Operational Gaze:
How to Run Payroll in Minnesota?

April 5th 2024

In Minnesota, running payroll involves adhering to a range of legal steps when compensating employees. These procedures Include ,determining earnings, deductions, and adhering to payroll tax laws. To effectively oversee payroll, it is crucial for employees to comprehend and update themselves about the distinctive labor laws and tax regulations in Minnesota.

In this article, you will discover a detailed guide made specifically for Minnesota’s payroll demands, designed to aid businesses in accurately handling each pay period.

This Article Covers

Laws That Affect Payroll Procedures in Minnesota
Worker Classifications in Minnesota
Payroll Forms and Relevant Bodies in Minnesota
Applicable Taxes in Minnesota
Key Pay Elements That Impact Payroll in Minnesota
Step-by-Step Guide to Payroll in Minnesota

Laws That Affect Payroll Procedures in Minnesota

In the space of payroll procedures, certain legal regulations govern how employees are compensated and businesses must adhere to these rules. 

Minnesota Laws

  • Minnesota Labor Regulations: The Minnesota Administrative Rules address numerous labor-related issues, including wage disbursements, sick leave, medical benefits, and workers’ compensation.
  • Overtime: Minnesota overtime regulations stipulate that overtime compensation should be calculated based on the number of hours worked within a single workweek. Employees are entitled to receive overtime pay for any hours worked beyond 40 in a workweek.
  • Paid Breaks or Lunch Periods: Minnesota labor laws mandate that employees should be given enough time to eat a meal. Employers decide the duration of these breaks, but any breaks lasting less than 20 minutes are paid. Furthermore, employees must be given restroom breaks every four hours of work. If employees work eight hours or longer, they are also entitled to a meal break. Employers must also provide breastfeeding parents with a reasonable amount of time to express milk.
  • Unemployment, Disability, and Workers’ Compensation: Employers in Minnesota are legally obligated to participate in the state’s unemployment fund, and both disability and unemployment insurance are mandatory.
  • Minimum Wage: Employees in Minnesota are entitled to receive at least the minimum wage. The current minimum wage in Minnesota stands $10.85 for businesses with annual revenues exceeding $500,000, and it is $8.85 for those with earnings below this amount.
  • Paid Time Off and Leaves: Leave compensation in Minnesota is governed by federal labor laws, meaning employers are not compelled to provide remuneration for various types of leave, including sick leave, holiday leave, jury duty leave, voting leave, or bereavement leave.
  • Payment Records: Employers in Minnesota are required to furnish pay stubs with each wage payment, delineating an employee’s earnings and deductions.
  • Final Paycheck: In the event of an employee’s termination in Minnesota, they are entitled to promptly receive their final wages, which should encompass any accrued but unused vacation or paid time off, as outlined in state labor regulations.

Federal Laws

  • The Federal Unemployment Tax Act (FUTA): FUTA mandates that employers must make contributions to unemployment taxes, which are utilized to provide benefits to eligible employees who experience job loss. While it doesn’t directly affect employees’ paychecks, as it’s an employer obligation, FUTA contributions still need to be recorded in each payroll cycle. Typically, a 6% tax on the first $7,000 paid to an employee annually is expected, with potential exceptions based on the industry.
  • The Fair Labor Standards Act (FLSA): FLSA sets guidelines and parameters for minimum wage, overtime pay, recordkeeping, exemption classification, and regulations pertaining to child labor in various industries. These regulations apply not only to private enterprises but also extend to federal, state, and local government bodies.
  • The Federal Insurance Contributions Act (FICA): FICA requires both employers and employees to make contributions to Social Security and Medicare. Employers must withhold 6.2% for Social Security tax and 1.45% for Medicare tax from each employee’s earnings. Employers are also obligated to match these deductions, resulting in a total FICA payroll tax rate of 15.3% for each employee.

HR Laws

  • New Hire Reporting: Employers in Minnesota are obliged to inform the relevant department within a 20-day timeframe subsequent to the recruitment, reinstatement, or recall of any fresh staff member. This notification is obligated to include specific information such as the complete name, residence, social security number, and commencement date of employment for each recently hired, reinstated, or recalled individual. Additionally, the notification must include the identity and address of the employer, along with their state and federal identification numbers.
  • Posting Requirements: The Minnesota Department of Labor mandates that all enterprises conducting operations in the state and engaging the services of employees must exhibit an array of labor law posters within their place of business. These posters cover critical topics, including stipulations concerning minimum wage, guidelines for maintaining health and safety standards, and various other imperative labor regulations.

Worker Classifications in Minnesota

Employees and Independent Contractors

In Minnesota, it’s really important to tell the difference between employees and independent contractors because it has big implications for their rights, duties, and taxes. Employees usually do what their bosses tell them, get benefits, and have taxes taken out of their pay. Independent contractors, on the other hand, have more freedom in their work, deal with their own taxes, and don’t get the same work perks as employees.

Getting this classification right is super important for following Minnesota’s work and tax laws. If you classify workers incorrectly, it can cause legal and money problems for employers. To make sure you get it right, it’s a good idea to check out the guidelines provided by the state authorities. If it’s a complex situation, getting advice from professionals is a smart move. This can help employers understand and follow Minnesota’s work and tax rules and avoid legal problems.

The Five-Factor Test

When there’s a question about whether a certain relationship is between an employer and an employee or between two separate entities doing business, there’s a test with five key factors that has evolved through legal cases. This test typically helps employers and employees decide how to correctly classify the relationship. Here are the five factors to consider:

  1. The authority to dictate how the work is done and the methods used.
  2. The method of payment.
  3. Providing the necessary tools and materials.
  4. Control over the location where the work is carried out.
  5. The ability to terminate the relationship.

To learn more about the rights of salaried and hourly employees, you can read our guides on rights of salaried employees in Minnesota, and rights of hourly employees in Minnesota.

Payroll Forms and Relevant Bodies in Minnesota

Minnesota Payroll Forms

  • Form W-4MN (Employee’s Withholding Allowance Certificate): This form is used by employees to specify their state income tax withholding preferences. It helps employers determine how much state income tax to withhold from an employee’s wages.
  • Form MWR (Reconciliation of Income Tax Withheld): Employers use this form to reconcile the total state income tax withheld from employees with the total amount deposited during the year. This form is usually filed annually.

Federal Payroll Forms

  • W-4 Form: Determines the correct tax withholding for their employees.
  • W-2 Form: Displays the total yearly earnings of each employee.
  • W-3 Form: Summarizes the combined pay and taxes for all employees.
  • Form 940: Reports owed unemployment taxes to the IRS.
  • Form 941: Reports income and FICA tax deductions from paychecks on a quarterly basis.
  • Form 944: Reports annual income and FICA taxes withheld from paychecks.
  • 1099 Forms: Provides contractors with the necessary information to calculate the taxes they owe the IRS based on their earnings.

Federal and Minnesota Payroll/ Tax Bodies

  • Internal Revenue Service (IRS): The IRS is the national organization responsible for gathering and overseeing federal income tax, Social Security tax, and Medicare tax. Employers must deduct and send these taxes on behalf of their workers.
  • Social Security Administration (SSA): The SSA manages the Social Security program, which offers retirement, disability, and survivor benefits. Employers and employees contribute to Social Security through payroll taxes.
  • U.S. Department of Labor (DOL): The DOL establishes and enforces federal labor laws, including rules about minimum wage, overtime, workplace safety, and family and medical leave.
  • Minnesota Department of Revenue: The Minnesota Department of Revenue is responsible for overseeing Minnesota’s tax laws, including income tax, sales tax, and property tax. Employers in Minnesota must withhold and remit state income tax from their employees’ paychecks.
  • Minnesota Unemployment Insurance Program: This program, managed by the Minnesota Department of Employment and Economic Development (DEED), offers unemployment benefits to eligible individuals who lose their jobs. Employers pay unemployment taxes to support this program.
  • Minnesota Department of Labor and Industry: The Minnesota Department of Labor and Industry enforces labor laws and regulations in Minnesota, including laws related to wages, working hours, workplace safety, and workers’ compensation.
  • Minnesota Department of Commerce: This Minnesota Department of Commerce supervises insurance regulations in Minnesota, which include requirements for workers’ compensation insurance and rules for employers.
  • Minnesota Secretary of State: The Minnesota Secretary of State office deals with business registrations and official filings for corporations and businesses, which may be relevant to employers operating within the state.

Applicable Taxes in Minnesota

Employer Contributions

Federal Unemployment Tax Act (FUTA): The State of Minnesota is in compliance with the Federal Unemployment Tax Act (FUTA) which currently sets a standard federal rate, currently 6.0% on the first $7,000 of each employee’s wages.

Withheld from Employee’s Wages

  • State Income Taxes in Minnesota: Minnesota imposes a state income tax on both individual residents and corporate entities. The state follows a progressive income tax structure, comprising various tax brackets with rates that vary depending on income levels. The four rates are 5.35 percent, 6.80 percent, 7.85 percent, and 9.85 percent. All income earned by individuals and corporations within the state is subject to Minnesota’s state income tax. It’s important to mention that Minnesota does not levy a state-level sales tax.
  • Workers’ Compensation Laws in Minnesota: In Minnesota, state law requires that employers provide workers’ compensation coverage to their employees. This system ensures that individuals who suffer injuries or illnesses directly related to their work receive compensation for medical expenses and disability benefits. In the unfortunate event of a work-related fatality, workers’ compensation benefits are extended to the dependents of the deceased employee.
  • Social Security (FICA) Withholding in Minnesota: Employers in Minnesota are obligated to adhere to the Federal Insurance Contributions Act (FICA). This federal law mandates the deduction of taxes for Social Security and Medicare from employees’ salaries. Employers are also responsible for matching these withholdings by contributing an equivalent amount for Social Security and Medicare. It’s important to note that, for the additional Medicare tax, employers are only required to withhold the employee’s portion and are not obliged to match it themselves.

Additional Relevant Subtractions to Withhold on Behalf of Employees

Within the state of Minnesota, it is permissible to make deductions from an employee’s earnings, including federal itemized deductions or the federal standard deductions, in accordance with federal tax rules. Employers can establish these deductions through official, written agreements with their workers, ensuring they comply with federal tax laws and do not reduce the employee’s wage below the minimum wage or overtime rates set by state and federal regulations. It is imperative to verify that these deductions adhere to both state and federal laws to avoid legal disputes and uphold fairness for employees.

Key Pay Elements That Impact Payroll in Minnesota

Minimum Wage

In Minnesota, the current minimum wage depends on the employer’s size and whether employees receive tips. For larger employers, it’s set at $10.85 per hour, while smaller businesses with under $500,000 in annual revenue can pay $8.85 per hour. These rates follow both state and federal guidelines.

Overtime

Minnesota adheres to federal overtime rules established by the Fair Labor Standards Act (FLSA). If an employee works more than 40 hours in a week, they are entitled to be paid at a rate of 1.5 times their regular hourly wage. In 2024, this equates to an overtime rate of $16.28 per hour based on the $10.85 minimum wage for larger employers.

Workers’ Compensation Insurance

Minnesota’s workers’ compensation programs are safety nets for employees dealing with work-related injuries or illnesses. They also provide disability benefits for workers unable to work due to job-related reasons. Workers’ compensation covers medical expenses resulting from workplace injuries and illnesses. Employers are protected under Minnesota’s workers’ compensation law, thanks to exclusive remedy provisions. Covered scenarios include medical costs related to workplace injuries and illnesses.

Pay Stub Laws

Minnesota’s laws for pay stubs mirror federal regulations on payment methods and frequency. This means employers in Minnesota need to follow the wage payment and frequency rules established by the federal Fair Labor Standards Act (FLSA).

Under the FLSA, employers are obligated to keep records of employees’ hours worked and wages paid to them. However, it’s important to note that the FLSA doesn’t specifically require employers to give pay stubs, which are sometimes called wage statements or paychecks. Employers can choose to issue pay stubs as a company policy or to meet state-specific requirements.

Wage Garnishment

Wage garnishment laws in Minnesota, like in other states, are guided by both federal and state regulations:

Federal law, as outlined in the Consumer Credit Protection Act (CCPA), limits the maximum amount that can be taken from an individual’s earnings to 25% of disposable income. Various types of debts can be subject to garnishment, including child support, alimony, student loans, and unpaid taxes. For other debts like credit card or medical debt, a court judgment is typically needed before garnishment.

Minnesota’s law aligns with federal wage garnishment regulations and provides protections to employees from being fired due to a single wage garnishment. However, this protection doesn’t apply to multiple garnishments. Before garnishing wages, creditors must inform the debtor, who has the right to challenge the debt or request a hearing. State law also addresses the order of prioritization for different types of debts and the garnishment process.

Final Paycheck

When an employee is let go, their final paycheck must be issued within 24 hours of their request for wages. If an employee chooses to resign, their wages are due on the next payday occurring more than five days after their departure. In both cases, it’s crucial for employers to ensure that the employee receives their wages within a maximum of 20 days after they leave the company.

In situations where the departing or resigning employee had been responsible for handling money or company assets during their employment, the employer is allowed an additional 10 calendar days after the employee’s departure to review the employee’s financial records. Only after this review can the employee’s wages be provided.

Step-by-Step Guide to Payroll in Minnesota

Administering payroll in Minnesota involves several important steps. To begin, follow this straightforward breakdown:

  • Understand Payroll Regulations Relevant to Your Company: It is crucial to be aware of and comply with the payroll regulations applicable to your company in Minnesota before initiating the payroll process. These regulations originate from both state and federal authorities. In Minnesota, you need to consider aspects like the minimum wage, overtime rules, tax withholdings, and other key factors affecting payroll.
  • Register Your Business as an Employer with the IRS: This entails obtaining your Employer Identification Number (EIN) and creating an account in the Electronic Federal Tax Payment System (EFTPS). It’s essential for new businesses to secure an EIN before creating a tailored payroll process flowchart. The EIN is crucial as it serves as a unique identifier used by the Internal Revenue Service (IRS) to track a company’s tax-related activities. You can conveniently apply for an EIN online using Form SS-4.
  • Register with the State of Minnesota: If your business operates in Minnesota, you must register it with the state. New businesses can complete the necessary forms for business licensing with the Minnesota Department of Revenue and legal entity registration with the Minnesota Secretary of State.
  • Classify Your Employees: Incorrectly classifying an employee as an independent contractor and mishandling their tax obligations can lead to the employer being responsible for any unpaid taxes and penalties. In Minnesota, the state uses the ABC test to determine an individual’s status as an independent contractor.
  • Collect Payroll Documents from Employees: Newly hired employees are required to submit specific documentation, including payroll forms, as part of their onboarding process. All employees must complete I-9 verification within the first days of employment. Additionally, every employee should maintain a completed W-4 form in their records.
  • Establish a Payroll Schedule: Determine the payment dates for employees. Minnesota’s payroll regulations require that employees receive regular payments, whether semi-monthly, bi-weekly, or weekly, as agreed upon with your employees.
  • Monitor Employee Work Hours and Attendance: Employees can ensure precise payroll administration by carefully tracking time and attendance. Keep records of employee workweeks, overtime calculations, break times, paid leave, and sick leave entitlements. To simplify payroll management and time tracking, employees may use time and attendance software, a payroll hours tracker, or a time-off tracker.
  • Fulfill Federal Payroll Tax Obligations in Minnesota: Follow IRS regulations for federal taxes, including unemployment tax. When making federal tax payments, you have two options: If the IRS designates a monthly schedule, deposit employment taxes for payments within a calendar month by the 15th of the following month. If the IRS assigns a semiweekly schedule, deposit employment taxes for payments on Wednesday, Thursday, and Friday by the following Wednesday, and for payments on Saturday, Sunday, Monday, and Tuesday, by the subsequent Friday.
  • Maintain Accurate Payroll Records: In Minnesota, it’s essential to keep precise records of your employees’ payroll, including details such as their working hours, pay statements, tax forms, and other relevant paperwork. Federal and state laws require Minnesota employers to retain these records for a specific period, typically at least three years. Keeping these records secure is necessary to comply with audit regulations and to have documentation available in case of inquiries or investigations by tax authorities.
  • Complete Annual Payroll Reports: Each year, you must finalize government reports, including W-2 Forms and 1099 Forms. Employees should receive these forms no later than January 31 of the following year.

Final Thoughts

The various aspects of handling payroll, which involve calculating employee pay, managing deductions, handling taxes, and disbursing payments, highlight its critical role in the world of employment in Minnesota. It’s essential to understand and comply with the specific regulations for minimum wage, tax, and labor laws in the state to effectively manage payroll. The good news is that there are tools available to make this process easier. We have compiled a list of the top 6 apps designed to streamline your payroll operations in the US. Alternatively, if you already have a system in operation, we offer 10 tips to enhance the efficiency of your US payroll processes.

Important Cautionary Note

This content is provided for informational purposes only. While we make every effort to ensure the accuracy of the information presented, we cannot guarantee that it is free of errors or omissions. Users are advised to independently verify any critical information and should not solely rely on the content provided.

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