2 Percent Minnesota Income Tax Withholding on Construction Contractors

[Bees Knees]

The way I understand the new law for construction contractors doing business in Minnesota:

1) You have to have all sub-contractors obtain an independent contractor exemption certificate from Minnesota, otherwise they have to be treated as employees.
2) Even with an independent contractor exemption certificate, you have to withhold 2% Minnesota tax on all payments made if total payments for the year exceed $600 (report payment and MN withholding on Form 1099-MISC).
3) The independent contractor exemption certificate and 2% MN withholding does not apply if your sub-contractor is an LLC or a corporation.

Does that sum up the new rules? Or am I missing anything?

[mblatour]

As I see it...

what you put down about sums it up. I am frustrated about this matter because it does pertain to my home business and I am going to have to deal with this. To better explain:

For starters, I have my home-based tax preparation business. I'm in my 5th season now and have about 65 clients.

I also have a geothermal heat pump installation business with my husband. Last year was our first full year with the business....AND we actually showed a profit of $6,000 if you can believe that! My husband works a full time job besides as a union sheet metal foreman and I stay home with my 6 and 5 year old sons as well. We are hoping that if the business grows enough, we'll be able to have my husband do this full time and I'll be around to assist. We'd like to eventually take this a step further and have employees and maybe even sign a union contract in the future. I take part in the entire business. Meaning that I do estimating, meet with the potential clients, help install the loop fields and heat pumps (and ductwork if needed) as well as handle all of the "office" type work that is tied to the business.

This past year we had two subcontractors that we had to send out 1099's to. One for $1,500 and the other for $2,775. This next year, it'll likely be much more than that. We've already paid one contractor $4,000 in 2009. He has a sheet metal business that he operates as a sole proprietor and has for many, many years. He files a schedule C. Now with this new change in MN, it looks to me as if we should have withheld $80 (2%) of the money we paid him for the MN tax. He has done nothing to file with the state at this point. He doesn't even carry insurance nor bonding. Believe me, he's totally legit and would give you a kidney if you needed one. He just likes the old-fashioned way of doing things and stays away from computers whenever possible. And in some ways I see him as a genius because he knows his stuff (when it comes to his occupation). I've spoken to him about the recent changes (which he had heard nothing about) and he got quite wound up. He said "I am thinking of just going back to working FOR someone". He's been in the union for 30 years (with my husband) and he goes back and forth between working for someone until things get slow and then he goes on his own.

Bees: To sum this up, I just wanted to tell one situation and have you give your opinion on the matter. My husband and I have a single-member LLC and we file as sole proprietor on Schedule C as well for the geothermal business. Any red flags standing up?

[Bees Knees]

Your sub needs to be an LLC. That is my opinion on the matter.

My advice to everyone in MN in the construction business is to be an LLC. Problems solved. It is a small one time fee. No annual fee like in other states. You get a certain degree of liability protection. Plus it avoids this new 2% withholding rule.

[mblatour]

You can avoid it even if....

you are a single member LLC filing taxes as sole proprietor and not LLC filing Corp. status?

[Bees Knees]

Yes. That is the way I read it. The website http://www.taxes.state.mn.us/taxes/w...tors_faq.shtml says:

Beginning January 1, 2009, a construction contractor who makes payments to an individual construction contractor carrying on a trade or business as a sole proprietorship must deduct and withhold 2 percent (.02) of the payment(s) as Minnesota income tax withholding. Payments are subject to 2 percent withholding only if the work was performed in the state of Minnesota and the total payments during the year exceed $600.

Then it says:

What is the difference between a construction contractor and an individual construction contractor?

A construction contractor (payer) is any individual or business entity carrying on a trade or business described in industry code numbers 23 through 238990 of the North American Industry Classification System (NAICS).
An individual construction contractor (payee) is any individual carrying on a trade or business as a sole proprietorship described in industry code numbers 23 through 238990 of the NAICS. A single member Limited Liability Company (LLC) is not a sole proprietorship for purpose of this law.

Thus, a single member LLC filing a Schedule C as a disregarded entity is not a sole proprietorship for purposes of the 2% withholding rules.

Thats the way I see it.

[Mike Mac]

The following is a link to a Fact Sheet from MN that I plan to give to my contractor clients.

http://www.taxes.state.mn.us/withholding/tax_information/factsheets/wfs18_08.pdf

I know they will want me to help them with this in 2009 but I stick strictly to the tax prep business (and am thinking of retiring from that in the next couple years). Most of my contractor clients are young, shot-from-the-hip type guys. This will drive them nuts. Perhaps I should suggest they get married or get a live-in. I'm always amazed how a good woman improves the bookeeping for these operations!!

Mac