Reference: Minnesota Law, §268.035 Subd.20 (19), and §268.035 Subd.29 (g)
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 children under the age of 18. A sole proprietor paying only these employees does not need to register.
- Partnership. Services performed by the partners of a partnership. A partnership paying only these individuals does not need to register.
- Corporations and LLCs (Limited Liability Companies). Wages of owner/officers or members who own 25 percent or more of a corporation or LLC. A corporation or LLC paying only these owner/officers or members does not need to register for an employer account. Employers may voluntarily extend coverage to these employees by electing optional coverage for them.
For information about voluntarily electing coverage for non-covered employees, reference the Elect Coverage for Noncovered Employees section of this handbook.
Special Provisions Related to S-Corporations and LLCs
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 (including S-corporations) or LLC members who perform services for the corporation or LLC are considered employees of the corporation or LLC. Electing to be treated as a partnership (as is the case for S-corporations and multi-member LLCs) or sole proprietorship (as is the case for single member LLCs) for income tax purposes does not change the corporation or LLC into a partnership or sole proprietorship, or the employment status of the corporate officers or LLC members for UI reporting purposes.
- Wages Paid to S-Corporation Officers and LLC Members. All wages paid, and wages due and payable, for services performed by an officer, shareholder or LLC member who owns less than 25 percent of the corporation or LLC are reportable for Minnesota unemployment insurance tax purposes. Wages paid to an officer, shareholder or LLC member who owns 25 percent or more of the corporation or LLC are reportable if a voluntary election to extend coverage to that individual is in effect (see Elect Coverage for Noncovered Employees section of this handbook). Wages can take the form of cash, commissions, bonuses, profit sharing, and the cash value of room, board, or any other advantage provided to an employee. These wages are usable as wage credits if the individual 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 or LLC must be declared as such in corporate or LLC minutes. All corporation shareholders and LLC members must be paid on the basis of percentage of ownership and must first be paid an equitable wage for any services performed by them for the corporation or LLC.
- Expense Reimbursement. Expenses incurred by an officer, shareholder, or LLC member must be reasonable, must be documented by a written expense voucher, and must be recorded on the corporate or LLC records as a corporate or LLC expense.
- Loans to/from Officers, Shareholders, and LLC Members. A loan made by the corporation or LLC to an officer, shareholder or LLC member, or to the corporation or LLC by an officer, shareholder, or LLC member must be documented by an actual loan instrument that sets the rate of interest and a definite repayment schedule. It must be evidenced by a promissory note signed by a corporation officer or LLC member before the payment of the loan proceeds, and recorded on the books and records of the corporation or LLC as a loan to or from an officer, shareholder, or LLC member. If the officer, shareholder, or LLC member is performing services for the corporation or LLC in covered employment (see "Corporations and LLCs" above), they must first be paid reasonable wages for those services before loan repayments/proceeds are paid to them, or the loan repayments/proceeds will be considered wages up to the amount of wages determined to be equitable for the services performed by the officer, shareholder, or LLC member for the corporation or LLC.
- Rental Payments on Property Personally Owned by an Officer or Shareholder. A rental payment made by the corporation or LLC to the officer, shareholder, or LLC member for property personally owned by that officer, shareholder, or LLC member 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 also be considered. The payment must be recorded on the corporate or LLC records as a corporate or LLC expense. Rental payments in excess of 15 percent of the assessed market value of the property will be considered wages paid for UI purposes if the officer, shareholder, or LLC member is performing services for the corporation or LLC in covered employment (see "Corporations and LLCs" above).