Types of business taxes in Minnesota
As a Minnesota employer, you may be responsible for reporting and paying other business taxes in addition to withholding payroll taxes from your employees' paychecks. From federal to state and local levels, understanding the different tax programs and their impact on your business’s finances is important.
Federal taxes
You'll be responsible for federal taxes in whatever state you open a business in. Unfortunately, there are dozens of federal tax forms with unique due dates and requirements. Using an accountant or small business accounting software can be helpful in avoiding mistakes that can lead to overpayment or penalties.
As a business owner, you have both personal and business tax filing obligations. Here’s what you need to know:
Personal tax filing
Federal income tax returns:
Every individual is required to file and pay federal personal income tax. This forms the foundation of your overall tax responsibility.
Business tax filing
Business owners have additional filing requirements, depending on the business structure:
- Sole proprietorship: Income and expenses are reported on your personal tax return using Schedule C (Form 1040).
- Partnership: A partnership must file an information return (Form 1065) to report income, deductions, and other relevant details, while each partner reports their share of income on their personal return.
- Corporation: A corporation files a corporate tax return (Form 1120), paying taxes on its profits.
- S Corporation: An S corporation files an informational return (Form 1120S). Its income, losses, and deductions pass through to shareholders, who report them on their personal returns.
- Limited Liability Companies (LLCs): LLCs are not classified separately for federal tax purposes and are taxed based on their ownership structure. Single-member LLCs default to sole proprietorship taxation or may elect corporate taxation, while multi-member LLCs default to partnership taxation or may elect corporate taxation.
Self-employment tax
If you work for yourself and earn more than $400 a year, you pay toward Social Security and Medicare programs through a self-employment tax. The Social Security system provides retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.
Employment taxes
As an employer, you are responsible for withholding and depositing federal income tax and the employee contribution to Social Security and Medicare taxes. You must also pay the employer portion of Medicare and Social Security and pay federal unemployment tax (FUTA).
State taxes
As a business owner, understanding your state tax obligations is an integral part of running your organization.
Minnesota corporate franchise tax
In Minnesota, corporations pay a franchise tax based on their net income.
What is the franchise tax rate?
The tax rate for 2024 is a flat 9.8%, regardless of the corporation's income level. This applies to both domestic corporations (incorporated in Minnesota) and foreign corporations (incorporated elsewhere but doing business in Minnesota). Corporations must file an annual franchise tax return, even if they have no tax liability.
It's important to note that the term "franchise tax" can sometimes be used generally to refer to taxes levied on businesses for the privilege of operating within a state. However, in Minnesota, corporate franchise tax and corporate income tax are often used interchangeably and essentially refer to the same tax. For more detailed information and filing instructions, refer to the Minnesota Department of Revenue website.
How is the corporate franchise tax calculated?
Minnesota calculates the portion of a corporation's income that is subject to the state's franchise tax by using a single-sales factor apportionment formula. This considers only the percentage of the business’s total sales made to customers located in Minnesota. Using this method ensures that the tax reflects the corporation's economic activity within the state, without considering property or payroll factors that some states include in their formulas.
For example:
- If a corporation has total sales of $10 million, with $2 million in sales to Minnesota customers, 20% of the corporation's net income would be apportioned to Minnesota and taxed at the 9.8% rate. This ensures the tax reflects only the corporation’s economic activity within Minnesota.
Who may be liable for the franchise tax in Minnesota?
In Minnesota, a company is subject to franchise tax if it has "nexus" with the state, which includes:
- Domestic corporations: Corporations incorporated in Minnesota.
- Foreign corporations: Corporations doing business, employing capital, owning or leasing property, maintaining an office, or deriving receipts from activity in Minnesota.
- Economic nexus: For tax years beginning on or after January 1, 2024, corporations with $1 million or more in receipts from Minnesota sources.
- Unitary businesses: Corporations that are part of a unitary business with Minnesota nexus, even if they don't have nexus individually. This applies to corporations with at least $10,000 in Minnesota receipts if they are part of a unitary group that, in aggregate, derives receipts of $1 million or more from Minnesota sources.
- Partnerships: Foreign corporations that are general partners in partnerships doing business in Minnesota.
Certain entities, such as insurance companies, S corporations, and some types of partnerships, are generally not subject to the corporate franchise tax but may have other tax obligations in Minnesota.
For detailed information, refer to the Minnesota Department of Revenue's Corporation Franchise Tax page.
Minimum fee
While pass-through entities like "S" corporations, partnerships, and LLCs are exempt from the corporate franchise tax, they—and "C" corporations—are subject to a minimum fee if their Minnesota property, payroll, and sales exceed $1,220,000. This fee ranges from $250 to $12,200, depending on the total, and applies even if the entity has no taxable income or corporate franchise tax liability.
Excise taxes
Excise taxes are special taxes imposed on specific goods or services. In Minnesota, these taxes apply to a wide range of products and activities, including:
- Alcoholic beverages: Different types of alcoholic beverages are taxed at varying rates. For instance, distilled spirits are subject to an excise tax of $5.03 per gallon.
- Tobacco products: Cigarettes, cigars, and other tobacco products incur excise taxes based on quantity or weight. As of 2024, the tax rate for a pack of 20 cigarettes is $3.04. The rate for premium cigars is 95% of the wholesale sales price or $0.50 per cigar, whichever is less.
- Motor fuel: Minnesota imposes a motor fuels excise tax on gasoline and diesel fuels. The tax rate is $0.318 per gallon, which includes a $0.02 per gallon cleanup fee and a $0.001 per gallon inspection fee.
- Vehicles: A $20 excise tax is applied to motor vehicle sales in certain cities or counties. Retailers selling new or used vehicles are required to collect and remit this tax. It must be reported on the retailer's Sales and Use Tax return.
Unemployment tax
Minnesota employers are required to pay state unemployment (UI) taxes, which are used to provide temporary benefits to eligible unemployed workers. For 2024, the taxable wage base is $42,000, meaning employers pay UI taxes on each employee's wages up to this amount. The tax rate comprises a base rate of 0.1% and an experience rating that can be as high as 8.9%, depending on the employer's history with unemployment claims. New employers are assigned rates based on their industry classification.
Local taxes
Minnesota business owners should remain aware of how local tax rates can impact their operations. These special local taxes often focused on specific sectors like lodging and large-scale public projects, impacting both residents and businesses.
For example, effective April 1, 2024, Plymouth implemented a 3% lodging tax, while Ortonville introduced the same rate starting October 1, 2023. These taxes apply to hotel rentals and other short-term lodging accommodations within these cities. Metro Area Sales and Use Taxes include a 0.25% rate dedicated to funding housing projects and statewide rent assistance along with a separate 0.75% rate for supporting transportation initiatives.
Sales and use taxes
The state imposes a sales tax rate of 6.875% on most taxable goods and services. In addition to this state rate, local taxing jurisdictions—including cities, counties, special purpose districts, and transit authorities—may levy an additional sales and use taxes. The City of St. Paul, for instance, implemented a 1.5% sales tax rate as of April 1, 2024. Many smaller towns across Minnesota impose a general sales tax of 0.5%.
Remote seller tax considerations
In Minnesota, remote sellers—businesses without a physical presence in the state—are required to collect and remit Minnesota sales tax if they have an economic nexus in the state. Specifically, a business must register for a Minnesota Tax ID Number and begin collecting sales tax if, over a 12-month period, a remote seller either:
- Makes 200 or more retail sales shipped to Minnesota
- Or has more than $100,000 in retail sales shipped to Minnesota
Remote sellers meeting these thresholds should register and start collecting Minnesota sales tax by the first day of a calendar month no later than 60 days after exceeding the threshold. For detailed information, refer to the Minnesota Department of Revenue's Sales Tax FAQs for Remote Sellers.
Property taxes
Minnesota property taxes attach to real estate and are set by the state's local governments. These taxes fund services like education, public safety, and infrastructure. Taxation rates vary by county and city, and they're determined by the area's budgetary needs. Property valuations conducted annually establish tax amounts payable.
