Tax Issues for Minnesota Start-Ups
Registering to Pay Taxes
Once you have officially obtained the necessary licenses and permits for your business, you will be responsible for notifying Uncle Sam. In many cases, you can simply contact a central tax agency, which in turn will get you started with the appropriate forms and filing requirements. Once your business is listed in their database, you may receive periodic inquiries about your business or forms that you must complete to comply with state or federal laws, or both. The main taxes you will need to be aware of include:
- Estimated federal and state individual income taxes,
- Estimated federal and state corporate income taxes,
- A sales and use tax, and
- Property taxes.
Oftentimes, there may be a single form or tax application that will get you registered with several agencies regarding several different taxes. The Minnesota Department of Revenue has a single form called Form ABR, Application for Business Registration that will help you determine for which taxes your business will be liable. Form ABR, Application for Business Registration, will assign a Minnesota tax identification number for your business and register it for sales and use tax, nonresident entertainer tax, income tax, franchise tax, Minnesota care taxes, and other special taxes, when applicable.
Get an Employer Identification Number
Unless you form a sole proprietorship, you must obtain an employer identification number (EIN), even if you do not have employees. The first registration you should make is to file Form SS-4, Application for Employer Identification Number, with the federal government. You will receive an employer identification number that you will need in many cases to complete other registrations. It is somewhat similar to your personal Social Security number, only it relates to your business.
You can obtain Form SS-4 from your local IRS office or your accountant. Once you have the form, you can apply for an EIN either by mail or by telephone. If you want an EIN immediately, call the Tele-TIN phone number for the service center for your state. The Tele-TIN phone and address are located in Appendix B. If you are not in a hurry, you can apply for your EIN through the mail. Keep in mind, you will need to complete Form SS-4 at least four to five weeks before you will need your EIN.
After you receive your EIN, you will need to register with the state agency that governs employees and employers.
Estimated Income Tax
As a small business owner in Minnesota, you will need to estimate the amount of money your business will make and pay taxes on these estimates. Regardless of the form of business you have chosen, you will be responsible for paying estimated income taxes several times throughout the year - usually on a quarterly basis. And, if you have underpaid, you will be required to pay underpayment penalties at the end of the year. Make sure you calculate these amounts or any underpayment penalties in your monthly cash flow projections. Your accountant may be able to advise you on how best to plan for paying estimated income taxes.
Individual Federal Income Tax
When you are a sole proprietor, a partner, or a shareholder in an S corporation, you are considered self-employed. Since there is no employer to deduct federal income tax from your wages, you must make quarterly advance payments against your estimated federal income tax. You must report this business income even if it wasn' t actually distributed to you. File your payments along with IRS Form 1040-ES. You will then file Form 1040 at the end of the year along with Schedule C - which itemizes your business expenses for the year. Check with your accountant to make sure you know how to estimate, file, and pay correctly.
Individual State Income Tax
In Minnesota, sole proprietorships, partnerships, corporations, and LLCs must pay against estimated state income tax. If your tax liability is estimated at $500 or more you will need to file Form M-14, Individual Estimated Tax Payment Vouchers. Foreign partners file Form M-71. Foreign S corporation shareholders use Form M-72. For more information contact the Minnesota Department of Revenue.
As a business owner, it is your responsibility to remain informed of these requirements. Contact your local small business administration (SBA) office, small business development center (SBDC), or the Minnesota Department of Revenue for more information. Further information and Internet links are available through The Oasis Press via its Internet Web site at http://www.psi-research.com.
In addition to estimated tax payments you must pay a self-employment tax, which is your contribution to Social Security and Medicare. This tax is paid quarterly and is included in your estimated tax payment. Since you are self-employed, you are responsible for the full amount of the contribution, rather than the 50% you would pay as an employee. One-half of the self-employment tax is deductible as a business expense on federal Form 1040
Corporate Income Tax
If your business is a corporation you will be required to submit a separate business tax form with your personal tax report. In Minnesota, corporate income taxes are imposed at the state level and administered by the department of revenue.
Corporate income tax is computed and filed using Form M-18. Minnesota corporations expecting to reach or exceed $500 in income tax liability need to make estimated tax payments. Minnesota corporations that have a tax liability exceeding $20,000 must make estimated tax payments through electronic funds transfer (EFT).
Your corporation will be required to make quarterly federal payments based on its estimated tax using Form 1120-W, Federal Estimated Tax Payment. Corporate taxes are typically due on April 15, June 15, September 15, and December 15, unless your corporation operates on a different fiscal year. In this case, your taxes will be due on the 15th day of the 4th month following the end of the fiscal year.
Any Minnesota corporation that is late paying its income taxes will have to file a M-4R, Business Activities Report. Questions regarding the activities should be directed to the Minnesota Department of Revenue.
In Minnesota all corporations, S corporations, partnerships, and LLCs have to pay a minimum tax fee. The fee is assessed based on the company' s total payroll, property, and sales or gross receipts (see Table 1).
Table 1 - Minimum Tax Fee for All Business Entities
|The company' s total payroll, property, and sales or gross receipts||Minimum assessed fee|
|Less than $599,999||$ 0|
|$500,000 to $999,999||$100|
|$1,000,000 to $4,999,999||$300|
|$5,000,000 to $9,999,999||$1,000|
|$10,000,000 to $19,999,999||$2,000|
|$20,000,000 or more||$5,000|
Sales and Use Tax
Minnesota imposes a sales tax on merchandise sold within the state. The general sales tax rate in Minnesota is 6.5%. Some retail items, however, are imposed a special rate. Sales of liquor items, for example, are taxed at the rate of 9.0%. The sale of farm or logging equipment is taxed at a rate of 2.5%. A complete listing of state sales tax rates is available from the Minnesota Department of Revenue. If you operate a retail business or provide certain services you will be required to collect and pay this sales tax to the Minnesota Department of Revenue. You may need to pay local sales and use taxes too. You will be required to file Form ABR, Application for Business Registration which registers your business for a Minnesota tax identification number. Or you may call or visit a regional department of revenue to obtain a registration for authorization to collect sales and use taxes.
In most cases you will not be required to pay sales taxes to wholesalers and distributors so long as you provide them with resale certificates on the goods you purchase. In like manner, as a wholesaler, distributor, or manufacturer, you will not be required to collect sales tax on the goods you sell provided the buyer is a retailer purchasing those goods for resale and provides you with resale certificates at the time of sale. For example, if you sell exclusively to other resellers or if your primary business is mail order, you may only be required to collect the tax for items sold and delivered within the state. However, this area of the law is being challenged, so you will find it wise to stay informed about how these changes affect you.
You will be assessed additional taxes on certain types of goods provided for resale. The federal government and most states assess pass-through taxes on certain goods such as gasoline, tobacco, and alcohol. As a retailer, you will pay taxes on these goods at the time of purchase and pass the tax through to the consumer. In the case of these taxes, you do not have to pay them separately to the state. The manufacturer, wholesaler, or distributor does this for you. However, you will still be required to maintain thorough records on all sales.
You are required to keep detailed records of the your gross receipts regardless of whether those receipts are taxable or not. These receipts will justify the taxes you pay and the deductions you take on gross sales throughout the year. You will be required to file ST-1 Sales and Use Tax Return to the Minnesota Department of Revenue. Returns are due annually for businesses with a tax liability averaging less than $100 a month. For businesses with a tax liability between $100 and $500, returns are due quarterly. Businesses with more than $500 of tax liability each month are required to file returns on a monthly basis. For those businesses with an annual tax liability of $120,000 or more, payments must be made via electronic funds transfer (EFT).
Be careful to report on a timely basis. Minnesota should send copies of reporting forms in advance of the due date. A late or incorrect form can result in heavy penalties or fines. Keep in mind, if you don' t receive your forms, don' t assume that you have no tax liability. You are responsible for getting the forms, filing them, and paying the tax. You can get useful IRS publications, tax forms, and instructions through the Internal Revenue Information Services (IRIS) via a government bulletin board called FedWorld. You can access IRIS directly via telephone or via the Internet.
Property taxes are assessed to pay the operating expenses of your locality, pay for bonds, and provide for special projects at the county and community level. Taxes are usually paid on an annual basis to the county treasurer. In most cases the county tax assessor will automatically bill you as the owner of record, so you will not need to contact this office when purchasing property for your business.
In general, Minnesota' s state and local governments do not tax personal property. This includes all of the items you purchase to conduct your business such as commercial and industrial goods, farm machinery and livestock, as well as your personal or household goods. Real property (land and buildings), however, is taxed. For specific questions on property taxes, contact the Minnesota Department of Revenue. For real property questions you can contact your local tax assessor.
When your business has employees, you must withhold federal income tax from their wages. In addition, you must contribute to Social Security, Medicare, and unemployment funds.
Federal Unemployment Taxes (FUTA)
Unemployment benefits are paid from state unemployment taxes and unemployment insurance. The cost of administering the unemployment program is paid from Federal Unemployment Tax Act (FUTA) funds.
The federal unemployment tax is your company' s contribution to the unemployment insurance fund. You are required to pay 6.2% on the first $7,000 of each employee' s annual pay. The actual rate you pay is normally 0.8% because you receive a 5.4% credit for the state unemployment taxes you pay.
You will be required to pay FUTA if you employ one or more persons (not farm or household workers) for at least one day in each of 20 calendar weeks (not necessarily consecutive) and if you pay wages of $1,500 or more during the year. You may be required to pay federal unemployment tax even if you are exempt from paying state taxes. If your FUTA liability is more than $100 in any quarter, you are required to make a federal tax deposit for the amount owing.
FUTA tax is reported annually on Form 940, Employer' s Annual Federal Unemployment Tax Return, which is due by January 31 of the next calendar year. If you have made timely deposits, however, you have until February 10 to file. In addition, if at the end of any calendar quarter you owe more than $100 FUTA tax for the year, you must make a deposit by the end of the next month. Some employers can qualify to file a simplified FUTA return. To be eligible to file Form 940-EZ, you must:
- Pay unemployment tax to only one state;
- Pay state unemployment taxes by the due date on Form 940-EZ; and
- Have wages that are subject to FUTA and are also taxable for state unemployment tax purposes.
To find out more about this simplified filing, get the following publications:
- Publication #334, Tax Guide for Small Business
- Publication #15, Circular E, Employer' s Tax Guide
- Publication #509, Tax Calendar and Checklist
As an employer in Minnesota, you are responsible for paying unemployment tax at the state level if you have employees or intend to hire employees.
Although the tax is on your employees' covered wages, you are not allowed to deduct this tax from their wages. The burden of paying the state unemployment tax lies on your shoulders as the employer. The amount of tax you will be liable for depends on what type and how many employees you have, and your payroll totals.
If you operate as a sole proprietor or partner, you will not be required to pay unemployment tax because you will not be considered an actual employee of your business. Also, in Minnesota your sole proprietorship is exempt from paying state unemployment tax on your spouse, parent, or children under 18 years of age if they are employees of your business. However, if you fire them or lay them off they will not be eligible to collect unemployment benefits.
To register to pay unemployment tax in Minnesota, you will need to file Form MDES-13, Report to Determine Liability for Unemployment Tax with the Minnesota Department of Economic Security. The department offers the handbook MDES-130, Unemployment Insurance Information for Employers, to help you better understand the filing process
Tax Experience Rating
The unemployment tax rate for your business is related to the overall experience your company has had with benefits claims over a certain number of years; hence, the name tax experience rating. For example, if you have had many employees who have claimed benefits, your business will probably have a higher experience rating. On the flip side, if you have had few employees claiming benefits in the past, you will have a lower experience rating.
As a new employer, Minnesota will assign your business a standard rate. Your experience with unemployment claims and benefits from the point you start your business or purchase an existing business will dictate whether your rate will increase or decrease. If the seller of the business has an excellent rating, talk to the Minnesota Department of Economic Security to learn how you can take over that rate.
As a precautionary measure, if you are buying an existing business make sure the seller is current and has filed all necessary unemployment taxes and reports. If you don' t, you may be held responsible for unpaid taxes. You are encouraged to get an unemployment tax release from the Minnesota Department of Economic Security. Discuss this important aspect of the sale with your attorney. If you do find unemployment taxes owing, make sure this amount is negotiated in the sale price of the business.
Social Security and Medicare (FICA)
Passed into law by Congress in 1935 as the Federal Insurance Contribution Act (FICA), all employers are required to pay Social Security taxes to the government to provide for old age, survivor, and disability benefits as well as hospital insurance (Medicare). Payments are made in equal amounts by an employee and his or her employer, with collection responsibilities falling on the employer. The current rate is 7.65% for the employer and each employee up to $72,600 of each employee' s annual pay. (This 1999 inflation- adjusted wage base is up 6.14% from $68,400 in 1998.) For more details, refer to IRS Circular E.
Federal Income Tax Withholding
You must withhold federal income tax from the wages of any employee who meets threshold wage levels. This requirement applies to all employees who do not claim an exemption from withholding. The amount withheld is recomputed each pay period. Federal income tax is based on gross wages before deductions for FICA, retirement funds, or insurance. Most employers base income tax withholding on percentage or wage brackets. Refer to IRS Publication 15, Employer' s Tax Guide for detailed descriptions of these withholding methods.
State Income Tax Withholding
You must also withhold a portion of an employee' s wages for the state income tax. Again, this requirement applies to all employees who do not claim an exemption from withholding. You are required to have a withholding identification number, which is obtained from the Minnesota Department of Revenue. Begin by filing Form ABR, Application for Business Registration, with the department of revenue. Form ABR registers your business for all state taxes. The department will then send you a tax identification number along with all the instructions and forms necessary to report and deposit the income tax you withheld from your employees' wages.
Keep in mind, you must begin withholding income from your employees' wages as soon as you start to pay them, even if you have not been issued a tax identification number yet. Make sure you contact the Minnesota Department of Revenue for the appropriate forms and filing procedures.
New Hire Reporting
In compliance with the federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996, all Minnesota employers must report each newly hired employee to the Minnesota New Hire Reporting Center. This legislation, contained within Welfare Reform Bill HR 3734, was enacted to expedite child support collections.
Your report must include the name, address, Social Security number, and hire date of each new hire, as well as the name, address, and federal employer identification number (EIN) of your business. Employees who are rehired after a layoff or other break in service of more than 26 consecutive weeks are considered new hires. Your report may be filed either through electronic file transfer, diskette, tape, fax, mail, or the New Hire Reporting Center' s Web site. Submissions can be made with an employee' s W-4, or on a New Hire Reporting Form available from the New Hire Reporting Center.
Depending on the amount and method of new hires you will report, your reports must be filed within 20 days of the employee' s first day on the job. Civil and criminal penalties for noncompliance can be imposed on an employer who fails to file a new hire report, so make sure you understand and comply with the requirements.
For more information on new hire reporting requirements, contact the Minnesota New Hire Reporting Center.
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