If your small business has employees working in Michigan, you’ll need to withhold and pay Michigan income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on Michigan state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you’ll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you’ll need one first and foremost for federal taxes. Many states issue separate tax ID numbers for withholding tax purposes. Michigan, however, uses the EIN for withholding. (Michigan does issue a separate account number for unemployment insurance as well as corporate ID numbers for Michigan businesses, such as Michigan corporations, that are registered with the state.) You’ll need an EIN to register with the state for withholding tax purposes (see below). You can apply for an EIN at the IRS website. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish a Michigan withholding tax account with the Michigan Department of Treasury (DOT). You set up your account by registering your business either online or on paper. To register online, use Michigan Business One Stop website. To register on paper, use Form 518, Registration for Michigan Taxes. There is no fee to register your business with the DOT.
All new employees for your business must complete both a federal Form W-4 and should also complete the related Michigan Form MI-W4, Employee's Michigan Withholding Exemption Certificate. You can download blank Form MI-W4s from the withholding tax forms section of the DOT website. You should keep the completed forms on file at your business and update them as necessary.
In Michigan, there are three possible payment schedules for withholding taxes: monthly, quarterly, or annually. Your payment schedule ultimately will depend on the average amount you hold from employee wages over time. The more you withhold, the more frequently you’ll need to make withholding tax payments.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, may change over time, so you should check with the DOT at least once a year for the latest information.
Here are the due dates for the various payment schedules:
If the payment is due on a Saturday, Sunday, or holiday, the due date is extended to the next business day.
The DOT should send you a booklet of withholding tax returns and vouchers to use when making payments. Depending on your payment schedule you will use Form 5080 (quarterly and monthly payments) or Form 5081 (annual payments). You can also make payments and file returns electronically through the DOT’s Online Business Services website.
The DOT provides several different methods for calculating how much tax to withhold. For more information, check the current version of DOT Publication 446, Michigan Income Tax Withholding Guide. Also, be aware that some Michigan cities assess a separate municipal income tax that must also be withheld. Check the DOT website for more details.
After the end of the year, you must file an annual reconciliation (also known as an annual return) with the DOT that summarizes the employee taxes you’ve withheld during the year. The annual reconciliation is in addition to providing each of your employees with a federal form W-2 summarizing the employee’s withholding for the year. Use Form 165, Annual Return for Sales, Use and Withholding Taxes. You should enclose copies of the federal W-2s sent to all of your employees working in Michigan. The annual reconciliation must be filed by mail and is due on or before the last day of February. If the due date falls on a Saturday, Sunday, or holiday, the due date is adjusted to the next business day.
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it’s easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on the basic elements of Michigan employee withholding taxes. Under Michigan law, people associated with a business who have responsibility for filing returns or making payments for that business, are personally liable for failure to file or for unpaid taxes. Avoid possible penalties for making mistakes by checking both the IRS and DOT websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.com.