Nobody goes into business to do taxes other than tax professionals. So it is no surprise that taxes are one of the most confusing and stressful tasks that business owners have to deal with each year.
Understanding how your entity type is taxed is one of the first steps to making sure that you and your business don't end up in tax trouble. We'll cover what an LLC is, how it is taxed, and the LLC filing requirements in the state of Kentucky.
Picture by Wix
Single-member LLCs are taxed the same way as sole proprietors by the Internal Revenue Service (IRS).
An LLC is not an entity recognized by the IRS.
LLCs registered in Kentucky must file Form KY725 each year with the Kentucky Department of Revenue.
What is a Limited Liability Company?
A limited liability company (LLC) is an independent legal entity that exists separately from its owner(s). This entity offers limited liability to whoever owns it. An LLC is set up at the state level and not at the federal level with the IRS.
There are two types of LLCs. Those with a single member, known as a single-member LLC or disregarded entity. Then there are LLCs with multiple members also known as a Partnership. In this article, we will be focusing on single-member LLCs when referring to an LLC and how it is taxed.
How is an LLC Taxed?
Single-member LLCs are taxed on the owner's individual tax return. This is because the IRS considers single-member LLCs to still be sole proprietors and taxes them as such. The profit and loss of the business are shown on Schedule C of the 1040. This income or loss then flows through to Schedule 1 and then page 1 of the 1040 to determine how much income tax will be paid on the profit. LLCs renting properties will have their income reported on a Schedule E.
If there is a net profit of $400 in the business the income is required to be filed on the tax return. This is also when self-employment tax kicks in. Self-employment tax is a business owner's contribution to social security and medicare. It comes out to be roughly 15.3% of net profits. So if the LLC has a net profit of $10,000 they may not pay income tax but they will pay almost $1,530 in self-employment tax when they file their 1040.
This is the scenario if there is no other income and no children are being claimed on the return.
LLC owners are required to pay income and self-employment tax payments quarterly. These are called estimated tax payments. Failure to make these payments quarterly can result in you having a tax bill, which will result in an underpayment penalty.
How are LLCs taxed in Louisville, Ky?
LLCs registered in Louisville, Kentucky must pay a limited liability entity tax (LLET) each year. This tax is figured on Form KY-725. This form is due at the same time as your 1040 but instead of going to the Internal Revenue Service(IRS) it goes to the Kentucky Department of Revenue (KYDOR) The amount of this tax is $175. Failure to file this form and pay the tax in a timely manner may result in an LLC being in bad standing with Kentucky.
What is Kentucky One Stop Business Portal?
Kentucky One Stop Business portal is your one stop shop to access the information you need to file your Kentucky business tax returns. You can find all of your tax account numbers and apply for applicable tax accounts from this portal. Some of these numbers you will need to file your KY-725 such as:
Sales and Use Tax Number
What is E-mints?
E-mints is the electronic metro integrated tax system. This is how the city of Louisville receives your occupational tax filings as well as payment. If you are a sole proprietor in the city of Louisville you are responsible for withholding and remitting your own local taxes.
These occupational taxes are filed on a Form OL-3. The tax rate as of 2/1/2022 is 2.2%. If you live in a different city within the metro area of Louisville you are responsible for paying those taxes as well. Most other cities in the Metro area have a tax rate between .75 -1.5%. Examples are:
Individuals will want to check with the city tax department to make sure you do not also owe them an occupational tax filing as well as 1% of their LLC net income.
Understanding how your LLC is taxed is critical to the financial health of your business. You do not want to be in over your head with the IRS. Your LLC is not recognized by the IRS. So your LLC taxes will be filed with your individual taxes on a Schedule C. If you are a registered Kentucky business you will also need to file a KY-725 each year and pay $175 to the state.
Timalyn Bowens, EA, is the owner and lead accountant for Bowens Tax Solutions. As an Enrolled Agent, she is licensed by the IRS as a tax expert and given clearance to officially represent taxpayers to them.
She received her accounting degree from Bellarmine University, where she also studied professional writing. Since that time, she has combined her love of tax law and writing to educate taxpayers.
If you're interested in having Timalyn speak or teach at your next event you can contact her at Timalyn@AmericasFavoriteEA.com .