Do I need to make Kansas estimated tax payments on nonwage business income again after Senate Bill 30?

Plain-English summary

Kansas Notice 17-09 tells taxpayers who receive nonwage business income to resume making estimated tax payments immediately, because Senate Bill 30 (2017) amended K.S.A. 79-32,117 to make that income subject to Kansas income tax again (the detail is in Notice 17-03).

Why estimates are needed again. The 2012 law had exempted this income, so affected taxpayers stopped paying estimates. Since most non-wage income isn't subject to withholding, individuals should pay tax on it through estimated payments as it is earned.

What is taxable again (for tax years beginning after December 31, 2016):

• income paid to stockholders in banks and savings and loans;
• "business income" reported on Schedule C (sole proprietors, statutory employees);
• income from partnerships, S corporations, LLCs, estates, trusts, and rental real estate, royalties, REMIC residual interests, and net farm rental reported on Schedule E;
• farm income on Schedule F;
• net gain from selling certain depreciable draft, breeding, dairy, and sporting animals; and
• net gain from selling Christmas trees.

Catch-up and penalty relief. Because the change is retroactive to January 1, 2017, taxpayers should consider increasing payments to catch up for the first two quarters. Under the added subsection (f), no penalty or interest is assessed for underpayment caused by the legislation if it is paid by April 17, 2018 (the 2017 return due date). Still, the Department strongly encourages making estimates now to avoid a large bill in April. The estimated tax form is K-40ES.

What this means for you

Owners of pass-through businesses, farmers, and landlords

• Resume Kansas estimated tax payments now on income that is taxable again from 2017, and consider larger payments to catch up for the retroactive period.

Anyone worried about penalties

• No penalty or interest applies to underpayment caused by this change if you pay it by April 17, 2018.

Common questions

Do I have to make estimated payments again? Yes -- the Department urges affected taxpayers to resume estimates immediately.

How far back does the change reach? It is retroactive to January 1, 2017, so consider catch-up payments.

Will I be penalized for the first two quarters? Not for underpayment caused by the change if it is paid by April 17, 2018.

Which form do I use? The Kansas estimated tax form K-40ES.

Citations and references

• Senate Bill 30 (2017), Section 5 -- amended K.S.A. 79-32,117 to make nonwage business income taxable again for tax years after December 31, 2016 (see Notice 17-03).
• Subsection (f) -- no penalty/interest for underpayment caused by the change if paid by April 17, 2018.
• Estimated tax form K-40ES.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 17-09

Original ruling text

Tax Policy Group Phone: 785-296-3081
915 SW Harrison St FAX: 785-296-7928
Topeka KS 66612-1588 www.ksrevenue.org
Samuel M. Williams, Secretary Department of Revenue Sam Brownback, Governor

                                       NOTICE 17-09

              ESTIMATED TAX PAYMENTS FOR NONWAGE BUSINESS INCOME
                                 (JULY 1, 2017)

The 2017 Kansas Legislature made substantial changes to income tax law including, specifically,
K.S.A. 79-32,117. The effect of these changes (contained in Senate Bill 30) is to make nonwage
business income subject to Kansas income tax. The new law does this by making changes to
several addition and subtraction modifications. Please see Notice 17-03 for more specific
information.

Kansas tax law changes made in 2012 stated that beginning after December 31, 2012, certain
categories of nonwage business income were exempt from income tax. As a result, taxpayers
receiving this nonwage business income were no longer required to make estimated tax payments,
and have not made such payments for the last several years. The provisions of Senate Bill 30
change this, so taxpayers receiving nonwage business income should immediately begin
making estimated tax payments.

Section 5 of Senate Bill 30 essentially reverses the 2012 changes. Generally, for tax years
beginning after December 31, 2016, the following nonwage business income will be subject to
Kansas income tax:

  •     Income paid to stockholders in banks and savings and loans

  •     "Business income", including income reported by sole proprietors and to individuals
        considered statutory employees, reported on federal Schedule C and line 12 of federal
        Form 1040

  •     Income received from certain types of entities, including income received from
        partnerships, S corporations, limited liability companies, estates and trusts, and certain
        types of income, including income from rental real estate, royalties, residual interests
        in real estate mortgage investment conduits, and net farm rental, reported on federal
        Schedule E and line 17 of federal Form 1040

  •     Farm income reported on federal Schedule F and line 18 of federal Form 1040

  •     Net gain from the sale of draft, breeding, dairy animals, and animals used for sporting
        purposes subject to depreciation

  •     Net gain from the sale of Christmas trees

Like the federal tax system, the Kansas tax system is designed so that income tax is remitted as
income is earned. While income earned as wages is generally subject to withholding, most income

other than wages is not usually subject to withholding. As a result, an individual who receives
non-wage income should make estimated tax payments. An estimated payment is a direct payment
to the Department of the estimated amount of tax due on income that has been received.

Individuals receiving nonwage income that is now subject to tax because of the amendments made
in Section 5 of Senate Bill 30 should begin making estimated tax payments immediately. And,
because the effective date of the amendments is retroactive to January 1, 2017, consideration
should be given to increasing the amount of the estimated payment(s) in order to "catch-up" with
the amount of tax had payments been made for the first two quarters of the tax year. Failure to
make these estimated payments could result in having to pay a significant amount of income tax
being due in April of 2018 when filing the 2017 income tax return.

Usually, failure to make estimated tax payments in a timely fashion will result in a penalty being
imposed. However, this legislation specifically provides that a penalty will not be imposed if all
of the tax that was underpaid as a result of changes made by the legislation is paid by April 17,
2018, which is the due date of 2017 calendar year income tax returns. Section 4 of the Bill amends
K.S.A. 79-32,117 by adding subsection (f) which states:

       (f) No taxpayer shall be assessed penalties and interest arising from the
 underpayment of taxes due to changes to the rates in subsection (a) that became law on
 July 1, 2017, so long as such underpayment is rectified on or before April 17, 2018.

Despite the fact no penalty will be imposed for failing to make estimated tax payments, the
Department strongly encourages all taxpayers receiving nonwage business income to make
estimated tax payments for tax year 2017, and to review their personal tax situation with their tax
preparer or tax professional. Making estimated payments now will help avoid a large, unpaid tax
bill later.

To access the Kansas estimated tax form, K40-ES, please visit our website
at: https://ksrevenue.org/pdf/k-40es17.pdf

                                  Taxpayer Assistance

Additional copies of this notice, forms or publications are available from our web site,
www.ksrevenue.org. If you have questions about this Notice, please contact:

                              Taxpayer Assistance Center
                             Kansas Department of Revenue
                               Topeka, KS 66612-1588
                                 Phone: 785-368-8222
                                  Fax: 785-291-3614