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Minn. Stat. § 144.604, subds. 1,
2
Minn. Stat. § 144E.101, subd.
14.
I.
Additional information on
expenditures
A.
Ambulances
Unless the Emergency Medical Services Regulatory Board has approved a
licensed ambulance service’s deviation from the guidelines per state law, the
ambulance service must transport major trauma patients from the scene to the
highest state-designated trauma hospital within 30 minutes transport time.
Ground ambulances must also comply with the following:
•
Patients with compromised airways must be transported immediately to
the nearest designated trauma hospital.
•
Level II trauma hospitals capable of providing definitive trauma care must
not be bypassed to reach a level I trauma hospital.
If no designated trauma hospital exists within 30 minutes transport time, the
patient must be transported to the closest hospital.
In cases where a patient does not have a compromised airway, the ground
ambulance must transport major trauma patients:
•
To a level I or level II trauma hospital within 30 minutes transport time
•
If no level I or level II trauma hospital exists within 30 minutes transport
time, the patient must be transported to the closest designated trauma
hospital within 30 minutes transport time or to a more appropriate higher
designated trauma hospital.
If predetermined by the ambulance service medical director; or if no
designated trauma hospital exists within 30 minutes transport time, the patient
must be transported to the closest hospital.
B.
Streets and highways
Almost all cities maintain streets and incur substantial associated expenditures.
Programs include snow and ice removal, seal coating, street lighting, and street
repairs. Consider costs for street and sidewalk repair and replacement.
C.
Sanitation
The cost of sanitation is another basic expenditure. Cities should consider the
costs of sanitary sewers and treatment plants, refuse collection and disposal,
recycling, street cleaning, weed eradication, and insect and pest control.
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D.
Health
General health costs include hospital facilities, nuisance abatement, dilapidated
building removal, cemeteries, and other health-related topics.
E.
Libraries
Some cities have local public libraries. The cost of running a library includes
acquisition and technology costs. Cities with bookmobiles should consider fuel
and maintenance costs.
Minn. Stat. § 134.34.
Cities without their own libraries may be members of regional library systems,
which generally require cities to provide at least the same contribution amount,
formerly known as “maintenance of effort” as the previous year. The
Department of Education certifies annually to participating cities the minimum
contribution level required. The Legislature sets the level of regional library
basic support that city members of a regional library must pay as the average
of the adjusted net tax capacity of the second, third, and fourth years preceding
the current year.
If a city’s aid is reduced and that city is contributing more than the minimum
amount of library support, the city may reduce the amount of support they
provide to the regional library system. If a city chooses to reduce its local
support in accordance with the law, it must notify its regional public library
system. The regional public library system must notify the Department of
Education that a revised certification is required. The Department must certify
the revised minimum level of support to the city.
F.
Minn. Stat. § 326B.112.
Parks and recreation
Many cities have municipal parks and public recreation programs. Programs of
this type include parks, playgrounds, community buildings, playing fields,
athletic courts, and ice rinks. State bleacher safety requirements should also be
considered.
G.
Debt service
Cities with outstanding debt obligations or bonds must provide funds to cover
the principal and interest.
H.
Miscellaneous
Cities may provide services in many other areas. Common programs include
cemeteries, airports, parking facilities, golf courses, liquor stores,
environmental initiatives, and programs for senior citizens. Cities should
consider how much money is needed to support these programs. User fees are
frequently used to meet all, or a substantial portion, of the costs of these
programs.
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I.
Employment costs
Cities must budget for the wages, benefits, and workers’ compensation costs of
elected officials and city employees. For most cities, this includes budgeting
for health insurance costs. Employers must also budget for retirement-related
costs, such as Social Security, Medicare, Public Employees Retirement
Association (PERA), and relief association contributions.
1.
Wages and benefits
The budget must consider the salaries and benefits of the mayor, council
members, city clerk, treasurer, assessors, auditors, attorneys, and other city
officials, along with other city employees.
2.
Tax Information for Federal,
State, & Local Governments.
Publication 963: Federal-State
Reference Guide November
2014 comprehensive reference
guide for Social Security and
Medicare coverage and Federal
Insurance Contributions Act
(FICA) tax withholding
Fringe Benefits Guide Revised January 2014: In-depth
discussion of meal allowances,
travel, transportation, and other
common fringe benefits.
Minnesota FSLG agent: Lori
Stieber (Lori.A.Stieber@irs.gov
or (651) 726-1421).
See also, IRS Educational
Resources for State and Local
Governments.
Increased IRS audits of city payroll for tax
compliance
Random IRS audits of cities are increasing in Minnesota. In an IRS audit, city
payroll documents may be examined to see if the correct employment-related
taxes were paid; issues may range from withholding for Social Security and
Medicare to the classification of staff as employee or independent contractor.
Problems may arise for cities if they fail to track and correctly tax or exempt
employee reimbursements (like parking or training costs) and fringe benefits
(like city vehicles), but the list of possible issues is long. Compliance with
payroll-related tax issues gets incredibly detailed and fact-specific in short
order. What follows are a few ideas offered because an IRS audit may affect a
city budget if noncompliance is found and the IRS assesses fines and penalties.
The “Federal, State & Local Government” (FLSG) section of the IRS offers
individualized service on a voluntary basis. IRS staff can address tax topics
unique to government entities including payroll tax compliance, for example:
•
Form SS-8, determination of worker status for federal employment taxes
and income tax withholding
•
Worker classification as employee or independent contractor
•
Special employment tax rules for public employees (election workers,
emergency workers, public officials, etc.)
•
Withholding from nonresident workers
•
Other federal tax issues for government entities such as reimbursements,
fringe benefits
•
Federal tax compliance on health care related payments to employees
•
General information about State-Social Security Administration Section
218 Agreements
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Public Employment Retirement
Association (PERA). Minn.
Stat. ch. 355.
PERA website: Social Security
Resources or call 1-800-6529026 or 651-296-7460 / FAX
651-297-2547.
PERA is designated as the State Social Security Administrator in Minnesota
and provides information about Social Security and Medicare coverage under
the terms of Minnesota’s 218 Agreement. The purpose of the federal-state
Section 218 Agreement is to extend or exempt classifications of state and local
government employees from Social Security coverage to the extent allowed
under federal law. Minnesota’s 218 Agreement can be modified to include
certain elected officials of cities as well as employees of special authorities
such as housing and redevelopment authorities. The law authorizes PERA to
modify the 218 Agreement on a city-by-city basis, meaning that one entity can
execute a change without affecting any other entity.
3.
Adjustment factors
To estimate the cost of these salaries, a good starting point is salaries from
prior years. Cities can use the most recent full year for which they have actual
salary data and adjust the amounts to anticipate changes in wages. Adjustment
factors include pay equity, market wage rates, and cost-of-living increases
(such as the consumer price index), employment contracts, and merit increases.
4.
Minn. Stat. § 471.9981.
Minn. Stat. § 471.999
Minnesota Management and
Budget: Local Government Pay
Equity.
In setting employee wages and salaries, cities must have implemented a pay
equity plan that addresses any gender bias. An amount may have to be
included in the budget to cover any salary increases necessary to implement or
maintain compliance with the state’s pay equity laws. Cities must report this
information to Minnesota Management and Budget every three years. Reports
must be submitted electronically, if possible, via e-mail to the department.
5.
Salary & Benefits Survey for MN
Local Governments.
Market wage rates
Another adjustment factor is the market wage rate of other employees in both
the private and public sector. To retain good employees, salaries should be
competitive. Information on current salaries is available from the League of
Minnesota Cities, the Labor Standards Division of the Minnesota Department
of Labor, and the U.S. Department of Labor. The League and the Association
of Metropolitan Municipalities offer an online salary and benefits survey for
current information on public-sector market wage rates.
6.
See the Bureau of Labor
Statistics.
Pay equity plan
Consumer price index
A factor closely related to market wage rates is cost-of-living adjustments. One
measure is the consumer price index (CPI), published by the Bureau of Labor
Statistics, U.S. Department of Labor. The CPI is a measure of the average
change over time in the prices paid by consumers for goods and services. The
CPI is often used to provide cost-of-living wage adjustments to American
workers.
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Other methods of adjusting salaries for inflation may also exist, depending
upon the particular city, and these may be used instead of the CPI. Cities
commonly use either the national or the local CPI, but the national figure is
more current. The CPI for the Minneapolis-St. Paul area is updated only twice
a year for the reference months of January and July.
The most current figures are
available from the CPI Hotline,
(612) 725-3580.
The CPI for Minneapolis-St.
Paul is published semiannually
and appears in Tables 34 and
39 of the January and July
issues of the CPI Detailed
Report.
The CPI for the Midwest went down 1.1 percent from April 2014 to April
2015. Other methods of adjusting salaries for inflation may also exist,
depending upon the particular city, and these may be used instead of the
CPI.
7.
Employment contracts
Cities must also consider union or employment contracts. A city must fulfill
contractual obligations, and will likely need to set 2010 salaries to allow for
cost-of-living increases and to ensure the city remains competitive with the
wages offered by other employers.
Minn. Stat. § 353.01, subd. 28.
See also, phased retirement
option for members 62 and older
in Pension and Retirement Costs,
this section.
If a city considers rehiring retired city employees, note that under the PERA
law, a minimum 30-day break in service is required. The 30-day requirement
applies to all “paid service”—even service as an independent contractor.
PERA has always considered any return to “paid services” to a local unit of
government to require the 30-day break, but took steps to clarify that it also
applies to an independent contractor relationship. In addition, as an IRS taxqualified plan, PERA contributions to the plan from both employees and
employers are exempt for purposes of federal and state income taxes until the
employee collects a refund or benefits. To continue this tax-qualified status,
the IRS requires a true separation from service. Penalties for not complying
with PERA requirements for a true separation are substantial. Both the retiree
and the city must pay contributions that they should have paid when the
employee was rehired too soon, with interest, and the retiree may need to repay
any benefits paid out by PERA.
8.
State and Federal Fair Labor Standards Act
(FLSA)
29 U.S.C.A. §§ 201-219. See
U.S. Department of Labor. LMC
LMC information memo, Fair
Labor Standards Act:
Determining Exempt vs. NonExempt Status.
The federal Fair Labor Standards Act (FLSA) defines the employer
requirements for minimum wage, overtime compensation and compensatory
time, exempt and non-exempt status, child labor standards, and recordkeeping
in relation to these requirements.
See the LMC information
memo, Fair Labor Standards
Act: An Overview.
It is a good practice for cities to review the FLSA and job classifications to see
if this federal law will affect any city employees’ pay or status. If you have any
questions about the FLSA, contact the League’s HR & Benefits Department.
Minn. Stat. §§ 177.21-.33.
Minnesota also has a Fair Labor Standards Act. The purpose of this Act is to
establish minimum wage and overtime compensation standards, to safeguard
existing minimum wage and overtime compensation standards, and to sustain
purchasing power and increase employment opportunities.
See MN Department of Labor &
Industry.
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Minn. Stat. § 177.24, subd. 1.
On Aug. 1 of 2015 and 2016, the Minnesota minimum wage is scheduled to
increase for both large and small employers. As of Aug. 1, 2015, the
Minnesota minimum pay rate increased to $9 per hour for large employers, and
to at least $7.25 per hour for small employers. Then, on Aug. 1, 2016, the
Minnesota minimum pay rate will increase to $9.50 per hour for large
employers, and to at least $7.75 per hour for small employers.
There are a number of minimum wage exceptions to both the state and federal
FLSA. Cities are encouraged to review both laws before deciding to
compensate an employee at a rate that is less than state minimum wage.
See LMC HR Information
Memos.
See LMC HR Reference Manual.
The League’s HR & Benefits Department publishes a number of memos on
various aspects of FLSA. The department also provides a comprehensive
human resources guide for members, the online HR Reference Manual. The
comprehensive LMC HR Reference Manual addresses personnel issues.
9.
A.G. Op. 107-a-3 (Jan. 22, 1980).
A.G. Op. (Feb. 6, 1998) (informal
letter opinion to Champlin).
The attorney general has determined that bonuses constitute a gift; therefore,
they are not lawful city expenditures. Cities, however, can have merit-based
pay systems. However, it would appear a bonus could become payable if it
followed a prior agreement or understanding that such a bonus would become
payable. Most recently the attorney general’s office has opined that “an agreed
monetary bonus might be provided as part of a salary plan to employees who
meet performance or longevity standards….”
10.
26 U.S.C.A. § 457(b) (2).
For more information, see
Minnesota Deferred
Compensation Plan.
Bonuses
Employee contributions to deferred
compensation
Generally, an employee may elect to defer specified amounts from his or her
salary under a deferred compensation plan. There is a tax savings for the
employee because taxes are not payable until the money is withdrawn. Since
most employees have a lower income during their retirement years, the
earnings will be taxed at a lower rate.
See LMC information memo,
Budget Guide for Cities.
Please note: Each calendar year, the IRS modifies the annual contribution
limits. The IRS announces annual increases late in the calendar year, based on
specific cost-of-living adjustment (COLA) benchmarks.
Minn. Stat. § 352.965.
At the request of an officer or employee (or an employee covered by a
retirement fund in state law), a city must defer payment of part of the
compensation of the public officer or employee through payroll deduction. The
amount to be deferred must be as provided in a written agreement between the
officer or employee and the city. The agreement must be in a form specified by
the executive director of the Minnesota State Retirement System, and must be
consistent with the requirements for an eligible plan under federal and state tax
laws, regulations, and rulings.
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The city must complete implementation of the deferred compensation plan
within 45 days of the request. If the city fails to implement the deferred
compensation plan, the city may not defer compensation under any existing or
new deferred compensation plan from the date of the request until the date on
which the requested state deferred compensation plan is implemented. Upon
the petition of a city officer or employee, the executive director of the
Minnesota State Retirement System may order the city officer or employee’s
public employer to implement the deferred compensation plan, and may
enforce that order in appropriate legal proceedings.
Minn. Stat. § 353.028. Minn.
Stat. § 356.24, subd. 1.
See Section 2.d: Volunteer
Firefighters and Social
Security.
There is special authority for cities to offer deferred compensation to city
managers and chief administrative officers, and cities must do so upon request.
(Within six months of beginning employment, the manager or chief
administrative officer may elect to be excluded from PERA). The city may
agree to contribute deferred compensation for these individuals. Such
contributions must comply with federal tax laws. No city may contribute to a
deferred compensation plan for volunteer or emergency on-call firefighters in
lieu of withholding social security benefits, if applicable.
Although the employee contributions to a deferred compensation plan reduce
the individual’s taxable income, the city will still need to budget for the
employer’s share of Social Security and Medicare to the same extent that these
withholdings would be required on the employee’s regular earnings.
11.
Minn. Stat. § 352.965.
Employer contributions to deferred
compensation
Under Minnesota law, public employers may also contribute to the Minnesota
deferred compensation plan in amounts provided in the employer’s personnel
policy or collective bargaining agreement. The employee must match the
employer’s contribution to a deferred compensation plan.
Although the employee contributions to a deferred compensation plan reduce
the individual’s taxable income, the city will still need to budget for the
employer’s share of Social Security and Medicare to the same extent that these
withholdings would be required on the employee’s regular earnings.
12.
Minn. Stat. § 465.72, subd. 1.
Severance pay
Cities must also consider any expenditure for severance pay to city employees.
Severance pay provided for an employee leaving employment may not exceed
an amount equivalent to one year of pay.
13.
Vacation and leave
When budgeting, cities must be mindful of costs associated with employee
time off, whether the time off is for holidays, vacation, sick leave, schoolrelated leave, family leave, military leave, or any of the other leave provisions
that may apply to city employees. Additionally, cities should budget for the
cost of having temporary replacements for employees absent for significant
amount of time.
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Minn. Stat. § 471.59, subd. 12b.
Employees of local joint powers public safety organizations that merge must
receive credit for their accumulated sick and vacation time.
League of Minnesota Cities HR
& Benefits Department:
HR&Benefits@lmc.org (651)
281-1200 or (800) 925-1122.
You may also contact the League HR & Benefits Department regarding
vacation, leave and furloughs. In addition, PERA provides employer
information on furloughs. If a city considers using furloughs to cut costs a
number of issues arise including FMLA, contracts and use of paid time off.
Consult the city attorney before deciding to use this potential cost saving
measure.
PERA: Reduced Hours Option
Available to Members.
See LMC information memo,
Budget Guide for Cities.
14.
Health insurance costs and plans
a.
Health and dental premiums
In budgeting for future health and dental premiums, cities need to be aware of
underlying trends in the cost of health and dental care. While growth in health
insurance premiums has moderated slightly in the past couple of years, health
and dental care costs continue to increase faster than the general rate of
inflation. Health experts and actuaries project that the inflationary cost of
healthcare will continue to outpace inflation and average wage growth by wide
margins.
Cities offering health and dental benefits will also need to consider their own
group’s claims experience when determining what type of increases they will
experience for the coming year. If your city is pooled with other groups, the
experience of the entire pool will also be a factor in determining increases to
the city’s health and dental premiums, which could be more or less than the
projected inflationary trends.
15.
LMC HR Reference Manual.
Pension and retirement costs
Cities should budget for the cost of making required employer payments other
post-employment benefits (OPEB), pension and retirement plans of city
employees. The various costs can include Social Security and Medicare,
PERA, volunteer firefighter relief association, ambulance personnel
retirement, and police and paid firefighter relief associations. Additional
retirement system costs may also be considered, such as staff time to do
paperwork, reporting, and training of responsible staff.
16.
Public Employees Retirement Association
PERA, a public pension system, covers almost all regular, non-seasonal city
employees in Minnesota. Exceptions include most volunteer firefighters and
election officers. Employees must belong to the system; contributions from the
city and from employees are mandatory. Cities, as employers, are entrusted
with the responsibility of enrolling all employees who qualify for membership,
and are legally required to remit contributions on a pay period basis.
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See PERA Employer Manual.
The Employer Response Line:
(888) 892-7372 or (651) 2963636.
PERA provides a variety of employer services, including a PERA Employer
Manual and an Employer Response Line. The PERA Employer Manual
contains comprehensive information about PERA and its policies and plans,
and is available on the PERA web site.
a.
Minn. Stat. § 353.01, subds. 2a
and 2b.
See PERA Employer Manual.
PERA Membership Options for
Elected officials.
Whether an employee is included in a PERA defined benefit plan depends on
whether the employee meets the statutory definition of an included or an
excluded employee. Salaries earned from all positions held by a person within
a governmental unit apply to the $425 salary threshold for membership
eligibility in PERA’s Coordinated Plan unless one of the positions is
specifically excluded. Generally, most local government employees holding
full or part-time positions are required to participate as a condition of
employment unless they are specifically excluded. Minnesota law allows
employers, on an entity-by-entity basis, to modify the state agreement with the
Social Security Administration to allow elected officials, on an individual
basis, to elect to receive coverage in both PERA’s defined contribution plan
and Social Security. For further information on employee eligibility, see part
five of the PERA Employer Manual. As discussed below, PERA administers
defined benefit plans and defined contribution plans.
b.
See PERA Employer Manual.
Section 415(b) of the Internal
Revenue Code.
Section 415(c) of the Internal
Revenue Code. Minn. Stat. §
353.028, subd. 1.
Defined benefit plans
Defined benefit retirement plans are known as such because members’ benefits
are computed using a formula and are not based on the amount the member
contributed to the plan. PERA has four types of defined benefit plans: Basic,
Coordinated, Correctional, and Police and Fire. The Basic Plan closed to new
members in 1968 when Social Security coverage became available for most
city employees. Generally, all new city employees, other than fire and police
officers, participate in the Coordinated Plan. The annual additions on behalf of
a member or any limitation year beginning after Dec, 31, 2001, shall not
exceed the lesser of 100 percent of the member’s average compensation for his
high three years or $16,000 as adjusted by the United States Secretary of the
Treasury. For descriptions of the plans, see chapter three of the PERA
Employer Manual.
c.
See PERA Employer Manual
Eligibility for participation
Defined contribution plans
A defined contribution plan (DCP) involves contributing into a retirement
account, which the employee will receive in lump sum upon application.
Defined contribution plans include plans for elected officials and plans for
volunteer ambulance personnel and some volunteer firefighters.
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Minn. Stat. § 353D.03, subd. 6.
See PERA Employer Manual.
A volunteer or emergency on-call firefighter who does not participate in the
police and fire plans or relief association pension plans may choose to
participate in the defined contribution plan and shall contribute at least 7.5
percent of any compensation received for firefighting services. If the city or
the independent nonprofit firefighting corporation ratifies the selection of the
defined contribution plan, the employing unit and the volunteer firefighter
shall contribute in total an amount equal at least to 7.5 percent of any
compensation received for firefighting services. For a detailed description of
defined contribution plans, see chapter four of the PERA Employer Manual.
d.
See PERA Employer Manual.
For current year contribution
rates, see the LMC information
memo, Budget Guide for Cities.
Employer contribution rates
Employers are required to withhold employer and employee contributions at
rates established by statute. Employer contribution under the Basic and
Coordinated plans includes both a match to the employee contribution and an
additional employer contribution. For further information on contribution rates
and reporting, see chapter seven of the PERA Employer Manual.
e.
PERA website: Phased
Retirement Option.
Employer Response line: (888)
892-7372 or (651) 296-3636.
Phased retirement option for members 62 and older
State law allows PERA Coordinated and Basic members age 62 and over the
option of receiving a PERA pension without formally resigning. However, the
decision to offer the phased retirement option (PRO) to members is strictly up
to the employer. A member and their employer must sign a phased retirement
agreement form with PERA to collect pension payments in this way. An
employer is under no obligation to renew this agreement. The initial offer must
not exceed one year, but it can be renewed for periods of up to a year for a
total of five years. In order to qualify for phased retirement, a number of
requirements must be met:
•
Meet all other requirements for a pension from PERA.
•
Be at least 62 years of age.
•
Have worked at least half-time in a PERA-covered position for a minimum
of five years immediately prior to beginning phased retirement.
•
Agree to a reduction of hours worked of at least 25 percent, not to exceed
1,044 hours per year—essentially half-time or less.
Contact PERA for more information about the new phased retirement option,
or PRO.
17.
Minn. Stat. § 424A.091.
.Minn. Stat. § 424A.001.
Minn. Stat. § 424A.002.
Relief association plans
The articles of incorporation or bylaws of a volunteer fire relief association
must specify whether it is a “defined benefit relief association” or a “defined
contribution relief association.”
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a.
Minn. Stat. § 353G.01.353G.16.
Voluntary statewide lump-sum volunteer firefighter
retirement plan
The voluntary Statewide Volunteer Firefighter Retirement Plan (SVFRP).
Under this plan, volunteer firefighters may accrue pension benefits by
volunteering in different cities, or the same city, and are vested after five years
of credible (or “good time”) service. This plan is optional, both for those cities
currently without a volunteer firefighter retirement plan and cities with a relief
association that may wish to provide an alternative to an existing plan.
18.
Internal Revenue Service:
Federal, State and Local
Governments.
Social Security and Medicare
The FSLG section of the IRS is responsible for ensuring federal tax
compliance by federal, quasi-governmental, and state agencies; city, county,
and other units of local government; and governmental entities. The office
coordinates activities with other IRS offices such as Customer Account
Services, Counsel, Government Liaison & Disclosure, Employee Plans, and
Excise Tax. FSLG delivers various services through partnership with
government associations, practitioner associations, IRS Counsel, and other IRS
offices. Individualized service is available to you on a voluntary basis.
Specially trained IRS staff can address tax topics unique to government entities
that may relate to, for example, governments as employers, and issues of
payments to outside contractors. FSLG offices, located throughout the country,
currently provide:
•
Assistance through individualized instruction focused on employment tax
withholding, reporting, and filing requirements.
•
Assistance for information return reporting for payments to vendors.
•
Guidance on any other federal tax-related issues.
•
Participation in educational seminars and workshops at national and local
levels.
Public Employees Retirement
Association of Minnesota:
Social Security.
FSLG works with the Social Security Administration (SSA) to educate
government entities about Section 218 Social Security Agreements. These
voluntary agreements provide Social Security and/or Medicare coverage for
state and local employees. While IRS is responsible for administering and
enforcing the tax laws, SSA processes and interprets these agreements and
related coverage issues. Each state has a State Social Security Administrator
who is the main resource for informing governmental entities within the state
on Social Security and Medicare issues and the terms of the state’s Section 218
Agreement. In Minnesota, PERA administers the Section 218 Agreement.
See IRS Circular E, Employers’
Tax Guide (IRS Publication 15).
Currently, the Social Security withholding rate for 2015 continues at 6.2
percent of an employee’s wages. The social security wage base limit is
$118,500.At the time of publication, 2016 withholding rates are not available.
The employer must contribute a matching amount. The Medicare withholding
rate for 2015 continues at 1.45 percent on all earnings without limit. Again, the
employer must contribute a matching amount.
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There are three different possibilities of withholdings of Social Security and
Medicare. An employee will have one of the following possible withholding
situations:
•
Both Social Security and Medicare are withheld.
•
Neither Social Security nor Medicare is withheld.
•
Only the Medicare portion is withheld.
(Note: In no case would any employee have only the Social Security portion
withheld).
The following table summarizes required withholdings:
Type of Plan
No qualified plan
Social Security
Yes
Medicare
Yes
Coordinated Plan
Yes
Yes
Basic Plan
Hired on or before 3/31/86
No
Yes
& elected Medicare participation
Hired after 3/31/86
No
No
Yes
Yes
Police & Fire Plan
Hired on or before 3/31/86
Hired after 3/31/86
No
No
No
Yes
Election judges or election workers
Paid less than $1,500 per year
No
No
Paid $1,500 or more per year
Yes
Yes
Hired on or before 3/31/86
a.
26 U.S.C.A. § 3121 (b) (7) (F).
42 U.S.C.A. § 410 (a) (7) (F).
Medicare and Social Security withholdings
Determining the category for each employee is no easy task. Generally, a
public employee who is not participating in a qualified retirement system
through his or her employment is subject to both the Social Security and the
Medicare withholdings.
The retirement plans offered through PERA have been deemed “qualified”
retirement systems. Thus, employees who are not participating in PERA (such
as some elected officials and part-time, seasonal or temporary employees)
might fit into the category of those having both Social Security and Medicare
withheld.
It is important to remember that employees who are members of the PERA
Coordinated Plan will also have Social Security and Medicare withheld, even
though they are participating in a qualified plan. This is because participation
in Social Security and Medicare is included as part of this particular retirement
system.
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b.
26 U.S.C.A. § 3121 (b) (7) (F)
(iv).
42 U.S.C.A. § 410 (a) (7) (F)
(iv).
See IRS Circular E, Employers’
Tax Guide (IRS Publication
15). See Revenue Ruling 20006 on page 512 of Internal
Revenue Bulletin.
Minnesota FSLG agent: Lori
Stieber (Lori.A.Stieber@irs.gov
or (651) 726-1421).
Exempt from withholdings
There are very few exceptions to the above general requirement. The one that
is most applicable to cities is the exemption from both Social Security and
Medicare withholdings for election workers (or election judges) who are paid
less than the threshold amount of $1,600 or more in 2015. This amount is
annually adjusted. At the time of publication, the threshold for 2016 has not
been established. Note: Election judge pay is not subject to federal or state
taxes. If your city employs and pays an election worker who also works for the
city in another capacity (for example, the city clerk) you may have to report
election pay. You can get information on reporting and social security
coverage from your local IRS office.
There are also a few individuals participating in qualified plans whose earnings
may be exempt from withholdings, depending upon their date of hire. This
possibility is described in more detail in the next paragraph.
c.
Medicare withholdings
Employees who are participating in a qualified plan are exempt from the
Social Security withholdings, but some of these employees may still be subject
to the Medicare withholding, depending upon the employee’s date of hire. If
the employee was hired after March 31, 1986, Medicare must be withheld. If
the employee was hired on or before March 31, 1986, and is participating in a
qualified retirement plan, the employee’s earnings are exempt from this
withholding, unless the employee chose to have Medicare withholding during
an election option that was given in October 1989.
Employees who might fit into the category of having only the Medicare
portion withheld would include PERA Basic Plan members and PERA Police
and Fire members hired after the above date. Also included would be any
Basic Plan members hired on or before March 31, 1986, who opted for
Medicare participation in the October 1989 referendum. If you are unsure of a
Basic Plan member’s status with regard to the 1989 referendum option, contact
PERA.
Although no new members have been eligible to join the PERA Basic Plan
since 1968, members who were participating were allowed to continue. In such
a situation, the Basic Plan member who has left employment with one city for
a job with a different city would be seen as a new hire and Medicare
withholdings would be required. Under certain conditions, this type of
employee would be allowed to continue his or her participation in the PERA
Basic Plan.
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d.
Volunteer firefighters and Social Security
Cities have many questions about the applicability of Social Security and
Medicare withholdings to volunteer firefighters. There are essentially two
issues surrounding this matter. One must first determine whether a volunteer
firefighter is an employee. If so, one must then determine if the volunteer
firefighters’ relief association plan would be a qualified retirement plan under
the IRS criteria.
First, is a volunteer firefighter an employee? If the volunteer is compensated
only as a reimbursement for actual expenses incurred, prior IRS rulings
suggest the volunteer would not be viewed as an employee and withholding
would not be required. If the compensation is a result of anything that is not
justifiable reimbursement (i.e., supported by receipts for the expense), the
compensation may constitute a wage. In other words, the IRS could see the
individual as a paid employee rather than a true volunteer, and withholdings
would likely be required.
While some IRS rulings indicate earnings of a nominal amount would not
constitute a wage, there is no clear definition of a “nominal amount.” Cities
may want to err on the side of caution and make withholdings on any earnings
close to minimum wage.
26 CFR § 31.3121(b) (7)-(2)
(d) (2).
The second issue is whether a volunteer firefighters’ relief association plan
would meet the standards necessary for it to be deemed a “qualified” plan
under IRS regulations. It does not appear these plans are sufficient to meet the
standards because they fail to meet the 100 percent non-forfeitable benefit
requirement necessary for part-time, seasonal, and temporary employees. This
requirement means the plan must allow the retirement withholdings to be
returned to the employee if the employee has not yet vested 100 percent. Relief
association retirement plans do not allow this type of refund and do not fully
vest until a firefighter has participated for many years.
Although there is an exception to withholdings for employees hired
temporarily to handle disaster emergencies, this would not appear to exempt
volunteer firefighters from Social Security and Medicare withholdings. The
ongoing and continuous relationship volunteer firefighters have with their
cities in providing firefighting services probably precludes a “temporary”
relationship.
See also, Minnesota Public
Employees Retirement
Association: Social Security
Resources.
Fire departments and relief association plans can differ substantially from city
to city in Minnesota. Because of these differences, a city will have to look
closely at its particular situation to determine if its volunteer firefighters would
be exempt from Social Security and Medicare withholdings. Cities that believe
they have special circumstances may want to request a revenue ruling or a
private letter ruling from the IRS. (There may be a fee for such rulings).
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e.
W-2 reporting of Social Security and Medicare
26 U.S.C.A. § 3401(a).
Generally, all city employees, including elected officials and firefighters,
should receive a W-2 form after the end of each year. The W-2 is a statement
of the employee’s earnings and withholdings for the year. City employees
should not receive IRS Form 1099, which should be given only to individuals
who have an independent contractor relationship with the city.
See IRS Circular E, Employers’
Tax Guide (IRS Publication 15).
According to IRS Circular E, an IRS Form W-2 is not required for election
judges who are paid less than $600 in a year. However, cities must file a W-2
form for any election judge who has Social Security of Medicare withheld
from his or her compensation. (Again, Social Security and Medicare must be
withheld if an election judge earns $1, 600 or more in 2015). The thresholds
for withholdings from election judge pay in 2016 are not available at the time
of this publication.
f.
Section 419(c) of Public Law
108-203, the Social Security
Protection Act of 2004.
Social Security Online:
Government Pension Offset.
See also PERA: Social Security
Resources.
Social Security Administration.
Federal law: windfall elimination and government
pension offset
If a city hires new employees not covered by Social Security, federal law
requires that state and local government employers to disclose the effect of the
Windfall Elimination Provision and the Government Pension Offset to
employees hired on or after January 1, 2005 in jobs not covered by Social
Security. The law requires newly hired public employees to sign a statement
that they are aware of a possible reduction in their future Social Security
benefit entitlement. Under the Government Pension Offset Provision, any
Social Security spouse or widow(er) benefit to which an employee may
become entitled to will be offset if the employee also receives a federal, state
or local government pension based on work where the employee did not pay
Social Security tax.
For more information, visit the Social Security Administration web site (click
the “Federal, State & Local Government Employees” link on the right side of
the home page).
J.
Fees, dues, and insurance costs
Cities should budget for fees, dues, and insurance costs.
1.
Minnesota statewide 911
program.
MPCA storm water program.
State fees
Cities should budget for state fees that might affect city expenditures, such as
911 fees, storm water fees, and wastewater fees.
MPCA Wastewater.
2.
Contracting costs
Cites should budget for costs associated with municipal contracting.
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a.
Minn. Stat. 429.041, subds. 1, 2
Minn. Stat. § 469.015.
Minn. Stat. § 177.43, subd. 3.
Minnesota Department of
Labor & Industry: Prevailing
Wage.
Competitive bidding threshold and contracts
Cities of any size need not seek competitive bids for contracts less than
$100,000 and this now includes contracts for day labor and other contracts
when using special assessments to finance public improvements under Chapter
429, and contracts issued by housing and redevelopment areas (HRAs).
If state funding is involved, cities and other contracting authorities must
include information on prevailing wage law. If cities issue contracts or
proposals that involve state funding, the contract must specifically state the
prevailing wage rates, prevailing hours of labor, and hourly basic rates of pay.
The contracting authority must incorporate into its proposals and all contracts
the applicable wage determinations for the contract, along with contract
language provided by the commissioner of Labor and Industry, to notify the
contractor and all subcontractors of the applicability of state prevailing wage
law. Failure to incorporate the determination or provided contract language
into the contracts will make the contracting authority liable for making whole
the contractor or subcontractor for any increases in the wages paid, including
employment taxes and reasonable administrative costs based on the
appropriate prevailing wage due to the laborers or mechanics working on the
project.
K.
Association dues
Cities should include membership dues paid to organizations in their budgets.
1.
See LMC information memo,
Budget Guide for Cities.
League of Minnesota Cities
League dues are computed using the city’s latest population estimate and the
LMC Board of Directors recommended dues schedule (population estimates
are provided by either the state demographer or the Metropolitan Council).
2.
Insurance expenditures
For information on costs, see
LMC information memo,
Budget Guide for Cities.
Most cities are members of the League of Minnesota Cities Insurance Trust
(LMCIT) for property, liability, auto, and workers’ compensation coverage
and costs. If your city purchases insurance from a private company, you should
ask your provider about insurance coverage options, claim trends, and costs.
Experience Rating in LMCIT’s
Liability and Work Comp
Premiums.
In budgeting for premiums, it is important to keep in mind that in addition to
considering the rates, you also need to take into account any changes in your
exposures (i.e., payrolls, city expenditures, property values, etc.) and any
changes in your city’s experience rating since those factors will also affect the
city’s premium costs.
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26 U.S.C.A. § 4071(a).
26 C.F.R. § 48.4221-5.
26 U.S.C.A § 4221.
IRS Publication 510, Excise
Taxes for 2015.
See IRS Publication 510, Excise
Taxes.
L.
Federal taxes
1.
Federal excise tax
Many products are subject to federal excise taxes. (Excise tax means an
internal tax imposed on production or use of goods in a country). However,
cities may be eligible for refunds or be able to purchase some of these goods
tax-free. For example, cities are exempt from having to pay federal excise
tax on the purchase of tires.
The “gas guzzlers tax” is imposed on the sale by the manufacturer of
automobiles of a model type that has a fuel economy standard as measured
by the Environmental Protection Agency (EPA) of less than 22.5 miles per
gallon. Vehicles are exempt from this “gas guzzler” excise tax if the vehicles
are used primarily as ambulances or combination ambulance-hearses, for
police or other law enforcement purposes by federal, state, or local
governments, or for firefighting purposes.
Further information on tax-free purchases is available from manufacturers’
representatives or from the IRS. A special IRS publication discusses excise
taxes.
2.
26 U.S.C.A. § 6416(b) (2) (C).
26 U.S.C.A. § 4081(a) (2).
Federal fuel taxes
Cities are exempt from the federal excise taxes on gasoline and most diesel
fuel purchased for the exclusive use of the city.
MN Dep't. of Revenue, Fuel
Excise Rates and Fees.
See IRS Publication 510, Excise
Taxes.
Different tax rates exist for some special fuels such as ethanol and aviation
fuels. Contact the IRS for further information about these rates. Dyed diesel
fuel and dyed kerosene sold for nontaxable uses is not subject to federal
excise tax, but is subject to state excise taxes.
3.
See IRS Publication 510, Chapter
2.
For information on claiming
exemptions, see LMC
information memo, Budget
Guide for Cities.
There are two ways a city can use the federal tax exemption for gasoline
purchases. The city can: (1) purchase the gasoline without paying the tax by
filing a certificate with the vendor; or (2) apply for a refund.
4.
For information on claiming
exemptions, see LMC
information memo, Budget
Guide for Cities.
Exempt gasoline purchases
Exempt diesel fuel purchases
There are also two ways a city can purchase diesel fuel without paying
federal excise tax. The city can (1) purchase dyed diesel fuel; or (2) purchase
undyed diesel fuel tax-free from a registered ultimate vendor.
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Minn. Stat. § 297A.70.
See MN Revenue Sales Tax Fact
Sheet 142, Sales to Governments.
MN Revenue tax increase
announcement.
House Research: Alcoholic
Beverage Taxes.
M.
State taxes
1.
Sales tax
Cities do not always pay the same amount of sales tax on purchases of goods
and services that is paid by individuals and businesses.
For cities with municipal liquor stores, add 6.875 percent sales tax to the
gross receipts tax of 2.5 percent to all sales of liquor. The state excise tax
applies to beer, wine and other alcoholic beverages sold at an on-sale or offsale municipal liquor stores. (If the establishment has only a 3.2 percent malt
liquor license, the 6.875 percent tax rate applies).
2.
See MN Revenue Sales Tax Fact
Sheet 146, Use Tax for
Businesses
Minn. Stat. § 297A.80.
Use tax
Vendors generally collect sales tax at the time of sale; however, if the vendor
does not charge sales tax on taxable items, cities must pay use tax. Use tax is
similar to sales tax. Use tax applies to items bought without paying
Minnesota sales tax to the seller. For example, items purchased through mail
order or over the Internet may be subject to use tax or another tax.
When purchases are made in other states, cities should check with that state
as to whether the purchase is subject to that state’s sales tax. If the purchase
was subject to the sales tax of another state, the city would be exempt from
paying the Minnesota use tax only to the extent that the sales tax rate in the
other state is equal to or greater than the rate in Minnesota. A city that pays a
lower sales tax rate in another state will need to pay the difference between
the other state’s sales tax rate and the Minnesota rate as use tax.
a.
Exemptions
Minn. Stat. § 297A.70, subd. 2.
Public schools, public libraries, public hospitals, and public nursing homes
are exempt from sales and use tax.
Minn. Stat. § 297A.70, subd. 2, 3.
Some specific, limited exemptions to sales and use tax apply to certain
items. Some of the more common city purchases not subject to sales and use
tax include bulletproof vests, some solid waste disposal machinery and
equipment, and certain firefighter personal protective equipment. Note: For
sales and purchases after June 30, 2008, the sales tax exemption for repair
and replacement parts applies to all vehicles equipped or specifically
intended for emergency response -- not just ambulances.
See MN Revenue Sales Tax Fact
Sheet 135, Fire Fighting
Equipment.
Minn. Stat. § 297A.67 subd. 28.
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b.
Minn. Stat. § 297A.68.
See MN Revenue Sales Tax Fact
Sheet 103, Capital Equipment.
The purchase or lease of capital equipment is exempt from sales tax and
eligible for refund claims. “Capital equipment” means machinery and
equipment used primarily for manufacturing, mining, or refining tangible
personal property to be sold ultimately at retail. Few city purchases will fit
this exemption, but certain purchases made by city water or electrical
utilities may qualify. For refund eligibility, check with the Department of
Revenue.
c.
Minn. Stat. § 297B.02.
Minn. Stat. § 168.012, subd. 1(b);
Minn. Stat. § 297B.03 (8).
See MN Revenue Sales Tax Fact
Sheet 125, Motor Vehicles.
Minn. Stat. § 297A.70, subd. 3(a)
(7).
Capital equipment
Motor vehicle sales tax
The state motor vehicle sales excise tax of 6.5 percent applies to all city
purchases of vehicles, except specific emergency vehicles that are not
required to be registered. In general, fire vehicles, ambulances, and police
patrols are not taxable since their registration is not required. Bookmobiles
or library delivery vehicles are also exempt.
Payments on vehicles leased by cities are treated as individual transactions
subject to the general Minnesota state sales tax rather than to the motor
vehicle sales tax. Lease payments on motor vehicles leased by cities are
exempt from general sales tax if the vehicle is exempt from registration.
Vehicles acquired using a lease agreement that includes a buyout option may
be considered a sale subject to the motor vehicles sales tax.
N.
State fuel tax
Minn. Stat. § 296A.07, subd. 3.
Minn. Stat. § 296A.08, subd. 2.
Cities are generally subject to state gasoline and special fuel petroleum
taxes. Legislation enacted in 2008 increases the motor fuel tax rates and adds
a surcharge on all motor fuels. The surcharge automatically increases
annually, effective the first day of July of each following year. These rate
increases apply to all gasoline, undyed diesel fuel, and special fuel. The state
gasoline tax as of July 1, 2009 through June 30, 2010 (includes surcharge) is
0.271 cents a gallon. Ethanol blends of gasoline are taxed at lower rates. (An
ambulance service, licensed under state law, and some public transit systems
or transit providers are exempt from the state gasoline tax). Other special
fuels such as diesel and kerosene fuels are also subject to state petroleum
tax.
Minn. Stat. § 296A.08, subd. 1
(c).
Although dyed diesel fuel is not subject to federal excise tax, it is generally
subject to state tax. (Dyed fuel is dyed red to mark it as fuel sold for uses not
subject to federal fuel tax). Undyed diesel fuel is likewise subject to state tax
even though cities may be eligible for a federal refund of the federal tax
charged on undyed diesel fuel.
Minn. Stat. § 296A.16.
Cities may be eligible for a refund of state petroleum taxes paid for fuel used
for off-highway business purposes. The refund does not apply to fuel used in
licensed motor vehicles. Nor does it apply to fuel used in motorboats, allterrain vehicles, and most snowmobiles.
See MN Revenue Sales Tax Fact
Sheet 116, Petroleum Products.
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See MN Revenue Petroleum Fact
Sheet 300.
See MN Revenue Form PDR-1.
Minn. Stat. § 168.012, subd. 1(b).
Minn. Stat. § 296A.01, subd. 29.
Minn. Stat. § 296A.08.
Minn. Stat. § 297A.68, subd.
19(6).
To claim a refund of state petroleum tax paid for fuel used for off-highway
business purposes, a city must submit detailed supporting information to the
Department of Revenue using Form PDR-1. Minnesota general sales tax
must be paid on any refunded gallons.
Diesel fuel used by some city fire vehicles, ambulances, and police patrols
for which registration is not required is exempt from the state special fuel tax
and from the general sales tax. For more information about diesel fuel
refunds, contact the Petroleum Tax Division of the Department of Revenue,
at 651-296-4444 (Refunds).
O.
Minn. Stat. § 287.08.
Cities are subject to the state deed tax for conveyance of land by deed. The
tax must be paid before the county will record a property transfer. Except for
documents filed electronically, the state deed tax must be paid to the
treasurer of the Minnesota county in which the real property (or some part)
is located. The tax must be paid at or before the time of filing the mortgage
for record. And the treasurer must endorse a receipt for the tax on the face of
the document or instrument. The tax is $1.65 if the price of the property is
$500 or less. If the price is more than $500, the tax rate is .0033 percent of
the net consideration. The rate in Hennepin and Ramsey counties is .0034.
P.
Minn. Stat. §§ 297H.02-.03.
See MN Revenue Special Taxes
Fact Sheet 1, Solid Waste
Management Tax.
Minn. Stat. § 297H.06, subd. 1.
State deed tax
Solid waste management tax
Waste management service providers are responsible for collecting and
remitting the solid waste management tax of 9.75 percent for residential
generators and 17 percent for commercial generators. Cities are responsible
for the tax if they (1) provide solid waste management services; (2) directly
bill on a property tax statement for private waste management services; or
(3) subsidize the cost of waste management services through the sale of
bags, stickers, or other indicia. A service charge by a home rule charter or
statutory city that owns and operates a solid waste-to-energy resource
recovery facility is exempt from the solid waste management tax.
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