Withholding Requirements


Withholding Requirements on Nonresident Individuals
 

Every FTE in Michigan must withhold on every member that is a nonresident individual. This withholding is done at the individual income tax rate on the distributive share, after allocation or apportionment to Michigan, which is reasonably expected to accrue to the nonresident individual. Withholding is not required on income protected by federal Public Law 86-272.

If an FTE receives no instructions from a nonresident individual regarding personal exemptions, the FTE should withhold at the individual income tax rate without regard to personal exemptions. Personal exemptions may be considered if the necessary W-4 information for members is provided.

For tax years ending in 2012, the individual income tax rate is 4.33%. For tax years ending 2013, 2014 and 2015, the individual income tax rate is 4.25%.


Withholding Requirements on Corporate Members
 

An FTE with business activity in Michigan that reasonably expects to accrue more than $200,000 in business income for the tax year, after allocation or apportionment to Michigan, must withhold on the distributive share of its members that are corporations. This withholding is done at the CIT rate of 6%.

The $200,000 threshold is determined at the FTE level and is not a “per member” threshold. The entire amount of the FTE’s apportioned business income is included for purposes of this threshold, regardless of whether it is allocated to members that are corporations, other FTEs, or individuals. To apportion its business income for determining this threshold, the FTE will use only its sales factor. The FTE’s sales factor is a fraction, the numerator of which is the total sales of the FTE in this state during the tax year and the denominator of which is the total sales of the FTE everywhere during the tax year.


Withholding Requirements on Intermediate Members in a Tiered Structure
 

An FTE (source FTE) with business activity in Michigan that reasonably expects to accrue more than $200,000 in business income for the tax year, after allocation or apportionment to Michigan, must withhold on the distributive share of its members that are other FTEs (intermediate FTE members).

The $200,000 threshold is determined at the FTE level and is not a “per member” threshold. The entire amount of the FTE’s apportioned business income is included for purposes of this threshold, regardless of whether it is allocated to members that are corporations, other FTEs, or individuals. To apportion its business income for determining this threshold, the FTE will use only its sales factor. The FTE’s sales factor is a fraction, the numerator of which is the total sales of the FTE in this state during the tax year and the denominator of which is the total sales of the FTE everywhere during the tax year.

Flow-Through Withholding on intermediate FTE members is not required if the annual business income of the source FTE, after allocation or apportionment to Michigan, is $200,000 or less. The source FTE, however, may still choose to withhold.

Withholding on intermediate FTE members generally must be done at the CIT rate of 6%. However, the source FTE may withhold at the individual income tax rate, instead of the CIT rate, if it knows the ultimate owner of the intermediate FTE member is a nonresident individual. The source FTE is not required to withhold if it knows the ultimate owner of the intermediate FTE member is a resident individual. For tax years ending in 2012, the individual income tax rate is 4.33%. For tax years ending 2013, 2014 and 2015, the individual income tax rate is 4.25%. The source FTE may also withhold directly on the corporate members of its intermediate FTE members.

In order for the source FTE to be able to withhold directly on the ultimate members of its intermediate FTE members, it must know the name and account number of the ultimate members and be able to calculate the amount of distributive business income that the ultimate members will receive.

The intermediate FTE member may be required to withhold if the source FTE made no withholding payments. This situation can arise in a tiered structure when the source FTE is below the $200,000 threshold and therefore has no obligation to withhold on its corporate members or intermediate FTE members. Although the source FTE may be free of an obligation to withhold on its members that are other FTEs, the intermediate FTE members are not excused from the withholding obligation if directly owned by nonresident individuals or if the intermediate members meet the $200,000 withholding threshold. In such case, the intermediate FTE member will be responsible for the full amount of the withholding on the distributive share that flows through to a direct owner.

An intermediate FTE member that has no business income sourced to Michigan, other than business income received from a source FTE, will be credited with any payments paid on its behalf by the source FTE. However, this intermediate FTE member must file a Form 4918 , Annual Flow-Through Withholding Annual Reconciliation Return , to report this withholding to the State and to distribute this withholding to its members.


Registration Requirements
 

FTEs that are required to withhold must register with the Department for Flow-Through Withholding. FTEs that were previously registered for other Michigan taxes must submit a new Form 518 to register for Flow-Through Withholding. The Form 518 may be filed on-line or faxed or mailed to the Department using the fax number or mailing address printed on the bottom of the form. An FTE may not report and pay Flow-Through Withholding on the same form or return used to report and pay employee withholding tax. Employee withholding will be reported and paid to the State separately from Flow-Through Withholding.

The FTE must use its FEIN when reporting and paying Flow-Through Withholding to the State, even if the FTE is also remitting withholding on employee compensation.