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Introduction to Payroll Tax Obligations for Minnesota Small Businesses

Overview of Employer Responsibilities (Federal and State)

Small businesses in Minnesota manage both federal payroll tax requirements set by the IRS—including income tax withholding, FICA, and FUTA—and state obligations under the Minnesota Department of Revenue (MNDOR) and the Department of Employment and Economic Development (DEED) for SUI, Workforce Enhancement Fee, and Paid Family & Medical Leave.

Importance of Compliance for Small Businesses

Accurate withholding, timely deposits, and correct filings are essential. Penalties and interest for non-compliance can strain cash flow, hinder growth, and even threaten viability. Minnesota agencies issue updates, but businesses must stay vigilant and subscribe to official communications.

Essential Registrations for Minnesota Employers

Federal Employer Identification Number (FEIN)

Obtain a unique nine-digit FEIN via the IRS online application for federal tax purposes.

Minnesota Tax ID Number (Withholding Tax)

Register through the MNDOR e-Services portal to withhold state income tax. Failure to register before withholding may incur a $100 penalty.

UI Employer Account Number

Register at UIMN.org for an 8-digit account to remit SUI and Workforce Enhancement Fee.

Federal Payroll Tax Overview

Federal Income Tax Withholding (FITW)

Withhold using employee W-4 inputs and IRS Publication 15 tables.

Social Security and Medicare Taxes (FICA)

Withhold 6.2% for Social Security and 1.45% for Medicare; match employer share. Additional 0.9% Medicare applies to wages over $200,000.

Federal Unemployment Tax Act (FUTA)

Employers pay FUTA on the first $7,000 of wages at a net rate of 0.6% after state credit.

Depositing and Reporting

Use EFTPS for electronic deposits. Deposit frequency—monthly or semi-weekly—is based on lookback period liability. File Form 941 quarterly and Form 940 annually; provide W-2s by January 31.

Minnesota State Payroll Tax Overview

Income Tax Withholding (SIT)

Withhold according to employee W-4MN elections. Use annual MNDOR tax tables; supplemental rate is 6.25% for bonuses; backup withholding at 9.85% when SSN invalid.

State Unemployment Insurance (SUI) & Workforce Enhancement Fee

SUI applies to first $43,000 of wages; new employer rates 1.0–8.9%; experienced rates 0.4–8.9%. A base rate of 0.40% and additional 5.0% assessment apply. Workforce Enhancement Fee is 0.1% on same base.

Paid Family & Medical Leave (PFML)

Effective Jan 1 2026, PFML premiums total 0.88% of wages, split 50/50 by default. Small employers (≤30 employees) pay 75% of that rate.

Year-End Reporting and Reconciliation

Federal Forms W-2 and W-3

Issue W-2s to employees and file Copy A with SSA by January 31. File Form W-3 to transmit totals.

Minnesota W-2 and 1099 Submission

Submit W-2s and any 1099s to MNDOR by January 31. Report Minnesota wages correctly, honoring reciprocity exemptions.

Annual Withholding Reconciliation

Confirm MNDOR’s current requirements for Form MW-3 or equivalent annual reconciliation via MNDOR e-Services.

Key Deadlines

Most filings and W-2/W-3 submissions are due January 31. Plan year-end activities accordingly.

Record-Keeping Requirements

Required Records

Maintain each employee’s personal data, pay rate, hours, earnings statements, new-hire notices, and policy acknowledgments as per Minn. Stat. §177.30.

Retention Period

Retain records for at least three years, with prompt availability for audits within 72 hours.

Audit Preparedness

Accurate, organized records demonstrate compliance and protect against assessments based on incomplete data.

Penalties, Interest, and Best Practices

Federal Penalties

Late deposits, late filings, and accuracy errors incur percentage-based penalties and interest. Consult IRS Publication 15 for details.

Minnesota Withholding Penalties

Late payment: 5% plus 5% per 30 days (max 15%). Late filing: 5% or $100. Missing W-4MN: $50 per form. Interest at 8%.

SUI Penalties

Late wage report: $10/employee (min $250), doubles after 30 days. Erroneous report: $25/record. Interest on late payments.

Compliance Best Practices

Use robust payroll software, maintain a payroll calendar, reconcile regularly, classify workers correctly, and seek professional advice when needed.

Considerations by Business Structure

Obligations vary: sole proprietors, partnerships, LLCs, and corporations have distinct SUI and owner-officer rules. Confirm exemptions and classification for each entity type to avoid underpayment issues.

Conclusion and Resources

Key Takeaways

Timely registrations, accurate withholding, electronic deposits, organized records, and proactive monitoring of federal and state updates are the pillars of compliance for Minnesota small businesses.

Official Resources