Minnesota Self-Employment Tax Requirements
Navigate Minnesota self-employment tax by understanding how your federal business profit informs your state income tax liability and required payment schedule.
Self-employed individuals in Minnesota have tax obligations at both the federal and state levels. A common point of confusion is the idea of a specific “Minnesota self-employment tax,” but no such state-level tax exists. Instead, tax responsibilities for business income are twofold: individuals must pay the federal self-employment tax, which covers contributions to Social Security and Medicare, and the net income from the business is subject to Minnesota’s state income tax.
The process involves calculating the federal tax, determining how that impacts your state return, and making timely payments to both the Internal Revenue Service (IRS) and the Minnesota Department of Revenue throughout the year. This ensures that both federal and state requirements are met.
Calculating Federal Self-Employment Tax
The calculation of federal self-employment tax begins with determining your net earnings from your business activities. This is derived by subtracting all ordinary and necessary business expenses from the gross income your business generated. This is documented on IRS Schedule C, “Profit or Loss from Business,” which is a required attachment to your personal federal tax return, Form 1040.
After establishing your net profit on Schedule C, you calculate the actual self-employment tax using IRS Schedule SE, “Self-Employment Tax.” First, you find the amount of your net earnings subject to the tax by multiplying your net earnings from Schedule C by 92.35%. This adjustment accounts for the fact that employees do not pay FICA taxes on the portion their employer pays, making the system more equitable for the self-employed.
After this adjustment, the self-employment tax rate of 15.3% is applied. This rate is a combination of 12.4% for Social Security and 2.9% for Medicare. The Social Security portion has an annual earnings limit. For tax year 2025, this limit is $176,100. Once your combined earnings from employment and self-employment exceed this threshold, you stop paying the 12.4% Social Security tax for the remainder of the year, though the 2.9% Medicare tax continues on all earnings.
The federal self-employment tax includes a deduction that lowers your overall income tax liability. You are permitted to deduct one-half of your total self-employment tax paid when calculating your Adjusted Gross Income (AGI) on Form 1040. This deduction is an “above-the-line” deduction, meaning you do not have to itemize to claim it. It effectively recognizes the employer’s portion of FICA taxes that a business would typically pay, reducing your taxable income.
Determining Minnesota State Income Tax Liability
Determining your Minnesota state income tax liability begins where your federal return leaves off. Minnesota does not have a separate system for calculating business profit; instead, it uses your federal Adjusted Gross Income (AGI) as the starting point for the state tax return, Form M1. The net profit from your business and the deduction for one-half of your self-employment tax are components of your federal AGI that become the foundation for your Minnesota tax calculation. Any changes or corrections made to your federal business income will necessitate an amendment to your Minnesota return as well.
Minnesota employs a progressive tax system with several tax brackets with increasing rates. Your total taxable income, which includes your self-employment earnings along with any other sources of income like wages or investments, will be taxed at these graduated rates. The state provides specific tax rate schedules each year that apply based on your filing status.
While Minnesota’s tax system largely conforms to federal income definitions, there can be state-specific adjustments. The state requires taxpayers to add or subtract certain items from their federal AGI to arrive at Minnesota taxable income. It is important to review these potential adjustments to ensure the final income figure is accurate. These modifications are detailed on Schedule M1M, “Income Additions and Subtractions.”
Making Required Estimated Tax Payments
Both the IRS and the Minnesota Department of Revenue have a “pay-as-you-go” system, requiring you to pay tax on income as you earn it. For self-employed individuals, this is accomplished by making quarterly estimated tax payments. This process is necessary if you anticipate owing $1,000 or more in federal tax and $500 or more in Minnesota tax for the year.
The deadlines for these quarterly payments are the same for federal and state purposes. Payments are due four times a year: April 15 for first-quarter income, June 15 for second-quarter income, September 15 for third-quarter income, and January 15 of the following year for fourth-quarter income. Failing to pay on time can result in underpayment penalties.
For your federal obligation, payments can be made. You can send a check or money order with a payment voucher from Form 1040-ES, “Estimated Tax for Individuals.” A popular option is to pay electronically. IRS Direct Pay allows for direct bank transfers, and the Electronic Federal Tax Payment System (EFTPS) is for scheduling and tracking payments.
The Minnesota Department of Revenue provides multiple options for state payments. You can mail a check with a payment voucher from the department’s website. Using the state’s e-Services payment portal allows you to make secure payments directly from your bank account and schedule all four payments at once.