Minnesota LLC Taxes

How Is an LLC Taxed in Minnesota?

Taxation in Minnesota isn’t applied in the same way to all LLCs – instead, it varies depending on a number of factors, such as an LLC’s nature, locality, and tax election.

While LLCs typically benefit from pass-through taxation by default, they can elect to be taxed as one of the following:

• C Corporations: The LLC is treated as a separate entity to its owners, paying corporate income tax rates on its total profit while the owners also pay personal income taxes on any distributions they take.
• S Corporations: In return for paying owners a “reasonable salary,” the LLC’s remaining profits are distributed among members without a need to pay self-employment tax or FICA tax on them.

The following sections go into the various tax responsibilities of your LLC at local, state, and federal levels in Minnesota to help you ensure your LLC navigates them effectively.

Minnesota Local Taxes

Minnesota’s local tax landscape is diverse and impacts LLCs in various ways. 

Below, we’ve listed the most common local taxes that your LLC may encounter in the state.

Local Option Sales Taxes

Local option sales and use taxes in Minnesota are levied by cities and counties and supplement the state sales tax. These local taxes, which range from 0.15% to 1.5%, are designated for funding specific local projects and initiatives.

As of October 1, 2023, the Twin Cities’ seven-county Metro Area has implemented an additional 1% tax, which is divided into two parts: 0.25% dedicated to housing and 0.75% for transportation. 

Note: For detailed information on local sales tax rates by location, refer to the Sales Tax Rate Calculator provided by the Department of Revenue.

Local Lodging Taxes

Local lodging taxes in Minnesota are typically levied by cities and towns on short-term lodging facilities, such as hotels and motels, primarily for tourism promotion. The general tax rate for these establishments is 3% or lower. 

Having said that, local governments can impose rates higher than 3% in some cases, potentially reaching up to 6%. This often occurs under special legislative approval or historical city charter agreements, enabling the additional revenue to be used not just for tourism promotion but also for other local community projects and initiatives.

Note: For more information on local lodging taxes, take a look at this publication from the Minnesota House of Representatives.

Property Taxes

LLCs in Minnesota are subject to property taxes determined at the county level, based on the Estimated Market Value (EMV) of the property. This EMV reflects the potential market price, factoring in aspects like location, size, and unique property features. However, EMV is just one component of the property tax calculation.

The actual property tax is calculated by applying the property’s EMV to a classification rate, which varies depending on the property’s primary use, such as residential, commercial, or agricultural.

Property taxes are typically due in two installments on May 15 and October 15, with an alternate due date of November 15 for agricultural properties. County assessor offices in Minnesota issue annual property tax statements and Truth in Taxation notices to LLCs, which provide details about the property’s assessed value, classification, and the estimated taxes due. 

Note: If market conditions, new constructions, or significant property changes lead you to believe your property’s tax assessment is incorrect, you have the right to appeal to your county assessor. 

Vehicle Excise Tax

LLCs involved in the retail sale of new or used motor vehicles in Minnesota should be aware that certain cities and counties may elect to impose a $20 vehicle excise tax on vehicle sales. This tax, when applicable, is collected by the business from the customer at the time of the sale and must be remitted as part of the Sales and Use Tax return.

Note: For a full list of cities where the tax is currently enforced under the state’s administration visit this link. 

Minnesota State Taxes

Every state has its own regulations and rules that dictate how it taxes individuals and businesses. Below is a list of the most relevant state-level taxes for LLCs in Minnesota. 

Sales-Related Taxes

LLCs involved in retail transactions with taxable services or tangible personal property must pay sales and use taxes at a statewide rate of 6.875%. 

This rate is consistent across Minnesota, but it’s separate from and in addition to any local sales taxes that might apply in specific areas.

Note: For comprehensive information on Minnesota’s Sales and Use Tax, we recommend having a look at the Minnesota Sales and Use Tax Business Guide.

Insurance Premium Tax 

LLCs operating in the insurance sector, such as property, casualty, life, and health insurance companies, are required to report and pay insurance premium taxes on the premiums they collect. The rates vary depending on the type of insurance and the company’s assets:

• Township mutual insurance companies have a tax rate of 1%
• Life insurers pay 2% on accident and health premiums and 1.5% on life insurance premiums.
• Mutual property and casualty companies are taxed at 1.26% if their assets exceed $5 million and 1% if their assets are less than $5 million.
• All other insurance providers are subject to a 2% tax rate.

These taxes must be reported by March 1st annually. Keep in mind that companies with a tax liability exceeding $500 in the previous year are required to make quarterly estimated payments. 

Note: For more detailed information regarding the insurance premium tax, refer to the instructions provided by the Minnesota Department of Revenue.

Corporation Franchise Tax

LLCs in Minnesota opting for C or S corporation tax status will need to pay the state’s corporation franchise tax. 

As of 2023, the rates for this fee follow a specific tier structure:

• Less than $1,160,000: $0
• $1,160,000 to $2,309,999: $240
• $2,310,000 to $11,569,999: $690
• $11,570,000 to $23,139,999: $2,310
• $23,140,000 to $46,279,999: $4,640
• $46,280,000 or more: $11,570

S corporations are generally exempt from this fee if they’re operating within a designated Minnesota Job Opportunity Building Zone (JOBZ).

To accurately determine their franchise tax, C corporations will use Form M4: Corporation Franchise Tax Return, while S corporations need to file using Form M8.

Note: For more detailed information visit the Corporation Franchise Tax section on the Minnesota Department of Revenue’s website.

Corporate Income Tax

LLCs in Minnesota that elect to be taxed as C corporations are subject to a corporate income tax rate of 9.8%.

In Minnesota, the calculation of corporate income tax for LLCs taxed as C corporations is closely aligned with federal taxable income guidelines. For LLCs that operate across multiple states, Minnesota’s portion of taxable income is specifically calculated by assessing the percentage of the LLC’s total sales made to customers within the state.

Individual Income Tax 

LLC members in Minnesota, taxed in their default pass-through status, are subject to individual income tax on their share of the LLC’s income. This tax is calculated using Minnesota taxable income (MTI), which starts with federal taxable income (FTI) and includes specific adjustments which are unique to Minnesota.

The state’s individual income tax follows a progressive rate structure, with four brackets: 5.35%, 7.05%, 7.85%, and 9.85%. The applicable tax rate is determined by the member’s income level and filing status, which varies across different categories such as married filing jointly, single, head of household, and married filing separately.  

Note: For more detailed information on Minnesota’s Individual Income Tax visit this detailed guide published by the Minnesota House of Representatives.

Federal Taxes

Regardless of where your business is located, if you run an LLC in the US, there are a number of federal taxes you’ll need to pay. Below are some of the main types your LLC may be required to pay for federal tax purposes:

Income Tax

By default, the Internal Revenue Service (IRS) will not treat single and multi-member LLCs as separate entities from you for tax purposes. What this means is that you’ll need to report your share of your LLC’s profits on your individual tax returns and pay federal income tax on them at the personal rate of your tax bracket.

Having said that, keep in mind that LLCs can also elect to be taxed as C corps or S corps, which changes how these taxes are levied in different ways.

Self-Employment Tax

In addition to income tax, members of single- and multi-member LLCs will need to pay federal self-employment taxes on the share of the business’s profits that they report on their personal tax return at the end of the year.

This tax is levied at a flat rate of 15.3% against businesses with net earnings that exceed $400, though it is applied slightly differently to LLCs that have elected to be taxed as S corps or C corps.

Employer Taxes

If your LLC hires any employees, it will need to withhold a portion of their salaries to cover various types of taxes on your employees’ behalf – including Social Security, Medicare (FICA), and payroll taxes.

Furthermore, the members of any LLCs that have elected to be taxed as an S corp will be required to pay employment taxes on their salaries. However, in return for this, the remainder of the business’s profit after these salaries have been distributed will be safe from both self-employment and FICA taxes.

Excise Tax

If your LLC engages in certain types of business (such as the sale of alcohol and tobacco or operating a heavy highway vehicle, among others), it may need to pay federal excise taxes in order to do so legally. Each excise tax comes with its own set of rules, rates, and filing obligations you’ll need to be aware of.

Understanding and fulfilling these federal tax obligations is crucial for keeping your LLC compliant and avoiding unnecessary financial penalties and/or fines.

How to File LLC Taxes in Minnesota

Below, we’ve outlined the general process an LLC in Minnesota will need to follow in order to file their tax return correctly. Note that the specificities of each step will vary slightly depending on how your LLC is organized and the specific locality it’s based in. 

Step 1: Gather Your Documentation

To ensure accurate tax filing, thorough record-keeping is essential. Begin by collecting your personal information, including:

• You and your partner’s Social Security number, date of birth, and residential address
• The previous year’s tax returns
• Your LLC’s Federal Tax Identification Number or Employer Identification Number (EIN)

Then, you’ll need to gather all documentation related to your business’s income, such as:

• Invoices you’ve issued
• Sales transaction logs
• Electronic payment reports from services like PayPal or Stripe

Lastly, assemble all records pertaining to your business expenses, which should cover:

• Lease receipts for your business premises
• Bills for utilities
• Records of office supplies purchases
• Documentation of business-related travel
• Payroll records for employees

Note: Depending on how your LLC is organized and its tax election, you may need different information for your tax return.

Step 2: Find The Right Tax Forms

Once you’ve gathered all necessary documents, the next step is to select the correct tax forms for your LLC based on its organization:

• Single-Member LLCs: The business’s total income and expenses are reported on a Schedule C form, which is attached to the owner’s personal tax return and due by April 15 or the following business day if it lands on a weekend or holiday.
• Multi-Member LLCs: File an information return using Form 1065. Members must fill out a Schedule K-1 showing their individual earnings or losses by March 15 or the next business day.
• C Corporations: File a corporate tax return using Form 1120 by the April 15 deadline or on the next business day if it’s a weekend or holiday.
• S Corporations: Use Form 1120-S for the corporate tax return and distribute Schedule K-1 forms to shareholders for reporting their shares of profits or losses. The deadline for filing taxes using 1120-S is March 15 or the following business day.

Since state and local taxes will have their own individual forms and requirements, we recommend contacting your municipality or hiring an accountant for guidance.

With the appropriate documentation gathered and the correct tax forms for your business entity on hand, you’ll be ready to fill them out and submit them.

Step 3: File Your Taxes

The majority of businesses choose electronic filing for its speed, enhanced security, and reliability compared to paper filing, which can be slower and more prone to errors. Here’s how it works:

• Federal Tax Returns: The IRS provides two electronic services for tax submission: Free File for businesses with an AGI below $72,000 and Free Fillable Forms for those above the threshold.
• State Tax Returns: LLCs can utilize the Minnesota Department of Revenue’s e-Services system to securely and efficiently file various state tax returns, including sales tax and corporation franchise tax, and access tools for tax calculation and deadline tracking.
• Local Tax Returns: Local taxes such as sales and use taxes or lodging taxes are generally filed through the state’s e-Services system, with some requiring direct submission to respective county or city authorities.

Note: These electronic filing tools are best suited for those who are already confident in handling their LLC taxes as if filling out a paper form. 

For new business owners, we recommend opting for the expertise of a tax professional in order to ensure both accuracy and compliance in your tax filings. 

Recommended: Schedule a free consultation with 1-800Accountant to stay on top of your taxes. 

Keep Your Minnesota LLC Compliant

While LLCs are generally easier to maintain than corporations, there are certain state and local formalities your LLC must satisfy in order to remain compliant. 

Minnesota LLC Annual Renewal

All limited liability companies must file an annual renewal with the Secretary of State’s office to maintain their active status. This is commonly known as an annual report in states outside of Minnesota and requires LLCs to verify or update key business details, including their registered office address and the manager or chief executive’s business information. 

Should there be any changes in the business name or registered office and/or agent, an additional amendment form is necessary. The annual renewal, which is due by December 31 of each year, is free for active, compliant LLCs.

Licensure and Tax Requirements

In Minnesota, almost all businesses are required to obtain various licenses and permits at the local, state, and federal levels. Below, we’ve broken down three of the most common types your LLC may need:

• Sales Tax Licenses: If your LLC in Minnesota engages in selling goods or offering taxable services, you may need to register for a Sales Tax License. This registration, accessible through the Minnesota Department of Revenue’s e-Services portal, allows your business to collect and remit sales tax on taxable transactions.
• Professional Licenses: For LLCs operating in regulated professions such as healthcare, legal, accounting, architecture, or engineering, professional licensing may be necessary. These licenses are regulated and issued by various state boards and agencies specific to each profession.
• Environmental Permits: If your LLC’s activities have environmental implications, like in manufacturing, waste management, or construction, you may be required to obtain environmental permits from the Minnesota Pollution Control Agency. The specific type of permit, whether it relates to air, water, or hazardous waste, depends on your business’s nature and activities.

Note: Visit the “Business Licenses and Permits” section on the Minnesota Department of Employment and Economic Development’s website for a comprehensive list of licenses and permits relevant to your LLC.