Minnesota Individual Income Tax Rates. The Minnesota individual income tax rates for 2023 are 5.35 percent, 6.80 percent, 7.85 percent, and 9.85 percent depending on income and filing status. Partnerships and S corporations that have nonresident individual partners or shareholders are allowed to file and pay using a composite income tax, on behalf of their nonresident partners or shareholders who do not have other Minnesota income, on the partnership’s or S corporation’s return. In this situation, the nonresident partners or shareholders do not have to file separate Minnesota individual income tax returns. The tax rate for the Minnesota Composite Income Tax is 9.85 percent of the individual’s “Minnesota source” income. If a partnership or S corporation does not pay a composite income tax on behalf of nonresident individual partners or shareholders withholding tax at a rate of 7.85 percent must be paid from that individual’s “Minnesota source” income, and submitted with the partnership’s or S corporation’s return. The partner or shareholder then files an individual income tax return claiming the tax paid by the entity on line 3 of schedule M1W. Certain partnerships and S corporations may elect to file and pay income tax at the entity level for all owners. The election is made by filing Schedule PTE. Once made, the election is binding on all owners and cannot be revoked after the original due date. The tax is calculated by determining the entity’s Minnesota source income and multiplying by 9.85 percent. Tax paid by the entity becomes a refundable credit claimed on the owners’ income tax returns. Nonresident owners may have the PTE tax election to fulfill their income tax filing obligation. Tax Impact Many factors determine the full tax burden on a business. Some of these factors – such as treatment of capital gains, deductibility of certain items, and the availability of certain credits – will vary depending on the form of organization. Other factors, such as employment taxes attributable to non-owner employees or property taxes, will apply regardless of the form of organization. For detailed analysis of these factors in the context of the specific business, a competent tax advisor should be consulted. The following paragraphs describe the major differences in tax impact attributable to the form of organization. Sole Proprietorship. A sole proprietorship business in itself is not subject to tax. Instead the net income or loss from the business is combined with the proprietor’s income and losses from other sources to determine the proprietor’s income for tax purposes. The proprietor is taxed on the net income of the business, regardless of whether the income is withdrawn for personal purposes or retained in the business. Because income or loss from the business is combined for tax purposes with income and losses from other sources, the tax impact on income from the business may be different than if the business were taxed as a separate entity. However, because only the proprietor is taxed and not the business entity, distribution of the business profits to the owner are not subject to tax. Another consideration of the sole proprietorship compared with a C corporation is that not only the amount but also the character of various income items, deductions, and credits may be claimed by the business owner. In a C corporation, items are claimed by the corporation on its tax return and are not passed through to shareholders.
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