The 2023 Guide to Small Business Taxes in Minnesota

Barbara C. Neff

Small businesses that operate in the state of Minnesota can run into a wide range of different taxes, some of which vary based on the type of business entity. Here’s what you need to know about the different business taxes that take a bit out of your bottom line.

How are corporations taxed in Minnesota?

Minnesota imposes a 9.8% corporation franchise tax on covered corporations. Corporations might also be required to pay a minimum fee based on their total property, payroll, and sales attributable to Minnesota. For 2023, the minimum fee kicks in at $1.16 million in total Minnesota property, payroll, and sales and ranges from $240 to $11,570.

Which corporations are subject to the corporation franchise tax?

The corporation franchise tax applies to companies that file annual federal income tax returns as C corporations and meet at least one of the following:

  • Are located in Minnesota
  • Have a business presence in Minnesota
  • Have Minnesota gross income

How is the corporation franchise tax paid?

The tax is paid with Form M4, “Corporation Franchise Tax Return.” The return must be filed by the due date for filing your federal income tax return.

You must generally pay all Minnesota business taxes electronically if you paid more than $10,000 of any one business tax during the previous fiscal year (July 1–June 30). 

Once you’re required to pay business taxes electronically for one year, you must continue to do so in the future. You’ll receive a notice from the Minnesota Department of Revenue the first year that you’re required to pay electronically.

Are filing extensions available for the corporation franchise tax?

All businesses subject to the corporation franchise tax are granted an automatic seven-month extension to file Form M4; you don’t need to submit a request.

If the IRS grants an extension of time to file your federal return that’s longer than the Minnesota automatic seven-month extension, your state filing due date is extended to the federal due date.

Remember this is a filing extension only. Any tax not paid by the regular due date is subject to penalties and interest.

Are estimated payments required for the corporation franchise tax?

Maybe. If your estimated tax is more than $500, you must make quarterly payments based on the required annual payment.

The required annual payment is generally the lesser of:

  • 100% of the prior year’s tax liability, or
  • 100% of the current year’s tax liability.

A corporation isn’t required to pay estimated taxes the first year it’s subject to the franchise tax in Minnesota. 

For a large corporation, the required annual payment is 100% of the current year’s tax liability. A large corporation is one that had Minnesota taxable net income of $1 million or more in any of the three prior tax years. When making a large corporation determination, a unitary business is considered one corporation. 

For the first quarter only, a large corporation can base its installment on 100% of the prior year’s tax liability. Any reduction in the installment from using this method must be added to the second installment.

You should pay your estimated tax in four equal installments unless certain exceptions apply. Payments are due by the 15th day of the third, sixth, ninth, and 12th months of the tax year. Installments for a short tax year are due in equal payments on the 15th day of the third, sixth, ninth, and final months, depending on the number of months in the short tax year. No installments are required for a short tax year of fewer than four months. 

You can make your payments electronically or by check by creating and printing a voucher.

Does Minnesota tax partnerships?

The partners’ income is taxed at an individual level, but the partnership itself is subject to the minimum fee if its Minnesota property, payroll, and sales or receipts total exceeds the minimum threshold, which is adjusted annually for inflation. The minimum fee is determined when you complete Form M3, “Partnership Return.”

Which partnerships are subject to the tax?

The partnership tax applies to businesses that file an annual federal income tax return as a partnership and meet at least one of the following:

  • Are located in Minnesota
  • Have a business presence in Minnesota
  • Have Minnesota gross income 

Are there any exceptions to the partnership tax?

A partnership doesn’t have to pay the minimum fee if:

What are the filing requirements for partnerships?

A partnership that has taxable Minnesota gross income must file Form M3 if it’s required to file one of the following federal tax forms:

  • Form 1065, “U.S. Return of Partnership Income,” or
  • Form 1065-B, “U.S. Return of Income for Electing Large Partnerships.”

As noted, each individual partner must report their share of the partnership’s income on their own personal income tax returns. But the partnership pays the state minimum fee, if one is required.

If the partnership has items of income, credits, or modifications that are different from its federal return, it should also issue and file Schedule KPI and/or Schedule KPC. If the partnership has nonresident individual partners, it may file a composite income tax on its behalf using Schedule KC.

If you file by calendar year, your partnership tax return and payment are due by March 15 of the following year. For fiscal year filers, the due date is the 15th day of the third month after the end of the tax year.

If the partnership has nonresident individual partners, it may file a composite income tax on its behalf using Schedule KC. If it has nonresident individual partners who won’t be included in the composite income tax, the partnership is generally required to withhold income tax on behalf of such partners and remit it with its Minnesota partnership return, by using Schedule MW-3NR (see more on nonresident withholding below). Individual partners who aren’t included on the composite income tax should also complete Form M1, “Individual Income Tax.”

Are extensions available for the partnership tax?

All partnerships are granted an automatic six-month extension to file. If the IRS grants an extension of time to file your federal return that’s longer than Minnesota’s six-month extension, your state filing due date is extended to the federal due date.

To avoid penalties and interest, you must pay any tax owed by the regular due date.

You can make an extension payment electronically. If you’re not required to pay electronically and choose to pay by check, you can mail a payment voucher with your payment.

Do partnerships need to pay estimated taxes?

Partnerships must make quarterly estimated tax payments if the total taxes due (for minimum fees, nonresident withholding, composite income tax, and pass-through entity tax) is $500 or more. Include the estimated taxes, minimum fee, nonresident withholding, and composite tax in the same quarterly payment.

The annual payment amount is equal to the partnership’s total tax liability for the prior year, or 90% of all the taxes listed above, less any credits allowed against the tax for the current tax year (whichever is less).

Estimated tax payments are due by the 15th day of the fourth, sixth, and ninth months of the tax year and the first month of the following tax year. If you’re not required to pay electronically, you can pay by check, mailing it with a payment voucher

What is the S corporation tax?

Most S corporation income is taxed after it passes through to shareholders, on their individual income tax returns. But S corporations must pay Minnesota’s corporate tax rate of 9.8%  on the following:

  • The Minnesota portion of any passive income that’s subject to federal tax
  • The Minnesota portion of any recognized built-in gains and net capital gains that are subject to federal tax
  • The current year’s installment of any LIFO recapture tax, imposed when a C corporation converts to an S corporation and paid over a four-year period

An S corporation is subject to the minimum fee if its Minnesota property, payroll, and sales or receipts total exceeds the minimum threshold, which is adjusted annually for inflation.  

Which S corporations are subject to the tax?

The S corporation tax applies to companies that file an annual federal income tax return as an S Corporation and meet at least one of the following:

  • Are located in Minnesota
  • Have a business presence in Minnesota
  • Have Minnesota gross income

How do small businesses pay the S corporation tax?

You must file Form M8, “S Corporation Return,” and pay the tax owed by the due date for filing your federal return. Generally, the due date is March 15 of the following year. If you file on a fiscal-year basis, though, the due date is the 15th day of the third month following your tax year.

If the S corporation has items of income, credits, or modifications that differ from the federal return, it should also issue and file Schedule KS. If it has nonresident individual shareholders, it may file a composite income tax on their behalf using Schedule KC.

If the business has nonresident individual shareholders who won’t be included on Schedule KC, the S corporation is generally required to withhold income tax on behalf of such shareholders and remit it with the Minnesota S corporation return by using Schedule MW-3NR (see more on nonresident withholding below). Individual shareholders who aren’t included on the Schedule KC must also complete Form M1, “Individual Income Tax.”

Can an S corporation obtain an extension?

Like partnerships, all S corporations are granted an automatic six-month extension to file. And if the IRS grants an extension of time to file your federal return that is longer than Minnesota’s six-month extension, your state filing due date is extended to the federal due date.

To avoid penalties and interest, you must pay any tax owed by the regular due date.

You can make an extension payment electronically or by check, along with a payment voucher.

Are S corporations required to pay estimated taxes?

Estimated tax payments aren’t required for the first taxable year, but may be after that. An S corporation must make quarterly estimated tax payments if the sum of the following estimated taxes, less any credits allowed against the tax, is $500 or more. This applies to:

  • S corporation taxes
  • Minimum fee
  • Nonresident withholding (see below)
  • Composite income tax
  • Pass-through entity tax (see below)

The S corporation must pay quarterly installments based on its required annual payment. The annual payment amount is equal to the S corporation’s total tax liability for the prior tax year or 90% of all the taxes listed, less any credits allowed against the tax for the current tax year (whichever is less).

Estimated tax payments are due by the 15th day of the fourth, sixth, and ninth months of the tax year and the first month of the following tax year. You should include any estimated S corporation taxes, minimum fee, and nonresident withholding or composite income tax in the same quarterly payment.

You can make a payment electronically or pay by check, along with a payment voucher

What about limited liability companies?

The Minnesota Department of Revenue has indicated that a Minnesota limited liability company (LLC) will be treated for state tax purposes in the same manner that it’s treated for federal purposes. So, if it’s treated as a partnership by the IRS, for example, the Minnesota Department of Revenue will also treat the business as a partnership, with all the related obligations.

What if I’m not certain which tax return to file?

Not to worry. Form C101, “Minnesota Business Activity Questionnaire,” is designed to establish whether your business needs to file a Corporation Franchise, Partnership, or S Corporation tax return in Minnesota.

Does Minnesota offer any tax credits for businesses?

Yes, the state offers several tax credits, including the:

What is nonresident withholding?

Partnerships and S corporations may be required to withhold tax from partners and shareholders who don’t live in Minnesota if they don’t make the pass-through entity tax election (see below). Nonresident partners and shareholders may:

When applicable, these businesses must withhold 9.85% of a nonresident individual’s Minnesota income, less any allowable credits that are passed through to the individual.

Nonresident withholding applies when a partnership or S corporation has nonresident individual partners or shareholders who:

  • Won’t be included in composite income tax, and
  • Received at least $1,000 of Minnesota-source distributive income (not wages) from the business.

The withheld tax should be remitted to the Minnesota Department of Revenue with the business’s tax return (Form M3 or M8) on Schedule MW-3NR. Individual partners and shareholders who aren’t included on the composite income tax must also complete Form M1, the individual income tax return.

Does Minnesota have a pass-through entity election?

Minnesota is among the states that have enacted a state-level “workaround” in response to the $10,000 limit on the federal income tax deduction for state and local taxes.

The pass-through entity (PTE) tax allows a business entity to pay a tax on behalf of its partners or shareholders. The tax is calculated by multiplying the entity’s PTE taxable income by the highest Minnesota individual income tax rate.

Partners and shareholders may then claim a refundable credit equal to the PTE tax paid by the entity on their behalf. These credits are generally reported on Schedule M1REF, “Refundable Credits.”

The PTE tax election is available through 2025.

Which small businesses can make a pass-through election?

The election is available for:

  • Partnerships
  • S corporations
  • Limited liability companies taxed as a partnership or an S corporation

Qualified entities may elect to pay PTE tax if their qualifying owners who, as a group, control more than 50% of the portion of the entity owned by qualifying owners who choose to elect it. Ownership is determined according to the owner’s capital account percentage unless the entity’s agreement specifies how ownership is calculated. 

A qualifying owner generally must be:

  • A resident or nonresident individual who’s a partner, member, or shareholder of a qualifying entity, or
  • A resident who’s a shareholder of a qualifying S corporation.

Note: Nonresident partners and shareholders may elect to have the PTE tax fulfill their Minnesota income tax filing requirement.

How can a small business make the election?

Partnerships and S corporations must complete Schedule PTE, “Pass-Through Entity Tax,” if they elect to pay income tax at the entity level on behalf of their owners.

Starting in tax year 2023, partnerships must also complete Schedule PTE-RP, “Pass-Through Entity Tax for Resident Partners,” if any partners are Minnesota residents.

Once made, the election can’t be revoked after the original due date.

Are estimated payments required for the PTE tax?

Yes. PTE estimated tax payments must be made online using the same method as estimated tax payments for nonresident withholding, composite income tax, and other entity-level income taxes.

To calculate your business’s estimated PTE tax liability, complete Schedule PTE for the most recent tax year available. Make your PTE estimated tax payments in four equal installments by the 15th day of the fourth, sixth, and ninth months of the tax year and the first month of the following tax year.

Does Minnesota have any excise taxes?

Minnesota’s excise taxes include: 

When do sales and use taxes apply in Minnesota?

Sales tax applies to most retail sales of goods (tangible personal property) and some services in Minnesota. A number of local sales taxes might apply to the sales price, too. Local taxes apply to the same taxable items and services as the Minnesota general sales tax rate.

You may owe a use tax on taxable goods and services used in Minnesota if no sales tax was paid at the time of purchase. Specifically, if you buy equipment, supplies, or other taxable items for your business and the seller doesn’t charge Minnesota sales tax, you owe use tax on the cost of the items. If your business is located in an area with a local tax, you may also owe local use tax.

Some common situations where you might owe use tax include when you:

  • Buy taxable items or services online without paying sales tax
  • Withdraw an item from inventory to use (instead of selling it), donate, or give away
  • Buy taxable items outside of Minnesota
  • Buy taxable items in another Minnesota city or county with a lower or no local sales tax

The applicable sales tax rate equals the state general tax rate (6.875%) plus all applicable local tax rates (local taxes, special local taxes, and special taxes). You can either:

  • Add sales tax to the selling price (show the tax separately on the receipt or invoice), or
  • Include sales tax in the selling price (mark the item “tax included” on the receipt or invoice, or post a sign indicating that tax is included).

You must subtract the sales tax from your total receipts before filing your sales tax return.

Note: In 2023, the Minnesota Legislature approved a two-year pause on imposing new general local sales and use taxes or modifying an existing local sales and use tax. During the pause, a Local Tax Advisory Task Force will evaluate local taxes and their ability to fund local government capital projects. The moratorium, however, doesn’t apply to new local sales and use taxes or modifications to existing local sales and use taxes authorized in May 2023.

Are remote sellers subject to the sales tax?

Remote sellers must collect and remit Minnesota sales tax on their sales made in the state if, over the prior 12-month period total, they have:

  • 200 or more retail sales shipped to Minnesota, or
  • More than $100,000 in retail sales shipped to Minnesota.

A retail sale is one sales transaction. For example, one sale into Minnesota may contain 10 items for one customer, but that transaction counts as one retail sale.

How do small businesses pay sales and use taxes paid in Minnesota?

Under Minnesota law, your filing frequency depends on your average total tax liability for a year.

  • Average tax liability: Less than $100 per month or $1,200 per year
    • Filing frequency: Annual
    • Return due date: February 5 of the following year
  • Average tax liability: $100 to $500 per month or $1,200 to $6,000 per year
    • Filing frequency: Quarterly
    • Return due date: April 20, July 20, October 20, and January 20 of the following year
  • Average tax liability: More than $500 per month or $6,000 per year
    • Filing frequency: Monthly
    • Return due date: 20th day of the following month

You must file your Sales and Use Tax return online. If you didn’t make any taxable sales for a filing period, you must still file a zero return.

Are any exemptions or refunds available for the sales tax?

Several exemptions might apply. For example, certain items are excluded from the tax.

In addition, the capital equipment exemption is an upfront sales tax exemption on eligible capital equipment purchases. To claim the exemption, you’ll present your vendor with a completed Form ST3, “Certificate of Exemption.”

To qualify for the exemption, the equipment must be used to:

  • Manufacture, fabricate, mine, or refine products that are ultimately sold at retail,
  • Electronically transmit information sold to retail customers from an online database, or
  • Generate electricity or steam to sell at retail.

Examples include:

  • Machinery and equipment used to operate, control, or regulate the production equipment
  • Machinery and equipment used for research and development, design, quality control, and testing activities
  • Environmental control devices that regulate temperature, humidity, light, or air pressure when those conditions are essential to and are part of the production process
  • Materials and supplies used to construct and install machinery or equipment
  • Repair and replacement parts for qualifying equipment
  • Delivery and installation charges for qualifying equipment
  • Materials used for foundations that support machinery or equipment
  • Materials used to construct and install a special-purpose building used in the production process
  • Ready-mixed concrete trucks where the concrete is mixed as part of the delivery process

Potential refunds include the Greater Minnesota Job Expansion Refund Program. Eligible purchases include:

  • Taxable property and taxable services primarily (more than 50%) used or consumed at the qualifying facility
  • Construction materials and supplies primarily used or consumed in the construction of real property at the qualifying facility
  • Equipment incorporated into real property at the qualifying facility

A certified business may request up to $2 million in refunds per year, but no more than $10 million during the seven-year agreement period.

What are the withholding obligations for Minnesota employers?

Minnesota employers must withhold state income taxes from their employees’ pay (this is in addition to federal withholding for Social Security, Medicare, and federal unemployment taxes). Each employee should complete Form W-4MN, “Minnesota Employee Withholding Allowance/Exemption Certificate,” and federal Form W-4, “Employee’s Withholding Certificate” in some situations.

You must send copies of Form W-4MN to the Minnesota Department of Revenue if the employee:

  • Claims more than 10 Minnesota withholding allowances,
  • Claims to be exempt from Minnesota withholding and you reasonably expect the employee’s wages to exceed $200 per week—unless the employee is a resident of reciprocity states Michigan or North Dakota and has completed Form MWR, “Reciprocity Exemption/Affidavit of Residency,” or
  • You believe the employee isn’t entitled to the number of allowances claimed.

Employees who claim exemption from withholding must renew the exemption annually by filing new Forms W-4 or W-4MN by February 15 each year.

You must keep copies of Form W-4MN in your files. The forms serve as proof that you’re withholding income taxes according to the employee’s instructions; they should be available for inspection if the IRS or the state requests it.

You’ll use the information on the forms and the Minnesota withholding tables to determine the amount of state taxes to withhold. Employers are required to deposit Minnesota withholding tax following a semiweekly or monthly schedule. Your due dates depend on how much tax you withheld and when the IRS requires you to deposit.

You can pay your Minnesota tax deposits electronically, by telephone at (800) 570-3329, or by mailing a payment voucher. Note that some employers must pay electronically.

Most employers are required to file withholding tax returns quarterly. To qualify for annual filing, you must have a filing history of $500 or less of withholding in the prior calendar year.

Minnesota quarterly withholding returns must be filed online or by phone. A quarterly return must be filed even if you paid no wages subject to withholding, had no employees during the quarter, or didn’t withhold tax.

You’ll need to report the following:

  • Total amount deposited for the period, including any credit carried forward from the previous period
  • Wages paid during the period
  • Dates you paid your employees and how much you withheld on those dates
  • Number of employees during the period

You must also file an Annual Withholding Tax Return with the Minnesota Department of Revenue. You can file online or by phone.

What are the rules for unemployment insurance taxes?

Employers generally must register and pay quarterly unemployment insurance tax to the Minnesota Unemployment Insurance Trust Fund (the state unemployment insurance tax is on top of the federal unemployment tax). But you don’t need to include the following types of employment for unemployment insurance tax purposes:

  • Services performed by a sole proprietor’s spouse, parents, or children under the age of 18. A sole proprietor paying only these individuals doesn’t need to register for an employer account.
  • Services performed by the partners of a partnership. A partnership paying only these individuals also doesn’t need to register.
  • Wages of owner/officers or members who own 25% or more of a corporation or LLC. A corporation or LLC paying only these owners/officers or members doesn’t need to register. You can, however, voluntarily extend coverage to these employees by electing optional coverage for them.

If required to register, you can do so online or by calling (651) 296-6141. You must register as soon as possible after the first wages are paid and before the due date of the first quarterly wage detail report you’re required to submit. After you register, you’ll receive a notice with the rate you should use to determine your liability.

You’ll receive a Tax Rate Determination in the mail every December with the upcoming year’s unemployment insurance tax rate components (your experience rating and the base rate for all employers that ranges from 0.10% to 0.50%) and the taxable wage base. The wage base for 2023 is $40,000, meaning you must pay taxes on only the first $40,000 of each employee’s annual wages.

The tax rate for new employers that haven’t had employees long enough to be assigned an experience rating is based on the average rate for the employer’s industry. The 2023 rates range from 1.0% to 8.90%.

After you qualify for an experience rating, your tax rate will be determined by dividing the total unemployment benefits paid to former employees by the total taxable wages paid to all of your employees.

If you’ve been assigned an experience rating and have had benefits paid to former employees during the experience rating period, you can make a “buydown payment“ to cancel all or part of the benefits paid charges on your account. This will reduce your unemployment insurance tax rate.

You must file quarterly wage detail reports online, even if you paid no wages or had no employees during the quarter. Due dates are the last day of the month following the end of the calendar quarter.

Tax compliance is just one of the many things on small business owners’ plates. Gusto’s payroll service can ease some of the burden by making it easier to pay employees and automatically file your payroll taxes.

Barbara C. Neff has been writing about a variety of legal and other topics since 2001. She has a law degree and a master's degree in journalism.
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