How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners.
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Minnesota Corporation Owners Can Opt Out Of State Unemployment Insurance

Effective January 1, 2005, Minnesota corporation officers who own 25% or more of their company's stock can elect not to be covered by Minnesota state unemployment insurance (SUI).

"Unemployment insurance has always been a major hassle for small business owners who operate S corporations," says Peter Hupalo, author of How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners."

Small business owners who operate their own corporations are technically considered employees of the corporation and, because of this, are often subject to paying state unemployment insurance tax on their own salaries. Any corporate officer, including the president of a one-person S corporation, is considered an employee.

"The problem is that small business owners pay into the unemployment system, but seldom are in a position to collect unemployment. This makes it sort of an unfair tax," says Hupalo.

Unemployment insurance is a complex and state-specific area of law. One Wisconsin case decided that a one-armed man who lost the use of his other arm was ineligible for unemployment, because an individual has to be capable of working to collect unemployment. Another case decided that a business owner who closed his failing business was ineligible for unemployment, because by closing his business, he essentially quit his job voluntarily.

Minnesota corporate owners can fill out form DEED-591 available from The Minnesota Department of Employment and Economic Development to elect coverage or non-coverage under state unemployment insurance. The form also applies to the owners of limited liability companies (LLCs).

"I hope the Federal government will eventually allow an entrepreneur with a small S corporation to opt out of Federal unemployment tax (FUTA). Basically thatís a tax of $434 with no benefit to the owner of a small business. The owner essentially can't collect it," commented Hupalo.

Hupalo says that because FUTA only applies to the first $7,000 in wages there isn't a strong lobbying effort to exclude small corporation officers from FUTA.

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Summary

Effective January 1, 2005, Minnesota corporation officers who own 25% or more of their company's stock can elect not to be covered by Minnesota state unemployment insurance (SUI).

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Update 4-10-07

Minnesota Unemployment Insurance Officer/Shareholder Exemption

Unless a corporate officer owning 25% or more of the corporation's stock chooses to be covered by Minnesota Unemployment Insurance, the default is that the officer won't be covered and is not subject to MN Unemployment Taxation. Officers not wanting Minnesota state unemployment benefits for themselves do not have to "elect" to "opt-out" in any formal filling-out of a tax-form sense.

Shareholder/Officers owning 25% or more of the corporation's stock may elect to be covered by Minnesota State Unemployment.

For more information about the Minnesota Unemployment Insurance Officer/Shareholder Exemption visit the UI Employer Assistance website (uimn.org/tax/25percent_faq.htm).

Tax-Savings Issues: "Opting-Out" Isn't Always The Best Choice

The Minnesota UI website provides a nice Excel Spreadsheet (cost comparison worksheet from the link above) to help you see the tax effects of electing coverage. Over time, electing MN UI coverage may actually save corporation owners money by allowing them to offset most of their Federal Unemployment tax liability. Further, if your corporation has non-owner employees, your corporation's UI tax rate is probably reduced by the inclusion of your wages into State UI calculations.

More information about how MN UI tax rates are calculated visit: uimn.org/tax/taxrt.htm

For 2007, the MN UI wage base is $24,000 and the new employer rate is 2.13% for "non-high experience industries" or those industries which are deemed not to have high unemployment. This amounts to a MN UI tax of $511 for a one-person corporation paying $24,000 or more in salary to the owner-officer. With the allowed tax credit, Federal UI tax would be $56. The total Federal and State tax bill would be $567. Paying into FUTA alone would create a tax bill of $434 (Federal UT has a wage base of $7,000 and a rate of 6.2%).

However, for example, if in future years your corporation's MN UI rate drops to 1%, MN UI tax would drop to $240 (wage base treated as fixed), while FUTA would be $56, creating a total tax bill of $296, which is less than the $434 paid into FUTA, if the MN corporation owner had chosen not to elect State UI. Currently, the lowest possible MN UI rate is 0.40%. Thus, for many MN S-corporation owners, electing MN UI coverage can offer tax savings. Entrepreneurs in "high experience industries" will need to compute the relative effects of paying the higher UI tax rate on officer salaries and the potential reduction in the UI rate to determine if electing coverage offers a tax advantage. Visit the Minnesota Unemployment Insurance website for more information.

It should also be noted that this change in the treatment of officer salaries for Minnesota unemployment taxation purposes in no other way changes the basic fact that a corporate officer (in any size corporation) is legally considered an employee.