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Covered Employment, Electing coverage, FUTA coverage
Am I required to pay Minnesota unemployment insurance (UI) tax on the wages I pay myself as a corporate officer?
According to Minnesota Law §268.035, Subd. 20, wages paid on or after January 1, 2005 to corporate officers who own 25 percent or more of
the corporation are NOT subject to Minnesota unemployment insurance tax. If your corporation DID NOT specifically request to have this category of owner/officer(s) covered under the Minnesota UI Program (see "Optional Coverage" below), DO NOT report the wages of these officers on your Unemployment Wage Detail Reports. This is
in addition to a previous law, which provides that wages paid to members of a limited liability company (LLC) who own 25 percent or more of the LLC are not subject to Minnesota Unemployment Tax.
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What impact does this have on my business?
You are not required to report wages paid to these individuals on quarterly wage detail reports or pay Minnesota UI tax on those wages. This applies ONLY to state unemployment tax; you should contact your accountant or tax advisor to find out what effect this change may have other employment taxes, such as federal unemployment tax (FUTA).
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What is FUTA?
FUTA stands for
Federal Unemployment Tax Act. FUTA tax is paid to the IRS. The exclusion of these owner/officer wages from Minnesota UI tax may increase your FUTA tax liability. Timely
payment of your state unemployment tax creates an offset credit on your FUTA tax liability. You should contact your accountant or tax advisor for more information.
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How do I determine the potential impact of this change on FUTA?
This is a complex tax issue, please check with your tax advisor before making a decision.
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Will my total tax liability be reduced if I don't pay state unemployment tax on the owner/officers' wages?
Not necessarily. Since state unemployment taxes offset some federal unemployment
taxes, the total state plus federal tax liability could be higher or lower depending
on a number of factors. Additionally, the exclusion of owner/officers' wages
from UI tax also causes them to be excluded from the calculation of the entity's
UI tax rate; this may cause a higher UI tax rate in future years. You should
contact your accountant or tax advisor for more information.
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Is an officer who indirectly owns a corporation (i.e. through another legal entity) excluded?
No. In order to meet the exclusion, an officer must own the corporation directly
(not through another legal entity).
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If Person A is listed as 100% owner of a trust; the trust owns 100% of a corporation of which Person A is an officer, are Person A's wages (paid by the corporation) excluded since they are effectively 100% owner and an officer of the corporation?
No. To be excluded, a corporate officer needs to have 25% or more direct ownership of the
corporation. In this example, the trust is the owner of the corporation and, therefore, all
corporate officers (who perform services for the corporation) are covered.
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I employ family members in my business. Will I still need to report their
wages?
Only corporate officers or LLC members who own 25 percent or more of the business fall under this exclusion. Services performed for a corporation or LLC by a family member of an owner are not excluded, unless that family member is also a corporate officer or LLC member who owns 25 percent or more of the business.
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How does this affect benefit eligibility?
When an individual applies for unemployment benefits, the weekly and maximum benefit amount is based on wages in covered employment that have been reported on quarterly unemployment wage detail reports. If the wages are not covered, they cannot be used to determine the benefit entitlement. In effect, unless you elect coverage for officers who own 25 percent or more of the corporation, wages they earn in the employ of the corporation cannot be used if they apply for unemployment benefits. Additional information is available in the
Minnesota UI Law.
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What is covered employment?
Covered employment is employment that can be considered when determining whether an individual’s wages can be used for an application for unemployment benefits.
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What are covered wages?
Covered wages are wages paid for covered employment.
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Optional Coverage: Do I have the option to elect coverage for these owner/officers?
Yes. You may elect to cover services performed by owner/officers whose employment is excluded from coverage by the law. The election must apply to ALL owners as a class. If you elect to cover these services, you will be required to pay Minnesota unemployment tax on wages paid to the affected owners for at least two full calendar years. The owners may then be eligible to collect benefits if the corporation or LLC goes out of business. If you choose to elect coverage, you should inform the Minnesota Unemployment Insurance Program as soon as possible. The easiest way to elect coverage is via our online Employer Self-Service System at www.uimn.org. If you do not have access to the Internet, you may elect coverage by phone at 651-296-6141.
For step-by-step instructions of this process, refer to Elect Coverage for Non-Covered Employees in the Employer Self-Service System User Guide.
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When can I file an election of optional coverage?
Elections may be filed at any time, and become effective with the first day of the
calendar quarter following the election of coverage. However, once an election has been filed, it must stay in effect for a minimum of 2 calendar years (i.e. if the election occurs AFTER the first calendar quarter, the election will stay in effect for the remaining quarters of the year in which the election is made PLUS two additional calendar years).
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When must the election be filed in order to be effective for the 1st quarter of a given year?
The election must be filed no later than December 31st of the year prior to the year in which coverage is to begin to be considered effective for the first quarter of the following year.
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If I elect coverage, how many weeks of unemployment benefits can a corporate officer receive?
It depends on the reason for the separation and whether it is temporary or permanent.
Additional information is available in the
Minnesota UI Law.
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Are there other factors I should consider when I decide whether to elect
coverage?
Yes. Minnesota UI wage detail and tax reports must be filed quarterly if covered wages
were paid. If you pay no wages other than those paid to owners who are excluded under this law, you will not have to file quarterly wage and tax reports with Minnesota UI. Therefore
the time spent (or amount paid for) preparing and filing quarterly wage detail reports and making tax payments should also be considered. Ask your accountant or tax advisor whether
your reporting burden will be affected in other ways.
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