Wednesday, August 9, 2017

Changes to Self-Employment Taxation in the State of Kansas.

Tax Increase In Kansas

Since 2012, self-employment income in Kansas has been exempt from state income tax. This massive tax cut was commonly referred to as “the LLC Loophole” and led to budget problems due to lack of tax revenue. The label “LLC Loophole” was a misnomer – this tax cut was not a loophole, it was a big tax cut that worked exactly as intended, and it really didn’t have a heck of a lot to do with LLCs.

Let me explain: a broad range of businesses became exempt from taxation on ordinary business income that was non-wage income. These businesses included sole proprietors, partnerships, most LLCs, and many corporations, as well as farms and rental properties. Not only did they not need to be LLCs to qualify, they didn’t have to be any type of entity: plain old self-employed individuals and owners of property benefited from the tax cut.

So you may have heard that massive quantities of new LLCs were formed in Kansas because of this tax cut, but you’re wrong. Massive quantities of new LLCs were formed in Kansas because people had no real comprehension of this law and read only the headline.

What does this mean for self-employed individuals?  Start making Kansas estimated tax payments. The tax bill is retroactive to January 1, 2017, so you’ll be paying Kansas taxes on your next tax return. Technically, you're already behind and have missed the first and second quarter estimated tax deadlines. You'll have to catch up. The Kansas Department of Revenue says they won't charge penalties for estimated tax payments that are late solely because of this tax change.

2.      Assess your structure. Now that self-employment income is no longer exempt from tax, it’s time to re-assess whether it’s prudent to make a tax election to become an S-Corp or a C-Corp. If that’s what’s right for you, there are forms to file and formalities to observe. Depending on your situation, it might be possible to make your election retroactive to January 1, 2017.

      If you're a wage earner, your tax rate also went up. The tax increase on wage earners wasn't as large as for self-employed individuals, so it's going to be less noticeable. Withholding tables should have been adjusted automatically in most payroll software. You may have noticed in the last month or so that your Kansas withholding went up a bit. There's nothing more you need to do. If your HR or payroll department changed your withholding since June 30, they have implemented the change already.