Start a business in Kentucky
A Kentucky web designer becomes a sales tax collector at $6,001 of revenue. House Bill 8 brought more than thirty services into the sales tax from 1 January 2023 — website design and hosting, marketing, SaaS, photography, interior design, personal training — and the registration threshold is $6,000 of gross receipts from those services in the prior year, which a part-time side business clears in a couple of months. That is the first of Kentucky's two surprises. The second is that cities, counties and school boards here tax your payroll and, separately, your net profits, and there is no central place to file any of it.
Kentucky is cheap to form in and cheap to keep — $40 for the Articles of Organization, usually approved the same day, and $15 a year for the annual report each 30 June. The state income tax is a flat 3.5% for 2026, down from 4% in 2025 and 5% a few years before that.
None of which is what makes Kentucky distinctive. Two things do: a sales tax that reaches services almost nowhere else taxes, and a local tax layer that charges you twice on two different bases. Both arrive early — the sales tax registration at $6,001 of qualifying revenue, and the occupational licence before you take on your first job in a new city.
- Sales tax
- 6% state · typically 6%
- Local income tax
- Yes — 0.5%–2.25% on payroll and, separately, on net profits
- State business licence
- Not required statewide
- Workers' comp from
- 1 employee
- Formation approved in
- Same day to 1 business day for online Articles of Organization through the Secretary of State's business filings system
- First 90 days, all in
- $250–$1,200 · $215 of it to the state
Official portals: Kentucky Secretary of State — Business Filings · Kentucky One Stop Business Portal · Kentucky One Stop — Local Requirements. Figures checked September 2026; the portal always wins.
The services House Bill 8 brought into the tax
From 1 January 2023, more than thirty services became subject to Kentucky's 6% sales tax. The list is specific, and it is heavy on exactly the businesses that get started from a spare room.
- Digital and marketing
- Website design and development, website hosting, marketing services, telemarketing, and prewritten computer software access services — which is what most people call SaaS.
- Creative and personal
- Photography and photo finishing, interior design and decorating, personal fitness training.
- Business services
- Executive employee recruitment, lobbying, private investigation, security system monitoring.
- Property and other
- Parking services, among the rest of the thirty-odd categories in the Department of Revenue's list.
The registration threshold is what makes this urgent rather than theoretical: $6,000 of gross receipts from those services in the prior year. Not $100,000, not a marketplace nexus figure, not a full-time income. Six thousand dollars.
So a designer who takes $600 a month for a year is over it. A photographer with a dozen weddings is over it. A one-person agency retained by two clients is over it. Cross the threshold and you register with the Department of Revenue, add 6% to invoices for the taxable services, and file returns on the cycle the Department assigns.
6% everywhere, with nothing to look up
The compensation is genuine, and it is the flip side of the same tax. No Kentucky city or county levies a sales tax. None. 6% is the rate in Louisville, in Paducah, in a village of four hundred people, and on a delivery to any of them.
That removes an entire category of work that Kentucky's neighbours all impose. Tennessee's counties and cities add up to 2.75%, putting the combined rate near 10% and different by county. Alabama's stack with no cap and reach 9%–10%. Virginia runs five regional rates. North Carolina varies by county and just moved Mecklenburg to 8.25%. West Virginia adds 1% in 167 municipalities. In every one of those states, a business selling across the state does destination lookups, tracks rate changes and files local detail. In Kentucky you charge 6% and stop thinking about it.
For a business selling statewide, that is worth more than it sounds — it is the difference between a sales tax process and a sales tax line.
The occupational tax hits twice, on two different things
Kentucky's cities, counties and school boards levy occupational licence taxes, and this is the part that catches people who have met local income taxes elsewhere. Most states with a local income tax tax one thing. Kentucky taxes two:
Payroll — withheld by you, from everyone who works there
The jurisdiction taxes the compensation of anyone working within it. The employer withholds it and remits it, on that jurisdiction's own schedule. It follows where the work is done, so an employee at a site in another county is withheld at that county's rate.
Net profits — filed by the business, on its own return
Separately, the jurisdiction taxes the business's own net profits, apportioned to it. That is an annual return the business files in its own name, and it is owed by a single-member LLC with no employees at all — there is no payroll to withhold from, and the net profits return still applies.
| Jurisdiction | Rate | What it applies to |
|---|---|---|
| Lexington-Fayette | 2.25% | Both compensation and net profits |
| Louisville Metro — resident | 2.2% | 1.25% Metro, 0.2% Transit Authority of River City, 0.75% school board |
| Louisville Metro — non-resident | 1.45% | The same components without the school board share |
On $80,000 of net profit, Lexington-Fayette's 2.25% is $1,800 a year — on top of the state's 3.5%, and owed on the same money the state has already taxed. The school board component in Louisville is a reminder that this is not one authority with one rate: several bodies levy on the same base, and the total is what you actually pay.
There is no central system, and that is the real cost
Kentucky has a good state portal — the One Stop Business Portal does formation, tax registration and unemployment insurance in one session, and it is free. What it does not do, and explicitly says it does not do, is handle the local layer. The Portal's own guidance is to contact each city and county separately. There is no combined application, no combined return and no single payment.
You need an occupational licence from the city and county of your principal location, and from every additional city or county where you transact business or have a presence. Registration fees are usually modest; the substance of the licence is the tax behind it. A business working across four jurisdictions holds four licences, withholds at up to four rates, and files four net profits returns on four schedules with four different forms.
The one aid that exists is worth bookmarking: the Secretary of State maintains a directory of occupational tax districts and their forms at web.sos.ky.gov/occupationaltax. It will tell you who levies where. It will not file anything for you.
The $175 the state charges whatever you earned
Kentucky's limited liability entity tax has a minimum of $175, and it applies to every LLC including a single-member one, paid with the state return regardless of profit. Together with the $15 annual report each 30 June, the state's floor cost is $190 a year. Five years of Kentucky state charges comes to $975 — the LLC hub has the comparison.
It is worth budgeting the LLET as a fixed annual cost rather than a tax, because it behaves like one: it does not fall when profits do. The $40 formation fee is the cheapest in this region by a distance, which makes Kentucky look inexpensive on a formation comparison and rather less so on a five-year one.
Kentucky has no general state business licence. Registration with the Department of Revenue through the One Stop Portal is free and is a tax registration, not a licence. Regulated professions are licensed by their own boards.
One employee, and family counts
Every Kentucky employer with one or more employees must carry workers' compensation. Family members, temporary workers and part-time workers all count as employees, so there is no version of "it is just my brother on Saturdays" that sits outside the requirement.
The statutory alternative is self-insurance, authorised by the Commissioner, and it requires assets exceeding liabilities by $10,000,000. That is not an option for a small business; it is in the law for large employers, and it is worth knowing only so that you do not waste time on it.
Unemployment insurance is the one part of hiring here that Kentucky does consolidate: it goes through the same One Stop Portal, to the Office of Unemployment Insurance, in the session you are already in. The trigger is $1,500 of wages in a quarter or one employee in 20 different weeks. The 2026 wage base and new-employer rate were not confirmed in this pass.
And the thing to hold in mind before a first hire in this state: the employee brings a workers' comp premium, a state withholding registration, and an occupational tax withholding obligation to whichever city and county they actually work in — which may not be the one your business is registered in.
Common questions
Which services are taxable in Kentucky?
House Bill 8 brought more than thirty services into the 6% sales tax from 1 January 2023, including website design and development, website hosting, marketing, telemarketing, prewritten software access (SaaS), photography and photo finishing, executive employee recruitment, security system monitoring, private investigation, personal fitness training, interior design, lobbying and parking. The Department of Revenue publishes the full list.
At what point do I have to register for sales tax?
$6,000 of gross receipts from taxable services in the prior year. That is a low bar — a designer billing $600 a month clears it inside a year — and it is why many one-person Kentucky service businesses are sales tax collectors without realising it.
Is there a local sales tax in Kentucky?
No. No Kentucky city or county levies a sales tax, so 6% is the rate statewide with no delivery-address lookup and no local returns. That is unusual on this border: Tennessee adds up to 2.75%, Alabama's stack with no cap, Virginia has five regional rates and West Virginia adds 1% in 167 municipalities.
What is the local occupational tax and do I pay it if I have no employees?
It is two taxes with one name. Cities, counties and school boards tax the compensation of anyone working in the jurisdiction, withheld by the employer, and separately tax the business's own net profits apportioned to that jurisdiction, on a return the business files itself. A single-member LLC with no employees still files the net profits return.
How much is the occupational tax?
It varies by jurisdiction, commonly 0.5% to 2.25%. Lexington-Fayette charges 2.25% on both compensation and net profits. Louisville Metro's resident rate is 2.2% — made up of 1.25% Metro, 0.2% for the Transit Authority of River City and 0.75% school board — falling to 1.45% for non-residents, who do not pay the school board share.
Where do I file the occupational tax?
With each jurisdiction separately. Kentucky has no central filing system for local occupational taxes: each city, county and school board has its own return, its own form and its own schedule. The Secretary of State maintains a directory of occupational tax districts and their forms at web.sos.ky.gov/occupationaltax.
What does a Kentucky LLC cost to keep going?
$15 a year for the annual report due 30 June, plus the limited liability entity tax, which has a $175 minimum for every LLC including single-member ones, paid with the state return whatever the profit. So $190 a year as a floor. With the $40 formation fee, five years comes to $975.
When does workers' compensation become compulsory?
From the first employee. Family members, temporary workers and part-time workers all count. The only statutory alternative is self-insurance authorised by the Commissioner, which requires assets exceeding liabilities by $10 million and is therefore not available to a small business.
Find out whether you are already over $6,000.
Describe your business and Velofound lays out Kentucky's list — the sales tax question, the jurisdictions you owe occupational tax in, the 30 June report — beside a live website taking real card payments. Free to start.
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