Tax Planning for Southern Indiana Businesses & Owners
We're a Louisville firm, and Southern Indiana is right across the river: Jeffersonville, Clarksville and Sellersburg in Clark County, New Albany in Floyd County. Living on one side of the Ohio and working or earning on the other puts three tax systems on the table at once: Kentucky, Indiana with its county income tax, and Louisville Metro. We plan with all three in view.
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What's different across the river
Reciprocity covers wages, and only wages
Kentucky and Indiana have a reciprocal agreement: an Indiana resident's wages, salaries and commissions earned in Kentucky aren't taxed by Kentucky, and a Kentucky resident's wages earned in Indiana are taxed by Kentucky, not by Indiana at the state level. The Indiana resident files Kentucky's Form 42A809 with the employer so Kentucky withholding stops. The agreement doesn't reach business profits, rental income or anything else, so an owner's share of a business on the other side of the river is taxed there like any other nonresident's income.
Indiana's county tax runs on January 1
Every Indiana county has a local income tax, and your county is fixed by where you lived on January 1, for the whole year, even if you move in March. An Indiana resident pays their county's tax on all of their Indiana income. A Kentucky resident whose principal place of work or business on January 1 is in an Indiana county, say a shop in Jeffersonville, owes that county's tax on the income from there, including partnership and S corporation profits, and the reciprocal agreement doesn't change that.
Louisville's occupational tax still applies
Reciprocity exempts wages from Kentucky income tax, not from Louisville Metro's occupational license tax. Louisville taxes work and business done anywhere in Jefferson County regardless of where the person lives, so an employee who commutes from New Albany has occupational tax withheld at the non-resident rate (non-residents don't pay the school board portion), and an Indiana business doing jobs in Louisville owes a Louisville net profits return. Indiana gives its residents a credit against their county tax for local income taxes paid in another state, even on wages reciprocity exempts, and whether a Louisville filing earns that credit is something we work out on the return.
Payroll across the river
An Indiana employer doesn't withhold Indiana state tax from a Kentucky resident who files Form WH-47, but it does withhold the Indiana county tax if the employee's principal place of work on January 1 is in an Indiana county. A Louisville business with employees working in Indiana registers for Indiana withholding through INBiz and manages it in INTIME, Indiana's online tax portal. An Indiana business needs a withholding account for nonresident partners and shareholders too, not just employees, so a Jeffersonville company with Louisville owners has one even without payroll. Remote work counts where it is actually done: a Kentucky resident working from home in Kentucky is working in Kentucky.
Equipment in an Indiana county means a property return
Indiana businesses file a business tangible personal property return (Form 103, with Form 104) with the county or township assessor. Indiana's small-business exemption has to be claimed on a return; once it is, no return is needed in later years while the business still qualifies. Inventory isn't taxed, and registered vehicles are excluded. A Louisville business that keeps equipment at a yard or office in Clark or Floyd County should know where it stands in this system.
Entity elections look at both states
Kentucky and Indiana each let pass-through entities (partnerships and S corporations, including LLCs taxed as either) elect, one year at a time, to pay state income tax at the entity level. When the owners live on different sides of the river, the right answer depends on both states: Indiana's credit for taxes paid to other states can include another state's pass-through entity tax, and a Kentucky election, once made for a year, binds every owner.
Living in Indiana, keeping a place in Kentucky
Reciprocity is for people who are actually Indiana residents. Someone domiciled in Indiana who keeps a home in Kentucky and spends more than 183 days there during the year is treated as a Kentucky resident, and the wage exemption no longer applies.
Common questions
I live in Jeffersonville and work in Louisville. Which state taxes my wages?+
Indiana. Under the reciprocal agreement your wages aren't subject to Kentucky income tax; give your employer Kentucky Form 42A809 so it stops Kentucky withholding. You still pay your Indiana county's tax, based on where you lived on January 1, and Louisville Metro's occupational license tax on the work you do in Louisville.
I live in Louisville and own a business in New Albany. Does reciprocity cover me?+
Not for your business income. Reciprocity covers wages, salaries and commissions only, so your share of the business's Indiana profits is taxed by Indiana. If the business is your principal place of business on January 1, you also owe Floyd County's local income tax on the income from there, even though you live in Kentucky.
Our Louisville company is hiring people who live in Indiana. What changes?+
For work done in Kentucky, they give you Form 42A809 and you don't withhold Kentucky income tax, but you still withhold Louisville's occupational tax on work done in Louisville. If they work in Indiana, including from home there, Indiana withholding comes into it, and we set that up with you.
Do you have an office in Indiana?+
No. We're based in Louisville, a short drive from Jeffersonville and New Albany, and we hold an active Indiana license. Most of the work runs through our secure client portal, wherever you are.
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