How Your LLC Will Be Taxed
In this guide, you'll learn about the main Minnesota business taxes you'll be responsible for, including sales, self-employment, payroll and federal taxes. Profits from an LLC aren’t taxed at the business level the way they are in C Corporations. Instead, they're as follows:
State Taxes for LLCs
There are three state taxes you must pay to the Minnesota Department of Revenue: income, sales and franchise. Depending on how your business is set up, you may also need to pay use tax.
Minnesota Income Tax
As a business owner, you’ll need to pay Minnesota income tax on any money you pay to yourself. These earnings flow through to your personal tax return. You’ll be taxed at Minnesota's standard rates, and you’ll be able to apply regular allowances and deductions.
Any salaried employees you hire will also need to pay Minnesota income taxes.
The Minnesota income tax rate ranges between 2 and 6 percent, depending on how much you earn.
Minnesota Sales Tax
If you sell physical products (such as electronics, books, cars, furniture, appliances, raw materials, etc.) or certain services, you may need to collect Minnesota sales tax at the point of purchase. Many states don’t levy sales tax on goods that are considered necessities, such as food, medications, clothing or gas. You'll remit the taxes you collect to the Minnesota Department of Revenue.
The Minnesota sales tax rate is 6.875 percent statewide. Local taxing jurisdictions, such as cities and counties, may impose additional sales taxes.
Use our sales tax calculator to get an idea of what you'll need to pay, but always check with your accountant and the Minnesota Department of Revenue to find out whether your business is required to collect sales tax and ensure you remain in compliance.
Minnesota Use Tax
If you purchase physical products outside the state for use in Minnesota, you may need to pay use tax.
For example, if you buy furniture for your MN LLC from a company in a state that either doesn't have a sales tax or has a sales tax that is lower than the Minnesota sales tax, you'll be responsible for paying the use tax.
Minnesota use tax rates is 6.875 percent, and you'll pay it directly to the Minnesota Department of Revenue.
Minnesota Franchise Tax
Some states levy a tax on certain businesses for the right to exist as a legal entity and do business in the state. This is usually called a franchise tax, transaction tax or privilege tax. Despite its name, this is not a tax on franchises. It is an essential part of filing taxes for your LLC.
In Minnesota, C Corporations are required to pay a Corporation Franchise Tax. LLCs are exempt from this tax unless they file as C Corporations. Check with your accountant or professional tax preparer to ensure you're compliant.
Federal Taxes for LLCs
As the founder and owner of an LLC, you must pay self-employment tax and federal income tax, both of which are levied as “pass-through taxation."
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Minnesota LLC is paying the correct amount.
Federal Self-Employment Tax
All members or managers who draw profits out of the LLC are required to pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA) and covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3 percent.
You'll be able to deduct your business expenses from your income when calculating how much self-employment tax you owe.
Pay Less Self-Employment Tax by Treating Your LLC as an S Corporation
The Internal Revenue Service allows an LLC to be treated as an S Corporation for tax purposes, provided your business meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals.
You do this by filing Form 2553, also known as an S Corp Election form, with the IRS. Incfile can also file the form for you. Use our S Corp Tax Calculator to get an idea of how much money you could save with this election.
Consult with your accountant or tax advisor for more information on reducing your LLC self-employment tax through an S Corporation tax election.
Federal Income Tax
You must also pay regular federal income tax on any earnings you take out of your LLC. The amount of income tax you pay depends on your earnings, current income tax bracket, deductions and filing status.
You only pay federal income tax on profits you take out of the business, less certain deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions for areas such as healthcare and some retirement plans.
Speak to your accountant for more information.
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
Employer Payroll Tax Withholding
All employers are required to withhold federal taxes from their employees’ wages. You’ll withhold 7.65 percent of their taxable wages, and your employees will also be responsible for 7.65 percent, adding up to the current federal withholding rate of 15.3 percent.
Speak to your accountant for more information.
Employees May Need to File Tax Returns
Regardless of whether you withhold federal and state income tax, your employees may need to file their own tax returns.
Employee Insurance and Other Requirements
You may also need to pay insurance for any employees, such as employee compensation insurance or unemployment tax.
Other Taxes and Duties
Depending on your industry, you may be liable for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, if you import or export goods, you may need to pay certain duties.
Speak to your accountant about any other taxes or duties you may need to withhold or pay.
Most LLCs must pay estimated taxes throughout the year, depending on the amount of revenue you expect to generate. The most common types of estimated tax are: