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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:

Be required to be included in nonresident withholding
Qualify to file as a part of a composite return
Be able to reduce their nonresident withholding amount by completing an alternate withholding certificate.

To learn more, watch our short video on Nonresident Withholding

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Nonresident Withholding for Partners and Partnerships [+]

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.

Nonresident Withholding for Shareholders and S Corporations [+]

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

Reporting Nonresident Withholding [+]

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.

Entity Filing Type	Return	Minnesota K Schedule	Instructions
Partnership	Form M3	Schedule KPI	Instructions for Form M3
S Corporation	Form M8	Schedule KS	Instructions for Form M8

Filing Form AWC, Alternative Withholding Certificate [+]

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.