Kentucky has been cutting its income tax steadily since 2022. In 2026 the personal rate is a flat 3.5%, the corporate rate is a flat 5% and the 6% sales tax has no state-level local add-ons. Two features make Kentucky more complicated than its headline rates suggest: the Limited Liability Entity Tax (LLET), which applies to LLCs as well as corporations, and local occupational license taxes on wages and business profits in many cities and counties.
This guide covers Kentucky's business taxes for 2026, with worked examples and comparisons against its seven neighbors.
Kentucky business taxes at a glance
For a typical small business in 2026, Kentucky's taxes stack up like this. The state taxes owners of pass-through businesses at a flat 3.5% and C corporations at a flat 5%. Most entities with limited liability, including single-member LLCs, also owe at least $175 a year in Limited Liability Entity Tax. If you work or do business in a city or county with an occupational license tax, you pay that on wages and net profits too, often around 2%. Customers pay a flat 6% sales tax with no local add-ons, but that tax now reaches many services, from landscaping to marketing. Formation and annual report fees are among the cheapest in the country at $40 and $15.
Corporate income tax
Kentucky taxes C corporations at a flat 5% of Kentucky taxable income.
- Apportionment: Single sales factor with market-based sourcing.
- Combined reporting: Mandatory for unitary groups since 2019.
- Credits: Kentucky Business Investment program credits, research and development credits and credits for job creation in distressed areas.
- Returns: Form 720 is due on the 15th day of the fourth month after year-end.
Limited Liability Entity Tax (LLET)
The LLET applies to corporations, LLCs, S corporations, limited partnerships and LLPs. General partnerships and sole proprietorships are exempt.
| Kentucky gross receipts or gross profits | LLET |
|---|---|
| $3 million or less | $175 minimum |
| More than $3 million | Lesser of 0.095% of gross receipts or 0.75% of gross profits, with reduced rates between $3 million and $6 million |
C corporations can credit the LLET, except the $175 minimum, against their income tax. For pass-through entities, owners receive a credit for their share of LLET above the minimum against Kentucky income tax on that business's income.
Personal income tax and pass-through owners
Kentucky's flat personal rate is 3.5% for 2026, down from 5% in 2022. Legislation passed in 2022 lowers the rate by half a point at a time whenever revenue triggers are met and the legislature approves.
- LLC owners, partners and sole proprietors pay 3.5% on profit.
- S corporation shareholders pay on their share.
- PTE election: Partnerships and S corporations can pay Kentucky tax at the entity level.
Local occupational license taxes
Many Kentucky cities, counties and school districts levy occupational license taxes on wages earned and net profits of businesses within their boundaries.
| Locality | Rate on wages and net profits |
|---|---|
| Louisville Metro (residents) | 2.2% |
| Louisville Metro (nonresidents) | 1.45% |
| Lexington-Fayette County | 2.25% |
| Many other cities and counties | 0.5% to 2.5% |
Businesses must withhold the tax from employees and file a net profits return with each taxing jurisdiction. Kentucky now has a standardized net profits return, and a statewide portal accepts many local filings.
Sales and use tax
Kentucky's 6% sales tax applies statewide with no local sales taxes.
Kentucky has significantly expanded the sales tax base to services since 2022. Taxable services now include marketing and advertising services, landscaping, janitorial and cleaning services, pet care and grooming, photography, personal fitness training, storage, many repair and installation services, and some event tickets.
- Groceries are exempt.
- Remote sellers with more than $100,000 of Kentucky sales or 200 or more transactions must collect.
Payroll and property taxes
- Unemployment insurance: Employers pay on a wage base that rises each year. New employers start at 2.7%.
- Property tax: Real and tangible personal property are taxed by the state and local governments. Business inventory is exempt from the state rate, and manufacturing machinery receives a reduced state rate.
Forming a business in Kentucky: fees and ongoing costs
| Item | LLC | Corporation |
|---|---|---|
| Formation filing fee | $40 | $40 plus organization tax based on authorized shares |
| Annual report | $15 | $15 |
| LLET | $175 minimum | $175 minimum |
| Local occupational license | Where applicable | Where applicable |
| Registered agent | Required | Required |
Worked example: $500,000 of profit
| Step | Amount |
|---|---|
| Taxable income | $500,000 |
| Kentucky corporate tax at 5% | $25,000 |
| Federal tax at 21% on $475,000 | $99,750 |
| Total income tax | $124,750 (24.9%) |
The LLET of $175 and any local net profits tax would be added. For a single LLC owner with $150,000 of Kentucky taxable income, state income tax is about $5,250. At $75,000 it is about $2,625. A Louisville LLC owner would also owe about 2.2% in local occupational tax on net profits.
How Kentucky compares with its neighbors
| State | Corporate rate | Top personal rate | State sales tax |
|---|---|---|---|
| Kentucky | 5% plus LLET | 3.5% plus local | 6% |
| Indiana | 4.9% | 2.95% plus county | 7% |
| Ohio | CAT on receipts over $6M | 2.75% plus municipal | 5.75% |
| Tennessee | 6.5% excise plus franchise | None on wages | 7% |
| West Virginia | 6.5% | 4.58% | 6% |
| Virginia | 6% | 5.75% | 5.3% |
| Illinois | 9.5% | 4.95% | 6.25% |
| Missouri | 4% | 4.7% | 4.225% |
Kentucky's state income tax is now one of the lowest in the region. Local occupational taxes, however, can add 2% or more, so owners in Louisville and Lexington pay combined rates similar to Ohio or Indiana.
Choosing an entity in Kentucky
- Sole proprietorship or general partnership: No LLET, but no liability protection.
- LLC: Pays the $175 minimum LLET; owners pay 3.5% on profit.
- S corporation: LLET plus federal payroll tax savings.
- C corporation: Pays 5%, with LLET credited against it.
Tax planning tips for Kentucky businesses
Check whether your services are now taxable. Many service businesses that were never subject to sales tax before 2023 now need a sales tax permit. Penalties for failing to collect can be significant.
Allocate net profits by location. Businesses operating in several Kentucky localities apportion net profits among them. Accurate payroll and sales records by location reduce overpayment.
Use the LLET credit. Pass-through owners can claim their share of LLET above $175 as a credit against Kentucky income tax on that business's income. It's easy to overlook when preparing personal returns.
Recent changes for 2025 and 2026
- Personal income tax cut to 3.5% for 2026.
- Expanded sales tax on services continues, with new categories added in recent sessions.
- Standardized local net profits returns now in place statewide.
Is Kentucky a good state for business?
Advantages
- Low flat state income tax with further cuts possible
- Very low formation and annual report fees
- Central location for logistics, with major hubs in Louisville and northern Kentucky
- Strong manufacturing base, including automotive and bourbon
Drawbacks
- Local occupational taxes on wages and profits
- LLET applies to LLCs, including a $175 minimum
- Sales tax on a growing list of services
- Multiple local filings for multi-location businesses
Compliance checklist
- File Articles of Organization or Incorporation with the Secretary of State.
- Register with the Department of Revenue for sales tax, withholding and income tax.
- Register with each city or county that levies an occupational license tax.
- Register for unemployment insurance if you hire.
- File the annual report between January 1 and June 30.
- File Form 720, 720S or 765 each year, including the LLET schedule.
Compare Kentucky with its neighbors below or estimate your taxes in the United States calculator. See LLC taxes for more.