Tax Issues for Minnesota Start-Ups

 

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.

Copyright 1997-1999 PSI Research/The Oasis Press

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