If your small business has employees working in Minnesota, you’ll need to withhold and pay Minnesota income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on Minnesota state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you’ll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you’ll need one first and foremost for federal taxes. In addition, some states use the federal EIN for state withholding tax purposes. Other states (like Minnesota) issue separate state tax ID numbers. You’ll need an EIN to register with the state. You can apply for an EIN at the IRS website. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to get a Minnesota taxpayer identification number from the Minnesota Department of Revenue (DOR). You obtain your Minnesota tax ID number by registering your business with the DOR. The tax ID serves as an employer ID for withholding and other employer tax purposes. You can register online, on paper, or by phone. To register online, go the e-Services section of the DOR website. To register on paper, use Form ABR, Application for Business Registration, which you can download, along with instructions, from the businesses section of the DOR website. You can submit Form ABR by regular mail or fax. For the latest phone registration information, check the businesses section of the DOR website. There is no fee to register your business with DOR.
All new employees for your business must complete a federal Form W-4. In addition, some employees may also need to complete the related Minnesota Form W-4MN, Minnesota Employee Withholding Allowance/Exemption Certificate. You can download blank Form W-4MNs from the businesses section of the DOR website (check within the Withholding Tax section for Forms & Instructions). For information on who needs to complete Form W-4MN, go to the DOR website and enter “W-4MN” in the Search box. You should keep the completed forms on file at your business and update them as necessary.
In Minnesota, there are four payment (deposit) schedules for withholding taxes: semiweekly, monthly, quarterly, and annually. In some cases, Minnesota links its payment schedule rules to the federal withholding tax rules. Your payment schedule depends on the average amount you withhold from employee wages over time and, in some cases, when you must make your federal withholding tax payments. In general, the more you withhold, the more frequently you’ll need to make withholding tax payments. Only a very few employers qualify for an annual payment schedule and it is not covered here. Quarterly payments, too, are not common, and are not covered here.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, may change over time so you should check with the DOR at least once a year for the latest information.
Here are the due dates for the different payment schedules:
If the payment is due on a weekend or holiday, the due date is extended to the next business day.
Certain Minnesota employers are required to pay withholding tax electronically. These include employers who:
Otherwise, you can download a personalized payment voucher from the DOR website, which you print out and mail in with a check.
The DOR provides several different methods for calculating how much tax to withhold. For more information, check the current version of the DOR publication Minnesota Income Tax Withholding: Instruction Booklet and Tax Tables, which you can download from the businesses section of the DOR website (check within the Withholding Tax section for Forms & Instructions).
Apart from making scheduled tax payments, businesses also must file withholding tax returns. For most businesses, returns must be filed quarterly. (In rare cases, businesses with low annual amounts of withholding or meeting other special criteria may file annually.) The returns reconcile the tax paid for the quarter with the tax withheld for the quarter. Minnesota withholding tax returns must be filed electronically online or by phone. To file online, go to the e-Services section of the DOR website. To file by phone, check the DOR website for current phone number information.
Quarterly returns are due on or before the last day of the month following the close of the quarter:
As with tax payments, any return due date that falls on a weekend or holiday is extended to the next business day.
The federal government and many other states require employers to file an annual reconciliation after the end of the year. (For the federal government, this generally is IRS Form W-3 with copies of Form W-2s included.) The annual reconciliation, where required, is in addition to the requirement to provide each of your employees with a federal form W-2 summarizing the employee’s withholding for the year. Minnesota, however, does not require you to file an annual reconciliation.
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it’s easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on the basic elements of Minnesota employee withholding taxes. Under Minnesota law, an employer may be held personally liable for failure to pay withholding tax. Avoid possible penalties for making mistakes by checking both the IRS and DOR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.com.