Minnesota Department of Revenue Small Business Reference Guide My Favorite Subject ...Taxes!” Video Contest
Rates, Deductions & Filing Essentials
Operating a Minnesota small business is all about multitasking — and that includes keeping up with your many tax obligations. This guide takes you through the basic taxes you must deal with, what deductions are most worth tracking and some filing and record-keeping tips to keep you on the right side of the law and collect more of your earnings.
Key Minnesota tax types you should know about
Income Taxes: Business income If your business is a sole proprietorship, partnership or S-corporation, business income usually passes through to owners’ individual returns and is taxed at Minnesota individuals income tax rates. Regular corporations pay state corporate income taxes on separate returns. If you know which structure you fall under, it can help determine how your income is taxed and what types of forms you’ll have to file.
Sales and use tax: A sales tax is generally applicable to retail sales of tangible goods and sometimes services. If you are selling taxable items, then you need to apply for a sales tax permit, charge the right sales tax rate at the point of sale and return your collected taxes to the state. Use tax is due when the purchases for use in business were not taxed by the seller at the time of purchase.
Payroll taxes: If you have employees, federal and state payroll taxes kick in. These are income tax withholding checks, Social Security and Medicare withholdings and state unemployment insurance. Employers should withhold, deposit, and file all of the payroll taxes on specific time periods.
Estimated taxes and withholding: Too many small-business owners must pay quarterly estimated tax for money not subject to withholding. For businesses that anticipate owing tax in excess of amount withheld — they should also figure estimated payments and pay them to avoid a penalty.
Minnesota tax rates — what you'll pay 23.7% Is the average combined state and local sales tax in Minnesota, one of the lowest among states that charge it (although clothing under $100 is taxable) Starting at 5th highest Income taxes If you're single, have a federal adjusted gross income (FAGI) of between $25,890 and $85,060 or married with a FAGI between $37,850and $145,960 there's bad news: curveballs While most personal property is exempt from sales tax in Minnesota services such as car repair or dryer cleaning aren't Always keep in mind You figured out your income Taxes on beer are lower than on wine_COMPARE Text by Suzy Allman for The New York Times; photograph by Tim Gruber for The New York Times
State tax rates are mobile, so just take the following as structural thoughts rather then hard figures. Like most states, Minnesota has a progressive system of individual income tax, which means that as people earn more money, they are taxed at increasing levels. Pass-through business income is taxed via owner-level returns at those brackets. Business profits are subject to state corporate income tax. Taxable sales are assessed state and local rates of sales tax, with many localities tacking on their own surtaxes. Actual percentages and brackets are updated annually, however, so be sure to verify Minnesota’s tax rates using official state resources or working with a tax pro prior to completing your return.
Small business tax-deductible expenses you didn’t know were deductible
Ordinary and necessary business expenses: Common charges like rent, utilities, office supplies, advertising fees and marketing agency costs as well as professional expenses … and business insurance are often deducted when they are considered ordinary, necessary to your trade or business and for which you have a receipt.
Home office deduction: If you use part of your home for business on a regular and exclusive basis, you may qualify for a home office deduction. The simplified method allows you to use a standard rate per square foot; with the regular method, you must figure actual expenses and determine the part that applies to business use.
Depreciation and Section 179-style treatment: Equipment and vehicles, for example, are generally recovered over time through depreciation. Some small businesses can choose accelerated expensing for certain purchases so that they reduce taxable income sooner.
Vehicle and travel: Keep a running log of your business miles and also any lodging and meals (with limits) when you are traveling on business. Standard mileage rate or actual expense method for your vehicles, be consistent and well documented, which one did you use?
Payroll taxes and benefits for employees: Employer-paid payroll taxes and contributions to employee retirement plans and health plans can give deductions while providing benefits that may assist in recruiting and retaining staff.
Qualified business credits: Although less certain than deductions, credits have a dollar-for-dollar impact on tax liability. Availability and maximum credits vary, so make sure to verify eligibility *I.
Practical filing and payment steps
Get registered and IDs: Register your business entity, get any state tax ID numbers that you need for income tax, sales tax and employer withholding.
Use the right forms and schedules: Submit state income tax filings that are relevant to your business type, and fill out schedules to report pass-through income, credits and adjustments. Filing and deposit schedules for sales, payroll are frequently different.
Stay on top of sales tax due dates: This can vary based on the size of your business and local rules. Late payment can result in penalties and interest, so mark your calendar or sign up for automatic payments.
File quarterly estimated payments: Estimate taxable income and file quarterly estimated payments if you're going to owe at the end of the year. Underpaying can result in penalties.
Keep your payrolls clean: Accurately withhold income tax and payroll taxes, make deposits when they are due, file wage reports and unemployment insurance reports on time.
Recordkeeping and documentation best practices
Accurate records support deductions and streamline filing. Keep receipts, invoices, bank and credit card statements, payroll records and mileage logs. Sort by year and type of document (income, cost of goods sold, payroll, expenses, asset purchases). Maintain electronic and hard-copy backup records, and keep appropriate documents for the time required by law -- particularly those related to depreciation and asset purchases.
Year-end planning and the purpose of a tax checklist
Heading toward year end, consider details of income, taxable events and potential deductions. Don't forget to look at timing for capital purchases and expenditures, retirement contributions for owners and employees, as well as payroll year-end reporting. A simple checklist can really help: reconcile accounts, check sales tax filings, make sure estimated payments were made in full and on time, prepare payroll forms and gather all the backup for deductions.
Common mistakes to avoid
Commingling personal and business costs: Keep accounts separate to avoid confusion and deductible status.
Neglecting to sign up for necessary tax accounts: Failure to sign up for sales taxes or employer withholding can lead to retroactive liabilities.
Underestimating payroll requirements: Mistakes in withholding or deposits of payroll can result in penalties.
Documentation nightmare: Poor or ambiguous recordkeeping leads to deductions disallowed upon audit.
When to seek expert help
Tax laws and rates shift, and certain tax scenarios like multistate sales, nexus matters or convoluted pass-through allocations are complex. There should be a tax adviser who can assist in deciding on your entity, the tax ramifications and help you to be in compliance with whatever state-specific rules apply.
Other tips to keep up with Minnesota business tax requirements
Begin with a list and calendar of deadlines for filing and paying.
Maintain well-organized, categorized records all year.
Regularly reassess entity structure to ensure tax efficiency.
Underestimate your quarterly payments to not get surprises.
Keep track of deductions and credits you can take each year.
But if your Minnesota small business remains vigilant about what taxes it has to pay, keeps tabs on deductible expenses, and meets deadlines for filing and paying taxes, you'll reduce stress all around – and realize other benefits like holding on to more of what the company earns. The best defense against penalties for underwithholding, and missed tax-saving opportunities, is frequent review and good record-keeping.