Special Provisions Relating to Business Entities

Reference: Minnesota Law, §268.035 Subd.20 (18) (2007), and §268.035 Subd.29 (f) (2007)

Under Minnesota Unemployment Insurance Law, every individual or organization that pays covered wages in Minnesota must register with the Minnesota Unemployment Insurance (UI) Program. Registration with the UI Program should be done as soon as possible after first wages are paid for covered employment in Minnesota. Reference the New Employer Registration section of this handbook for more information.

Special provisions exist for business entities in determining whether or not employment is covered. The following are not covered for Minnesota unemployment insurance tax purposes:

• Sole Proprietorship. Services performed by a sole proprietor’s spouse, parents, or child under the age of 18. A sole proprietor only paying these employees does not have to register.
• Partnership. Services performed by the partners of a partnership. A partnership paying only these individuals does not have to register.
• Corporations and LLCs (Limited Liability Companies). Wages of members who own 25 percent or more of a corporation or LLC. A corporation or LLC paying only these owner/officers does not have to register for an employer account. Employers may elect to extend coverage to these employees by electing optional coverage for non-covered employees.

For information about voluntarily electing coverage for non-covered employees, reference the Elect Coverage for Non-Covered Employees section of this handbook.

Special Provisions Related to S-Corporations

• Domestic Corporations. Domestic Corporations that meet certain requirements may elect to be subject to the provisions of Subchapter "S" of the Internal Revenue Code in lieu of paying federal income taxes. These corporations generally do not pay a tax on their income. Instead, the income, expense and credit items of the corporation are passed through to the shareholders, who then report them on their personal income tax returns. In essence, the corporation is treated like a partnership for income tax purposes.
• Status of Officers and Shareholders. Under Minnesota Unemployment Insurance Law, officers of any corporation who perform services for the corporation are considered employees of the corporation. Electing to be treated as a partnership for income tax purposes does not change the corporation into a partnership, or the employment status of the corporate officers.
• Wages to Officers and Shareholders. All wages paid, and wages due and payable, to officers or shareholders in covered employment who perform service for an "S" corporation are reportable for Minnesota unemployment insurance tax purposes. In addition to cash, wages can take the form of commissions, bonuses, profit sharing, and the cash value of room, board, or any other advantage provided to an employee. These wages are also usable as wage credits if an officer or shareholder applies for unemployment insurance benefits.
• Other Types of Payments. Certain types of payments by corporations are not reportable as wages if the following conditions are met:
  • Dividend and Earnings Distributions. All dividends and earnings distributed by the corporation must be declared as such in corporate minutes. All shareholders must be paid on the basis of percentage of ownership.
  • Expense Reimbursement. Expenses incurred by an officer or shareholder must be reasonable, must be documented by a written expense voucher, and must be recorded on the corporate records as a corporate expense.
  • Loans to Officers and Shareholders. A loan must be documented by an actual loan instrument that sets the rate of interest and a repayment schedule. It must be evidenced by a promissory note signed by an officer before the payment of the loan proceeds, and recorded on the books and records of the corporation as a loan to an officer or shareholder. The loan must appear on the corporate balance sheet.
  • Corporate Repayment of Loans or Interest to Officers and Shareholders. A repayment of a loan or payment of interest on a loan made by an officer or shareholder to the corporation must be recorded on corporate records as a liability of the corporation.
  • Rental Payments on Property Personally Owned by an Officer or Shareholder. A rental payment must be for a tangible asset and must reflect a reasonable rate of return on the value of the asset. As a rule, rental payments on real estate should not exceed 15 percent of the assessed market value of the real estate. When assessing the value of an asset other than real estate, the expected life of the asset should be considered. The payment must be recorded on the corporate records as a corporate expense.

      

This handbook is based on current UI legislation; statements are intended for general information and do not have the effect of law. The Minnesota Unemployment Insurance Law - MN Statutes §268.001 to §268.23 and Administrative Rules 3310 and 3315 - can be accessed through our Web site at www.uimn.org; by clicking on the UI Law link.