Entrepreneurs in Lexington, KY: taxes and retirement for 2026

For solo founders and small-business owners in Lexington, KY. Kentucky has a flat 3.5% state income tax for 2026. Lexington adds a local income tax. Here are the 2026 rules, a worked example and the official sources.

What's different in Lexington

Local income tax: LFUCG Occupational License Fee (2.25%) plus Fayette County Board of Education Occupational License Tax for Schools (0.5%): 0.0275% for residents, 0.0225% for nonresidents (effective LFUCG 2.25% is the rate posted with its 2026 forms; FCPS 0.5% is the rate currently posted by the school district's tax office (see notes about a voided 2025 increase)). Sole proprietors and other self-employed people pay the 2.25% LFUCG fee on net profits from business in Fayette County, file an annual Net Profits License Fee Return (Form 228) and make quarterly estimated payments (Form 228 ENP). Fayette County Public Schools also taxes the net profits of all businesses from activities in Fayette County at 0.5%, so self-employed profits earned in the county face about 2.75% in total; on wages, the 0.5% school tax applies only to county residents.
LFUCG Initial and Minimum Occupational License Fee: Every person and business engaged in business in Lexington-Fayette County must get an initial occupational license ($100, due at registration) and pay a $100 annual minimum license fee with the Net Profits License Fee Return. Individuals and sole proprietors who report gross receipts of $4,400 or less for a year skip the minimum fee for that year and the next, but still must file the return.
City business license: Yes. LFUCG requires every person and business entity engaged in any business in Lexington-Fayette County, including sole proprietors, to obtain an initial occupational license (Form 228 IP) before starting.
Also worth knowing: School tax source: https://www.fcps.net/community/tax-collection-office (0.5% on residents' compensation for work in Fayette County and on net profits from activities in Fayette County). In May 2025 the school board voted to raise the school tax to 0.75%, but Kentucky Attorney General opinion OAG 25-07 found that vote void for lack of notice (https://www.ag.ky.gov/Resources/Opinions/Opinions/OAG%2025-07.pdf), and the board then decided not to raise the tax for now (CivicLex, secondary source: https://civiclex.org/news). The FCPS tax office page still lists 0.5%; confirm with FCPS (859-422-0377). LFUCG publishes a Form 1099-LX transmittal for businesses reporting payments to 1099 contractors. No local gig-worker or freelancer pay ordinances were found. Population: Census Bureau Vintage 2025 estimate for July 1, 2025 (https://www2.census.gov/programs-surveys/popest/datasets/2020-2025/cities/totals/sub-est2025.csv).

Kentucky rules for entrepreneurs

State income tax (2026): Kentucky has a flat 3.5% state income tax for 2026. The rate fell from 4.0% to 3.5% for tax years beginning on or after Jan. 1, 2026 under HB 1 (2025 Regular Session): https://apps.legislature.ky.gov/record/25rs/hb1.html. The 2026 standard deduction is $3,360.
State estimated tax: Generally required if you expect to owe at least $500 for 2026 after withholding and refundable credits, and those will cover less than the smaller of 90% of 2026 tax or 100% of 2025 tax. Use 110% instead of 100% if 2025 AGI was over $150,000. Same dates as federal (April 15, June 15, and September 15, 2026, and January 15, 2027). Form 740-ES.
Kentucky limited liability entity tax (LLET): Applies to every corporation and limited liability pass-through entity doing business in Kentucky, including single-member LLCs owned by an individual, which file Form 725 even if disregarded federally. A sole proprietor without an LLC is not a limited liability entity. The tax is the lesser of 0.095% of Kentucky gross receipts or 0.75% of Kentucky gross profits (phased in between $3 million and $6 million), with a $175 minimum. Entities with $3 million or less in gross receipts or gross profits pay only the $175. (Source is the 2023 Form 725 instructions, the latest at this URL; rates are set by KRS 141.0401.)
Marketplace contractor law (KRS 336.137): App-based marketplace contractors are not employees under state or local law if they agree in writing that they are independent contractors and bear their own expenses. The platform also can't set required hours, bar other platforms or other work, or supply tools. Freight and parcel delivery are excluded.

Federal rules for 2026

Entity choice changes your taxes

A single-member LLC is taxed like a sole proprietorship unless it elects S-corp status. The S-corp can lower payroll tax but adds payroll, a separate return and a reasonable-salary requirement.

Retirement as a tax lever

With no employees, a Solo 401(k) allows up to $72,000 in 2026. With employees, a SEP IRA or a 401(k) must generally cover eligible staff too.

Quarterly estimated taxes

No one withholds tax from self-employment income, so you generally pay estimates four times a year if you expect to owe $1,000 or more. For 2026 income the federal dates are April 15, June 15 and September 15, 2026, and January 15, 2027. Paying 100% of last year's tax (110% if your AGI was over $150,000) in four equal installments avoids the underpayment penalty.

Self-employment tax

On top of income tax, self-employed people pay 15.3% on 92.35% of net profit: 12.4% Social Security up to the 2026 wage base of $184,500, plus 2.9% Medicare with no cap. Half of it is deductible.

A worked example

A solo founder with $200,000 of profit in 2026
Self-employment tax as a sole proprietor	$28,234
Solo 401(k) maximum as a sole proprietor	$61,677
Payroll tax saved as an S-corp on a $100,000 salary	$12,934
Solo 401(k) maximum as that S-corp	$49,500

Federal figures only. S-corps add running costs (payroll, an 1120-S return, state fees) not shown here. Computed from 2026 IRS limits (Notice 2025-67, Rev. Proc. 2025-32) and the SSA wage base.

Free tools

S-corp vs Solo 401(k) calculator Solo 401(k) vs SEP IRA calculator Quarterly tax calculator

Guides by job and platform

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Questions

Is there a local income tax in Lexington?

Yes. LFUCG Occupational License Fee (2.25%) plus Fayette County Board of Education Occupational License Tax for Schools (0.5%) is 0.028% for residents and 0.022% for nonresidents (effective LFUCG 2.25% is the rate posted with its 2026 forms; FCPS 0.5% is the rate currently posted by the school district's tax office (see notes about a voided 2025 increase)). Sole proprietors and other self-employed people pay the 2.25% LFUCG fee on net profits from business in Fayette County, file an annual Net Profits License Fee Return (Form 228) and make quarterly estimated payments (Form 228 ENP). Fayette County Public Schools also taxes the net profits of all businesses from activities in Fayette County at 0.5%, so self-employed profits earned in the county face about 2.75% in total; on wages, the 0.5% school tax applies only to county residents.

What local business taxes apply to self-employed entrepreneurs in Lexington?

LFUCG Initial and Minimum Occupational License Fee: Every person and business engaged in business in Lexington-Fayette County must get an initial occupational license ($100, due at registration) and pay a $100 annual minimum license fee with the Net Profits License Fee Return. Individuals and sole proprietors who report gross receipts of $4,400 or less for a year skip the minimum fee for that year and the next, but still must file the return.

Do I need a business license to freelance from home in Lexington?

Yes. LFUCG requires every person and business entity engaged in any business in Lexington-Fayette County, including sole proprietors, to obtain an initial occupational license (Form 228 IP) before starting.

Do entrepreneurs in Kentucky pay state income tax?

Kentucky has a flat 3.5% state income tax for 2026. The rate fell from 4.0% to 3.5% for tax years beginning on or after Jan. 1, 2026 under HB 1 (2025 Regular Session): https://apps.legislature.ky.gov/record/25rs/hb1.html. The 2026 standard deduction is $3,360.

When are Kentucky estimated tax payments due for 2026?

Generally required if you expect to owe at least $500 for 2026 after withholding and refundable credits, and those will cover less than the smaller of 90% of 2026 tax or 100% of 2025 tax. Use 110% instead of 100% if 2025 AGI was over $150,000. Same dates as federal (April 15, June 15, and September 15, 2026, and January 15, 2027). The state form is 740-ES.

Are there other Kentucky taxes for self-employed entrepreneurs?

Kentucky limited liability entity tax (LLET): Applies to every corporation and limited liability pass-through entity doing business in Kentucky, including single-member LLCs owned by an individual, which file Form 725 even if disregarded federally. A sole proprietor without an LLC is not a limited liability entity. The tax is the lesser of 0.095% of Kentucky gross receipts or 0.75% of Kentucky gross profits (phased in between $3 million and $6 million), with a $175 minimum. Entities with $3 million or less in gross receipts or gross profits pay only the $175. (Source is the 2023 Form 725 instructions, the latest at this URL; rates are set by KRS 141.0401.)

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Sources

State and local facts researched from official sources and independently re-checked; last verified October 2026, next scheduled review 2027-01-02. Educational information for 2026, not tax, legal or investment advice. Rules change; check the official sources listed and a tax professional for your situation. Gigaverse AI, Inc. is a financial technology company, not a bank, and not itself a registered investment adviser or broker-dealer.