Doing Business in Missouri: Taxes

Doing Business in Missouri: Taxes is intended to serve as a reference document and in no way attempts to provide all tax information pertinent to a business.  It is published with the understanding that MO SBTDC is not engaged in rendering legal, accounting or other professional services. The advice of an attorney and/or accountant should be sought before entering into any business activity or contract.

For personalized information and assistance on hiring employees, please locate a Missouri Small Business & Technology Development Center or call 573-884-1555.

Contents

The legal structure you select for your business will determine how business income is taxed — as individual income (e.g., sole proprietorship) or as a corporation.

If a business operates as a sole proprietorship, partnership or limited liability company (elected to be taxed as a sole proprietorship), all business income is attributed directly to the owner(s) who are taxed accordingly. People in this category take a payment as an owner’s draw and pay self-employment taxes.

If the business is taxed as a corporation, the income to the business is taxed and then any payment to officers or shareholders is taxable income.

Self-employment taxes and corporate income taxes should be estimated, reported and paid on a quarterly basis. Taxes are then reconciled at the end of the fiscal (tax) year for the business.

Federal taxes

FICA

The Federal Insurance Contributions Act provides a federal system of old age, survivors, disability and hospital insurance (Medicare). The old age, survivors and disability portion is financed by the Social Security Tax, while the hospital insurance portion is financed by the Medicare tax.

Self-employment tax

You must pay self-employment tax if:

  • You were self-employed and net earnings from self-employment (excluding any church employee income) were $400 or more; or
  • You performed services for a church as an employee and received income of $108.28 or more. However, if you are a member of the clergy or a religious worker, you may not have to pay this tax.
  • You are self-employed if you carry on a trade or business as a sole proprietor, an independent contractor, a member of a partnership, LLC or are otherwise in business for yourself.
  • You do not have to carry on regular full-time business activities to be self-employed. Part-time work, including work you do on the side in addition to your regular job, may also be self-employment.

A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. Regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business.

These rules apply even if you are fully insured under social security or have started receiving benefits.

For more information, see irs.gov/taxtopics/tc554.html.

Corporate estimating tax

A corporation must file Form 1120, Declaration of Estimated Tax, with the Missouri Deptartment of Revenue (search at dor.mo.gov/forms) and Form 1120, Federal Estimated Tax, with the IRS (irs.gov/uac/About-Form-1120).

Excise tax

The federal government imposes excise taxes on various types of business activities. Some excise taxes are on the production or sale of certain goods, while others are on services or the use of certain products or facilities. Still others are imposed on specific types of businesses.

Federal excise taxes can be broken down into several major categories:

  • Motor vehicle highway use tax
  • Retailer taxes on certain fuels

Retail excise taxes are imposed on sales of:

  • Heavy trucks and trailers
  • Tires and tubes
  • Recreation equipment such as bows, arrows, fishing rods, reels, lures and creels
  • Firearms and ammunition

Excise taxes are also levied on:

  • Air transportation — If you are in the business of transporting people by air, you may have to collect an excise tax
  • Telephone and teletype services
  • Wagering
  • Coal mined in the United States
  • Alcohol and tobacco products
  • Manufacturers of certain vaccines — Certain vaccines manufactured or imported into the United States are subject to an excise tax in order to create a Vaccine Injury Compensation Trust Fund, a no-fault program for compensating persons who are injured by, or die from, certain vaccines
  • Ozone-depleting chemicals
  • Oil spill liability
  • Petroleum products, various chemicals and hazardous wastes

A luxury tax applies to retail purchases of passenger automobiles costing more than $30,000.

For further information on excise taxes, refer to IRS Publication 510 (PDF)Excise Taxes.

For more detailed information on other federal taxes, refer to IRS Publication 334 (PDF)Tax Guide for Small Businesses.

State taxes

Missouri’s tax structure is one of the most favorable in the nation. Our tax requirements are responsibly based and competitive. Yet, because Missouri government is efficiently managed — deficit spending is unconstitutional — it can still maintain a high level of services and facilities through its sound fiscal practices.

Corporate income tax

In most cases, a company located in Missouri will have a lower corporate tax bill than in other states. State law sets the corporate income tax rate at a percentage of net taxable income earned by a business in Missouri. In addition, Missouri allows a portion of federal income tax payments to be deducted before computing taxable income.

Missouri taxable income

An important tax advantage for Missouri businesses is the amount of income considered taxable — only income earned in Missouri is taxed. Two allocation options are offered for calculating this income: (1) the three-factor formula, based on sales, property and payroll or (2) the single-factor formula, based only on sales. Missouri is the only state that permits companies to choose the formula that results in the lesser corporate income tax liability. This means that companies are not penalized for locating property and jobs in Missouri as they are in the other states. Missouri has also not adopted worldwide or nationwide unitary tax assessment in computing multinational corporate income tax liability.

Three-factor formula

A single state operation determines its intrastate sales and sales to non-nexus states to find the proportion of total or gross sales. A multi-state company computes these same two types of sales, and sales originating in another state and terminating in Missouri, to determine Missouri’s proportion of gross sales. Using this percentage of sales and percentages of property and payroll in Missouri, an average results in a ratio that is applied to taxable income.

Single-factor formula

The single-factor formula is based only on sales. Fifty percent of interstate sales and 100 percent of Missouri intrastate sales are combined. This total is then divided by gross sales to determine the apportionment percentage.

Sole proprietorship/partnership/S Corporation

All net business income is taxable to the sole proprietorship or to the partnership/S Corporation according to each partner or shareholder’s share of ownership. Your personal income tax rate depends on your level of total personal income. On your federal return you may be able to deduct some personal expenses from your gross income directly related to your business.

Property tax

Property tax is often a major tax expense for a company. Yet because it is set and administered locally, property tax is seldom comparable from state to state. Not only do tax levies vary widely from one city to another, but the assessment ratio for determining property value differs significantly among the 50 states. Even within one state, assuring a uniform assessment practice is very difficult.

Missouri law sets the assessment ratio for personal property at one-third of true value throughout the state. Real properties (land and buildings) classified as commercial and industrial, are assessed at 32 percent; residential, 19 percent; and agricultural, 12 percent of true or fair market value. The local property tax rate is an aggregate of school, city, county and state levies expressed in tax per $100 assessed valuation. Commercial and industrial real property is assessed an additional county surcharge designed to replace revenues lost by the tax exemption of business inventories.

Inventories exempt

Manufacturer’s inventories (raw materials, goods in process and finished goods), goods and wares of retailers, distributors and wholesalers are exempt from property taxes in Missouri.

Real property abatement

Urban Redevelopment Corporations Law (“Chapter 353”) and Missouri Enterprise Zone Law

Missouri promotes urban redevelopment through a potential 25-year ad valorem tax incentive program known as Chapter 353. Under this program, up to 100 percent of improvements to real property may be exempt from state and local property taxes for up to 25 years. This law is applicable to any city in Missouri.

Missouri enterprise zones may also abate improvements to real property up to 100 percent for up to 25 years.

Withholding tax

Every employer maintaining an office or transacting any business in Missouri and making payment of wages to a resident or nonresident individual must obtain a Missouri Employer Tax Identification Number by filling out Form 2643, Missouri Tax Registration Application. State tax is then withheld from the employee’s payroll and remitted to the Missouri Department of Revenue. For more information see dor.mo.gov/tax/business/withhold.

Refer to Doing Business in Missouri: Hiring Employees for more information.

Unemployment insurance

The Missouri Division of Employment Security is the state agency responsible for administering the unemployment insurance benefit and tax program.

State unemployment insurance laws must conform to certain standards in the federal employment tax law administered by the United State Department of Labor. By conforming to these laws, Missouri employers are allowed to take credit on federal unemployment tax returns (FUTA), if state unemployment taxes are paid in a timely manner. This credit is allowed regardless of an employer’s state tax rate.

The Internal Revenue Service administers federal unemployment tax. See irs.gov/Individuals/International-Taxpayers/Federal-Unemployment-Tax.

Each liable employer is required to file a quarterly contribution and wage report.

The term “liable employer” refers to an employing unit that has become liable to cover workers for unemployment insurance benefits and to pay unemployment taxes on the worker’s wages. Refer to Doing Business in Missouri: Hiring Employees for more information on establishing liability.

Contribution and wage report forms are furnished by the Division of Employment Security and are mailed to all established employers near the end of the calendar quarter. These reports should be filed and contributions paid during the month following the end of the calendar quarter. No part of the contribution due can be deducted from a worker’s pay.

The contribution and wage report must show the worker’s name, social security number and the amount of wages paid to each wage earner during a calendar quarter. Work separation dates and the beginning and ending dates of probationary employment should be included in the wage detail.

The report is also used to summarize total and taxable wages paid during the calendar quarter and to compute the amount of contributions due on the taxable wage total. Complete instructions for preparation of this report are furnished with the report.

All employers who are required to report W-2 copy A information on magnetic media to the Social Security Administration (currently, this includes employers with 250 or more workers), are required to report state unemployment insurance quarterly wage information on magnetic tape cartridge or diskette. For more information on how to file reports via magnetic media call 573-751-3422 or visit labor.mo.gov/DES/Forms/M-INF-368-AI.pdf.

Interest. Interest accrues at a variable rate, as established by the Internal Revenue Service, on contributions that are due and unpaid after each quarterly due date.

Assessment. Failure to file contribution and wage reports or pay tax when due could result in an assessment against the employer. A certificate of assessment will be filed in the circuit court where the employer resides or has assets. Once filed, it has the effect of a judgment upon any real or personal property of the employer.

Penalty. Failure to file contribution and wage reports when due could result in a penalty of 10 percent of contributions due or $100, whichever is greater, for each quarterly contribution and wage report not filed within the month following the due date. This penalty is imposed each month or fraction of a month the report is not filed. The maximum penalty per quarter is 20 percent of the contributions due or $200, whichever is greater. The law also provides for a 25 percent penalty if fraud or evasion is discovered.

Audits. All employing units in Missouri are subject to having their records examined by an authorized representative of the Division of Employment Security. Audits of employers’ records are conducted periodically to ascertain proper reporting of workers and wages. Failure or refusal by an employer or employing unit to make records available may result in a subpoena to compel production of books and records.

For more information, see the Employment Security website at labor.mo.gov/DES or the booklet Employers’ Rights and Responsibilities at labor.mo.gov/DES/Forms/M-INF-151-AI.pdf.

Workers’ compensation

In every state, business and industry incur some expense to provide their employees with workers’ compensation coverage. In Missouri, all businesses with five or more employees (except agricultural or domestic labor) must provide workers’ compensation insurance to protect their workers in case of job-related injury, illness or death. Companies can offer this protection through a private insurance carrier or they can become self-insurers. Premium rates vary, depending on the risks associated with special occupations. As in most states, the premium rates apply to an employee’s total annual compensation.

More information on workers’ compensation can be found in Doing Business in Missouri: Hiring Employees.

Franchise tax

Missouri’s franchise tax is based on capital employed in a company. Corporations with less than $1 million in outstanding shares and surplus are not taxed. Multi-state corporations are subject to franchise tax only on that portion of total company shares and surplus that occurs in Missouri. The tax is computed by applying the percentage of total property and assets, which occurs in Missouri to total company shares and surplus.

Personal income tax

Missouri’s individual income tax rates are graduated from a low of 1½ percent on taxable incomes of $1,000 or less, to a high of 6 percent on taxable incomes of $9,000 or more. Taxable income may be reduced by a portion of federal income tax liability. Additional deductions include an allowance for each dependent, personal exemption and federal standard or itemized deductions (which includes a deduction for FICA taxes paid through withholding).

Sales tax number

Any business making retail sales must obtain a Missouri Retail Sales License from the Missouri Department of Revenue. A bond, based on projected monthly gross sales, must be posted at the time of application. Instructions and an application form  [MO Dept. Revenue Form 2643 (PDF)]  are available from the Missouri Department of Revenue. Those businesses buying wholesale or operating solely as a wholesaler should complete a Form 149 Sales/Use Tax Exemption Certificate (search at  dor.mo.gov/forms) and provide it to their supplier. Go to the Missouri Department of Revenue site at: dors.mo.gov/tax/coreg/index.jsp or phone 573-751-5860 to get a sales tax number or sales tax exemption.

Additional materials and tax forms are available from dor.mo.gov.

For assistance with particular tax matters, please contact your nearest Missouri Department of Revenue Taxpayer Service Center dor.mo.gov/contact/assistance.php.

Retail sales tax

Any person or company with a business location in Missouri from which they sell or lease goods to a final consumer is required to collect and remit Missouri sales tax. Also, any company that leases motor vehicles (including boats, trailers and outboard motors) is required to collect and remit Missouri sales tax. If the lease period is 60 days or less, the sales tax is based on the address of the lessor. If the lease period is more than 60 days, the sales tax is based on the address of the lessee. It is the business’ responsibility to ensure that sales tax is collected at the correct tax rate. You must have a Missouri Retail Sales License prior to making sales. If you conduct retail sales without a valid Missouri Retail Sales License, you may be assessed a penalty of up to $500 for the first day and $100 for each subsequent day, not to exceed $10,000, in addition to any other penalties or interest that may be imposed. For the first 20 days this penalty does not apply to persons opening a business in the state of Missouri for the first time.

A bond must accompany the application for the license. The amount of the bond is based on your estimated monthly gross sales. The amount of your bond is calculated as follows:

Estimated monthly gross sales x your tax rate = monthly tax

Monthly tax (round to highest $10) x 3 = amount of bond

“Estimated monthly gross sales” is the amount of sales you estimate your business will make in taxable sales in an average month. If you are a small business, one of the things you should consider in estimating your average monthly gross is your operating expenses, such as rent, utilities, etc. Your average monthly gross should be higher than your estimated operating expenses. If you calculate the amount of bond to be less than $500, you are only required to submit a $25 bond. If you calculate your bond to be $500 or greater, you should submit the amount of bond figured.

Example 1
Ms. Brown will be opening a craft store in Jefferson City, which has a sales tax rate of 7 percent as of December 2013. Because the business is new and has no history of sales, she must estimate her average gross sales per month to compute the bond. Ms. Brown estimated her average gross sales to be $5,000 per month. This is how Ms. Brown computed her bond:

$5,000 x 7% = $350

$350 x 3 = $1,050

Amount of bond = $1,050

Example 2
Mr. Wilson is purchasing a bait shop in Columbia, which has a sales tax rate of 6.975 percent. The previous owner of the bait shop averaged $2,000 per month in sales. This is how Mr. Wilson computed his bond:

$2,000 x 6.975% = $139.50 (round to next highest $10 = $140)

$140 x 3 = $420

Amount of bond = $25 ($420 is less than $500, so a $25 bond may be posted)

If you are unable to estimate your bond, contact the Department of Revenue: dor.mo.gov/contact/business.php.

The department reviews all bond amounts to ensure they are sufficient and in accordance with Missouri statutes. Previous ownership of business, types of product or services sold, location of business, business hours and operating expenses are taken into consideration when determining a bond amount.

Bonds may be posted by:

  1. Cash
  2. Surety
  3. Irrevocable letter of credit
  4. Certificate of deposit

Complete information on types of bonds is included in the Missouri Tax Registration Application (search at dor.mo.gov/forms).

Sales/use tax

Use tax is similar to sales tax, but is imposed when tangible personal property comes into the state and is stored, used or consumed in Missouri. Communities have the option of adopting a local use tax equal to the local sales tax for that community.

Missouri has responded to the needs of industry by providing major exemptions from sales/use taxes. For a list of the current exemptions refer to the Missouri Department of Revenue’s website: dor.mo.gov/business/sales/sales-use-exemptions.php.

Food sales

A 3 percent sales and use tax exemption exists for certain food items. Examples of exempt foods include: general food items; fresh fruit and vegetables; meat, eggs, dairy products; ice, water — including bottled water; cold drinks; candy, gum; coffee beans/ground coffee/instant coffee; bread; spices, cooking spray, shortening; foods (not hot) sold through vending machines. Certain vending machine sales also qualify for the 3 percent exemption. Contact the Missouri Department of Revenue for more information.

Vendor’s use tax

Out-of-state businesses making sales of goods to the final consumer located in Missouri may be required to collect and remit Missouri vendor’s use tax. They must obtain a Missouri Use Tax License and post a bond.

Out-of-state businesses that lease goods to Missouri customers from an out-of-state business location are required to collect and remit Missouri vendor’s use tax. They also must obtain a Missouri Use Tax License and post a bond.

Consumer’s use tax

If your business is located in Missouri and is purchasing goods from an out-of-state vendor for consumption, when Missouri tax was not collected at the time of purchase, you are required to remit Missouri Consumers Use Tax. You must register for the payment of Use Tax; however, no bond is required. See: dor.mo.gov/personal/consumer. Form 53-C, Consumer’s Use Tax Return, can be found at dor.mo.gov/forms.

Fee on the sale of new tires and lead-acid batteries

Retail sellers of new tires or lead-acid batteries are required to collect a fee of $.50 per new tire or battery. The fee is then remitted to the Missouri Department of Revenue. For more information: dor.mo.gov/business/tirebattery.

Cigarette and other tobacco products

Missouri law requires all wholesalers of cigarette and other tobacco products to secure a written license from the Director of Revenue. For more information on the requirements for these sales please see dor.mo.gov/business/tobacco.

Fuel tax

Missouri law requires transporters, distributors and terminal operators of fuel to be licensed with the Missouri Department of Revenue. For more information, see dor.mo.gov/business/fuel.

Craft sellers

Craft sellers must charge the sales tax rate at the point of sale. For example, a vendor from Kirksville at a show in Springfield must charge the sales tax rate for the city of Springfield and note those sales separately on their sales tax report to the Missouri Dept. of Revenue. If you go to a show in another state, you need to obtain a sales tax number for that state unless the sponsor of the show has obtained a sales tax number and is collecting and reporting for all vendors at the show.

Purchase of existing business

Before you purchase an existing business, be sure to obtain a certificate of “No Tax Due” (Missouri Department of Revenue Form 943 — search at dor.mo.gov/forms) from the previous owner. Without this document, you may also be purchasing existing sales or withholding tax obligations.

Franchise tax

Missouri’s franchise tax is based on capital employed in a company. The rate is one-twentieth of one percent, or $0.50 per $1,000 of par value of outstanding shares and surplus or total assets. Corporations with less than $200,000 outstanding shares and surplus are not taxed. See: dor.mo.gov/business/franchise.

State tax credits

The State of Missouri, through the Department of Economic Development and other departments, administers numerous tax credits designed to help create new jobs and investment in Missouri. Please refer to the Missouri Department of Revenue’s site to learn more about various tax credits at dor.mo.gov/taxcredit.

Records retention

New business owners frequently have questions about tax record  keeping. The following list includes the most common documents you should keep. All businesses should retain items 1 through 6. If you are operating a business that makes retail sales, you should also keep items 7 through 10.

  1. Copies of federal income tax returns (retain at least three to five years).
  2. Sales journals and/or receipts journals (retain at least five years).
  3. Purchase journals and/or check registers (retain at least five years).
  4. General ledgers (retain at least five years).
  5. Detailed depreciation schedules (retained until items are fully depreciated, or at least five years, whichever is longer). Note: The depreciation schedule should show where the item was purchased. All purchase invoices listed on the depreciation schedule should be filed separately rather than with other expense purchases.
  6. Copies of paid bills for goods and services (retain at least five years).
  7. Copies of letters of exemption to support claims for exemption regarding sales to tax exempt entities. You should be aware of the expiration date on each letter of exemption.
  8. Copies of the checks from tax exempt entities to prove that payment for the tangible personal property or taxable service was made from the funds of the tax exempt entity and not those of an individual member of the tax exempt entity.
  9. Updated and fully completed resale exemption certificates. (Resale exemption certificates must be signed by an owner or officer and updated every five years.)
  10. Copies of the sales and use tax returns and backup documents used to prepare these returns (retained at least five years).

The following payroll records should also be retained for at least three years in the event of a withholding tax audit:

  1. Copies of W-2 forms
  2. Monthly payroll records showing actual Missouri withholding
  3. Copies of the MO941 reports (search at dor.mo.gov/forms).

The nature of your business may require that you keep additional records. Please use these lists as a general guide, but consult with your tax practitioner for advice about your specific needs.



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