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Nonresident Withholding
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It is important for entities to be aware of the decisions made by nonresident partners and shareholders regarding their Minnesota tax obligations. Partnerships and S corporations may be required to withhold tax from nonresident partners and shareholders if they are not making a pass-through entity tax election. Nonresident partners and shareholders may:
To learn more, watch our short video on Nonresident Withholding
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Partnerships must withhold and remit Minnesota income tax for nonresident partners that meet all of the following requirements:
- Partner’s legal residence is not in Minnesota
Partner has not elected to be part of the composite return
Partner received at least $1,000 of Minnesota-source distributive income (not wages) from the partnership
Income is not from the closure of the partnership in which no cash or property was distributed in the current or prior tax year
Note: Nonresident individual partners also include grantor trusts that file (or can file) under Code of Federal Regulations, title 26, section 1.671-4(b) and single-member limited liability companies (LLCs) when the member is an individual.
Exceptions
Debt or mortgage repayment: Withholding isn’t required on income from the discharge of a debt. Income from the gain on sale of property that has been subject to a basis reduction under Internal Revenue Code (I.R.C.) sections 108, 734, or 743 that was subject to a mortgage is excluded from withholding to the extent that no cash is received, or the cash is required to pay the indebtedness or mortgage.
Exempt partnerships: Withholding isn’t required if shares in a partnership are publicly traded.
S corporations must withhold and pay Minnesota income tax for nonresident shareholders that meet all of the following requirements:
Shareholder’s legal residence is not in Minnesota
Shareholder has not elected to be part of the composite return
Shareholder received at least $1,000 of Minnesota-source distributive income (not wages) from the S corporation
Income did not come from the closure of the S corporation in which no cash or property was distributed in the current or prior taxable year
The partnership or S corporation must withhold 9.85% of a nonresident individual's Minnesota income, less any allowable credits that are passed through to the individual.
Refunds of overpayments or nonresident withholding tax by the partnership or S corporation are limited to the amount of overpayment that was not deducted or withheld from the shares of the partners or shareholders. All other overpayments must be claimed by the partner or shareholder on their income tax return.
The partnership or S corporation may withhold less than the 9.85% if requested by a partner or shareholder if the smaller withholding amount is closer to their actual Minnesota tax liability.
If the nonresident individual wants to reduce withholding, they must complete Form AWC, Alternative Withholding Certificate, and submit it to the business.
| Entity Filing Type | Return | Check Box |
|---|
| Partnership | Form M3 | Line 3 |
| S Corporation | Form M8 | Line 4 |
