Business Tax Liabilities
Businesses operate in multiple taxing jurisdictions and owners need to be aware of the taxes imposed by federal, state and local government.
Federal and state income taxes, state sales and use taxes, FICA (Social Security and Medicare) taxes, state unemployment taxes and payroll tax withholding. We touch broadly on some of these most common business taxes. For a detailed breakdown, see our Guide to Starting a Business in Minnesota.
Sales and Use Tax
Everyone who makes taxable retail sales or provides taxable services in Minnesota must obtain a Minnesota tax identification number and register to collect and remit state sales and use tax. This must be done before making any taxable sales in Minnesota.
You must register to collect sales tax if you make taxable retail sales in Minnesota. This includes sellers outside Minnesota who have an office, distribution, sales or sample room location, warehouse or other place of business in Minnesota, either directly or by a subsidiary. There are other requirements as well. Learn more about who needs to register at Minnesota Sales and Use Tax Business Guide.
State and Local Sales Taxes
The sales tax applies to retail sales of taxable services, tangible personal property or specific digital products made in Minnesota. Businesses collect the sales tax due on items and services sold at retail on behalf of the state. Most retail sales are taxable in Minnesota. A “retail sale” means any sale, lease or rental of tangible personal property for any purpose other than resale, sublease or subrent. A retail sale also includes services for any purposes other than for resale. However, some sales are specifically exempted by law from the sales and use tax. These exemptions are discussed later in this section.
State and Local Use Taxes
The use tax complements and is similar to the sales tax. It applies when you buy, lease or rent taxable items on services used in your business without paying sales tax to the seller. The use tax rate is the same as the sales tax rate. The rate is applied to the cost of the taxable purchases on which the sales tax is not paid. The buyer pays use tax directly to the state. Both businesses and individuals are subject to use tax.
The Minnesota Department of Revenue currently administers several local sales and use taxes. The general local taxes apply to the same items that are taxed by the Minnesota sales and use tax law. You must be registered for any locality if you do business there.
The Social Security and Medicare benefit programs are financed by taxes paid by employers and employees under the Federal Insurance Contributions Act (FICA), and by self-employed individuals through the self-employment tax.
FICA taxes are levied on both the employer and the employee. The employer is responsible for the employer’s share of FICA taxes, and also is required to collect and pay the employee’s part of the tax, which is withheld from the employee’s pay in much the same way as income tax is withheld.
Income Tax Withholding
Employers must withhold federal and Minnesota income tax and the employee’s share of the FICA tax from their employee’s wages and pay those taxes to the federal and state government. The amount of withholding is based on the wages or salary paid to the employee, and the number of withholding allowances claimed by the employee on Form W-4, Withholding Allowance Certificate, which the employee completes at the time of hiring.
Employers are required to withhold both federal and state income taxes and FICA tax from their employees’ wages as soon as they are paid. The Internal Revenue Service and the Minnesota Department of Revenue provide withholding tables to enable the employer to determine the appropriate withholding amount.
Both the Internal Revenue Service and the Minnesota Department of Revenue require employers to deposit withheld tax on a periodic basis, and to file periodic returns. Both the Internal Revenue Service and the Minnesota Department of Revenue assess penalties and interest for the failure to make deposits on time, the failure to file required returns on time, and the failure to file Form W-2 and 1099 forms. The amount of penalty for late deposits or late filing is based on the length of time the payment or return is late. The Internal Revenue Service imposes a penalty on failure to provide correct information on W-2 forms, and failure to provide a correct Taxpayer Identification Number. In addition, the Minnesota Department of Revenue imposes a penalty on failure to provide Form W-2 information to the department and for refusing to provide all information required on the forms.
Any person responsible for paying withholding tax may be held personally liable for failure to do so. A penalty equal to 100% of the amount of income tax, social security and Medicare tax, withheld from an employee’s paycheck, may also be imposed. The IRS calls this the Trust Fund Recovery penalty.
Interest is assessed on unpaid withholding tax (plus penalties). Interest accrues from the date the payment should have been made to the date the payment actually is made. The interest rate is adjusted to reflect market rates.
Unemployment Insurance Taxes
Unemployment insurance provides temporary partial wage replacement to workers who lose their jobs through no fault of their own. The benefits are funded by federal and state taxes paid by employers.
Federal unemployment taxes pay the administrative costs of the program at both the federal and state levels. Businesses file a federal UI tax return once a year. It is generally due one month after the year ends.
All firms or organizations having services performed for them in Minnesota are subject to the provisions of the Minnesota Unemployment Insurance Law. Most are required to pay state unemployment insurance taxes.
Whether or not a business is required to report wages and pay unemployment insurance taxes depends on the amount and type of employment, the amount of wages paid and other factors present in special situations.
All businesses that pay wages to employees performing covered services in Minnesota are required to register with the Minnesota Unemployment Insurance (UI) Program. Registration is done either online or by automated phone system, and should be completed as soon as possible after wages are paid to employees performing covered services in Minnesota, but not later than the due date of the first wage detail report.
Based on information the business provides, the state's UI program determines if the business is required to report the wages paid to its employees and pay state unemployment insurance taxes on those wages. If the business meets the reporting requirements, it will be assigned an unemployment insurance employer account number.
These businesses do not need to register for an employer account number:
- Sole proprietorships whose only employees are the spouse, parents, and/or minor children of the sole proprietor
- Corporations and LLCs whose only employees are owner/officers who directly or indirectly own 25% or more of the business and have not chosen to be covered under the Minnesota Unemployment Insurance Program
- Partnerships whose only workers are the partners of the partnership.
The law requires that each new employer pay tax at a new employer rate, unless the rate was acquired from a predecessor with an existing Minnesota unemployment insurance employer account, and the new employer is eligible to have an experience rate computed based on all or part of the predecessor's experience record.