentucky tax business income?
Kentucky imposes corporate income tax on a corporation’s taxable net income.
You can compute your liability with a three-step process:
1) Adjust your federal taxable income for Kentucky’s tax laws. Some amounts are added to the federal taxable income (for example, state income taxes deducted for federal income tax purposes ), and others deducted (for example, dividend income, which isn’t taxed by Kentucky). The adjusted figure is your Kentucky net income.
2) Determine your taxable income. Kentucky taxes a business only on the portion of its net income that was generated by its business activity in the state. To compute that portion, you must multiply your Kentucky net income by an apportionment factor.
For most companies, the factor is calculated by dividing the amount of receipts from the business activity in Kentucky by the amount of receipts from the total business activity. (Note: Certain types of companies must use different apportionment formulas, depending on their industry).
The apportionment factor is multiplied by the Kentucky net income to reach your Kentucky taxable net income.
3) Apply the tax rate to your Kentucky taxable net income. Kentucky’s current tax rate is a flat 5%.
What is the limited liability entity tax?
The limited liability entity tax (LLET) isn’t an income tax. Rather, it’s a tax Kentucky imposes on every business that’s protected from liability by the laws of the state. This includes corporations, limited liability companies (LLCs), S corporations, limited partnerships, and other types of businesses. It doesn’t, however, include sole proprietorships or general partnerships because these types of businesses don’t have limited liability.
But your business might not be subject to the LLET. The state allows a small-business exemption based on a business’s amount of total gross receipts or total gross profits. If either your total gross receipts or your total gross profits equals $3 million or less, you’ll pay only a $175 minimum LLET.
Your total gross receipts includes receipts from all business activities everywhere, adjusted for returns and allowances. Companies operating in the economic sectors that are allowed to subtract the cost of goods sold deduct the costs from gross receipts to compute their total gross profits.
If your business isn’t exempt and has total gross receipts or total gross profits in excess of $6 million, multiply your Kentucky gross receipts by 0.095% and your Kentucky gross profits by 0.75% to figure your LLET liability. You’ll pay the smaller of the two amounts. If you also owe the Kentucky corporate income tax, you can reduce your income tax liability by the amount of your LLET liability less the minimum $175.
If your total gross receipts or total gross profits fall between $3 million and $6 million, a sliding-scale formula is applied to the amount to calculate the LLET liability.
Are any tax credits available?
Kentucky offers several tax credits, including the Kentucky Small Business Tax Credit program. It provides $3,500 to $25,000 in nonrefundable credits per year for small businesses that have:
- Hired and sustained at least one new job in the last year, and
- Purchased at least $5,000 in qualifying equipment or technology
The new employee must have been on the payroll for at least one year and earn at least $10.88 per hour.
Most businesses with 50 or fewer full-time employees are eligible, and the program is open to nearly all industry segments, including retail and service. You can use the credit against both the corporation income tax and the LLET.
Additional tax credits include the:
- Employer’s Unemployment Tax Credit: For hiring unemployed Kentucky residents
- Inventory Tax Credit: Businesses that timely paid tangible personal property taxes on inventory to a taxing jurisdiction in Kentucky can claim a credit for inventory tax paid against individual income tax or corporation income tax and the LLET
- New Markets Development Program Tax Credit: For taxpayers that make a qualified equity investment in a qualified community development entity
- Qualified Research Facility Tax Credit: For certain taxpayers that construct and equip new facilities or expand or remodel existing facilities in Kentucky for qualified research purposes
When are corporation income and LLET tax returns due?
Corporation and LLET tax returns are due on the 15th day of the fourth month following the close of the taxable year-end. Depending on the type of business entity, you must submit:
- Form 720, “Kentucky Corporation Income Tax and LLET Return”
- Form PTE, “Kentucky Pass-through Entity Income Tax and LLET Return” (for S-corporations, partnerships, and general partnerships)
- Form 725, “Kentucky Single-Member LLC Individually Owned Income Tax and LLET Return”
You must file electronically if your federal gross receipts are $1 million or more. The Kentucky Department of Revenue (DOR) doesn’t have a method of e-filing a business entity return directly through its website, so you must file through a supported software program.
If filing a paper return with payment, you can mail it to:
Kentucky Department of Revenue
Frankfort, KY 40620-0021
If filing a paper return showing no tax due or a refund, mail it to:
Kentucky Department of Revenue
Frankfort, KY 40618-0010
Can I obtain a filing extension?
You can request an extension if you can’t meet the filing deadline. C-corporations can request a seven-month extension, and pass-through entities can request six-month extensions.
Bear in mind, though, that extensions of time to file a return don’t extend the time you have to pay your tax. You should submit a check made payable to the Kentucky State Treasurer for the amount of any unpaid tax to the DOR, along with your Form 720EXT, “Corporation/LLET Extension,” on or before the 15th day of the fourth month following the close of the taxable year.
Are estimated tax payments required?
Kentucky’s estimated tax rules and penalties generally follow the federal rules for corporations and pass-through entities. So corporations generally must make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
A pass-through entity must pay estimated tax installments if its combined income tax and LLET liability can reasonably be expected to exceed $5,000.
Four installments of 25% of the estimated tax are due on April 15, June 15, September 15, and December 15.
Does Kentucky have a pass-through entity election?
Kentucky is among the states that have enacted a workaround to help the owners of pass-through entities bypass the $10,000 limit on the federal income tax deduction for state and local taxes. The Kentucky election is available to partnerships, S corporations, LLCs, limited liability partnerships, limited partnerships, or similar entities that aren’t taxed for federal purposes at the entity level.
When a business makes the election, the entity has the owners’ personal income tax liability imposed on it. You can make the election any time during the taxable year or until the 15th day of the fourth month after the close of the tax year (or the 15th day of the tenth month for extensions). The election is irrevocable for the tax year and binds all of the business’s owners.
Owners can then claim an individual refundable tax credit equal to 100 percent of their proportionate share of the tax paid by the entity for the tax year, based on the owner’s share of the entity’s income.
Beginning in 2024, an electing business must make estimated income tax payments.
What is the nonresident withholding tax?
Every pass-through entity doing business in Kentucky, except publicly traded partnerships, must withhold income tax on the distributive share income—whether distributed or undistributed—of each nonresident individual partner, member, or shareholder. The withholding rate is 5%.
Form 740NP-WH, “Kentucky Nonresident Income Tax Withholding on Distributive Share Income Transmittal Report and Composite Income Tax Return,” (with copy A of PTE-WH completed for each partner, member, or shareholder) must be filed by the 15th day of the fourth month following the close of the tax year.
Every pass-through entity required to withhold Kentucky income tax must make a declaration and payment of estimated tax. Instructions to determine if you are required to make estimated payments are available in the Kentucky Nonresident Income Tax Withholding Instructions Packet.
Does Kentucky have sales and use taxes?
Yes. The Kentucky sales and use tax is 6% of gross receipts (sales tax) or purchase price (use tax). No local sales and use taxes are imposed, though.
Specifically, the sales tax is imposed on the gross receipts derived from retail sales of tangible personal property and digital property and sales of certain services in Kentucky.
The use tax is imposed on the purchase price of tangible personal property and digital property purchased for storage, use, or other consumption in Kentucky. It generally applies to property purchased outside the state for storage, use, or consumption within the state.
Are remote sellers subject to Kentucky’s sales and use taxes?
Remote retailers with 200 or more sales in Kentucky or $100,000 or more in gross receipts from sales in the state must register and collect Kentucky sales and use tax. The transaction and gross receipts thresholds are based on the previous or current calendar year sales
Does Kentucky tax business personal property?
Yes. Taxable property includes:
The personal property tax return should include property that has been fully depreciated, in storage, or expensed if on hand as of the assessment date of January 1. Each business with taxable personal property must file a Form 62A500, “Tangible Personal Property Tax Return,” between January 1 and May 15 with their local Property Valuation Administrator (PVA). The form isn’t required for tangible personal property with a sum fair cash value of $1,000 or less per property location, although you must still keep records of property owned.
Returns filed by the due date are assessed by the local PVA. The tax bills resulting from these returns will be generated and mailed by local officials in the fall of the year. Don’t send payments with your return.
No extensions are allowed for Form 62A500. Returns filed late will be assessed and billed by the Kentucky DOR.
What about income tax withholding for employees?
Kentucky law requires employers to withhold state income tax from the wages of both resident and nonresident employees unless an employee is exempt (this is in addition to your federal income tax withholding responsibilities). To determine if an employee qualifies for an exemption, you’ll need to collect a completed Form K4, “Kentucky’s Withholding Certificate,” from them.
You must withhold taxes from the wages of employees without exemptions according to either withholding tax tables or the withholding tax formula. Employers report and pay Kentucky withholding tax annually, quarterly, monthly, or twice monthly:
- Employers withholding less than $400 in Kentucky income tax a year will be required to file a return and remit the tax annually. The annual return (Form K-3, “Employer’s Return of Income Tax Withheld (Annual Reconciliation)”) must be filed with the DOR by January 31, following the close of the calendar year. The tax due is to be paid in full when the return is filed.
- Employers withholding $400-$1,999 in Kentucky income tax a year must file and pay on a quarterly basis. They must submit the quarterly return (Form K-1, “Employer’s Return of Income Tax Withheld”) for the first three quarters of the calendar year, on or before the last day of the month following the end of the quarter. Payment of the withheld tax for the quarter should be submitted with the return. For the fourth quarter, quarterly filers should submit Form K-3.
- Employers withholding $2,000-$49,999 in Kentucky income tax a year must file and pay on a monthly basis. They file Form K-1 for each of the first 11 months of the calendar year, on or before the 15th day of the following month and with payment of the tax withheld. Monthly filers submit Form K-3 for the last month of the calendar year.
- Employers withholding $50,000 or more in Kentucky income tax a year must file and pay on a twice-monthly basis. Form K-1 must be filed for the first through the 15th of the month and is due on or before the 25th of the month. The 16th through the end of the month is due on or before the 10th of the following month. Payment of tax withheld for the reporting period must be submitted with the return. They file a Form K-3 for the last reporting period of the calendar year.
If you accumulate $100,000 or more tax during any reporting period, you must remit payment within one banking day.
You must electronically file and pay the income tax withheld through WRAPS (Kentucky’s Withholding Return and Payment System). Regardless of your assigned reporting and payment frequency, you must file returns even when you’ve withheld no Kentucky income tax during a period.
What are the requirements for Kentucky unemployment insurance taxes?
For-profit, non-agricultural businesses in Kentucky are generally liable for unemployment insurance if they 1) pay at least $1,500 in gross wages in a single calendar quarter, or 2) have at least one worker performing service in any part of 20 different weeks out of a calendar year. It needn’t be the same workers in each week, and the weeks don’t have to be consecutive. (You must also pay federal unemployment taxes.)
Most kinds of work must be reported for unemployment insurance purposes, including full- and part-time, temporary, and seasonal. Exceptions to this general rule include work performed by the spouse, parent, or child under the age of 21 of a sole proprietor. Such work also isn’t included for a partnership if the family member is related to each partner (for example, as the parent of one partner and the spouse of another).
The tax rate is based in part on the amount of taxes paid into your reserve account less the amount of benefits paid. In addition, a reserve ratio is calculated that compares the size of your account balance with the size of the total amount of taxable wages you reported in the 12 preceding calendar quarters. Construction employers may have higher rates despite their reserve ratio and account balance.
The rate is determined from a rate schedule. Under the schedule in effect for 2023, rates range from 0.30% up to 9.0% of the taxable wage base of $11,100. That means you’re only required to pay unemployment insurance taxes on the first $11,100 of an employee’s wages.
You must file your quarterly wage reports (Form UI-3, “Quarterly Unemployment Tax and Wage Report”) online, but you’re not required to pay electronically. You can mail a check payment with a payment coupon and your employer’s account number on the check to:
Office of Unemployment Insurance
P.O. Box 2003
Frankfort, KY 40602-2003
Keeping up with small business taxes on both the state and federal levels can consume a lot of time and resources. Gusto’s payroll service can lighten your load by making it easier to pay employees and automatically file your payroll taxes.