Local Tax Environment
As SEED Law has grown, we have clients that do not currently live in Missouri but are considering conducting business in the state. Due to questions about this, I wanted to create a post with some of the relevant data about taxes here in Missouri.
Sales and Use Tax
Many businesses considering a retail business are interested in sales and use tax rates for the area they will be located in. In Jackson County, Missouri, the sales tax rate is 5.6%, use tax is 4.25%, and the food sales tax is 2.6%. Since this varies across counties and districts, follow this link to learn more about the rates across MO. https://dor.mo.gov/pdf/rates/2019/aug2019.pdf Since the KC Metro area stretches into Kansas, feel free to check out this link for their tax rates. https://www.ksrevenue.org/salesratechanges.html These numbers do change some over time so check-in periodically for changes.
When I provide this information, it is not unusual for someone to say, “Use tax, I am aware that it exists but don’t really know what that is or if I pay it.” In MO, use tax refers to “tax imposed on the use, storage or consumption of tangible personal property in Missouri, unless the purchase is subject to sales tax or there is a specific exemption.” https://dor.mo.gov/faq/business/use.php Generally use tax applies when an item is purchased from a seller outside of MO where a sales tax is not paid at the time of purchase.
Business Formation
If you are considering starting a new business and in the process of business entity selection, keep in mind that partnerships and sole proprietorships are pass through entities so the income and deductions from the business are reported and taxed on their individual personal tax return. Missouri corporations are taxed at a rate of 6.25%.
MO does have an individual income tax calculator to help you estimate what your tax amount would be would be.
While this is not specific to MO, it is important to keep in mind that if you are an LLC or partnership, you will need to pay self-employment tax on the income that you receive from your business.Quick refresher: If you are an employee, you pay a portion of your employment tax and your employer pays the rest. When you are self-employed you pay the full amount. So when you pay your taxes each year, you will complete the IRS Form SE, to calculate the tax due on self-employment income. The upside of that is that this also allows the Social Security Administration to track your work for your social security benefits.
Estimated Tax Payments
Again, this is not specific to businesses in KC MO but it is important and many individuals starting businesses run afoul of this in their first years of business. When you start operating your business, you may need to make estimated tax payments quarterly to avoid a large bill or a penalty at tax time.
As an employee, your employer withholds and pays taxes throughout the year. When you own the business or are self-employed, you may need to make quarterly payments to IRS and/or the state. You also may need to make estimated tax payments if your household has other income sources and the withholding paid through that employer does not fully cover the tax amounts the IRS and state assess.
My own household is a great example for this that demonstrates the need for estimated tax payments to the state and IRS. We live in KC MO, I work in KC MO, my husband works in Overland Park, KS (just across the state line as is quite common for this metro area). His employer does not withhold taxes for MO and I am self-employed as the owner of a single member LLC so I pay any taxes due myself. We make quarterly estimated tax payments to IRS to pay tax on my income and we make quarterly estimated tax payments to MO Department of Revenue to pay tax on my income and my spouse’s income. If we did not do that, we would receive a penalty from IRS and MO.
To make everything a little less clear, not everyone has to make estimated tax payments but if you are a sole proprietor, partner, or an S Corporation shareholder and you expect to owe tax of $1,000 over the year, then you do need to pay quarterly. Corporations pay quarterly if they expect to owe $500. You may be able to avoid paying quarterly if you direct your employer to withhold more from wages. When you start your business, learn about whether you will need to pay these so that you can start out on the right foot and avoid penalties.
REMINDER: Quarterly estimated tax payments due Sept 15!.
Kansas City Earnings Tax
Kansas City does also have an earnings tax assessed for those living or working in KC MO. The tax is 1% of income earned including salaries, wages, tips, and commissions. This is an additional return that should be filed by April 15.
Let’s return to the example of my household for a moment. Since my spouse works in Kansas, they don’t withhold the amount for the KC Earnings tax assessed since we live in KC MO. He has to file a separate return with MO to pay that amount each year to avoid penalties and interest.
It is also important to note that there are various programs that you may be able to take advantage of based upon your industry such as Enterprise and Opportunity Zone programs, and special financing programs. Tune in next time for more information on those opportunities.
