City Income Taxes and Telecommuting FAQ
What is telecommuting?
Telecommuting, or working remotely, is the concept of working at home through a computer or telephone.
If an employer is located in a Michigan city that imposes a city income tax, are the wages of a nonresident who telecommutes from home subject to tax?
No, the nonresident is not subject to tax on wages earned while telecommuting from a location outside the city.
For example, Bill lives in Grand Ledge and primarily works from his office in Lansing. His income is generally taxable by the city of Lansing. On occasion, Bill works (telecommutes) from his home in Grand Ledge. The income Bill earns from the hours he works from his home are NOT taxable by the city of Lansing.
How does a nonresident allocate telecommuting wages to nontaxable income on a city income tax return?
Nonresident city income tax returns provide a schedule for nonresidents that allocates wages between taxable city income and nontaxable city income, based either on days worked or hours worked.
Please note: Some tax preparation software does not accommodate hourly allocation.
What documentation is required for a nonresident to allocate telecommuting wages to nontaxable income?
The employee should keep a work log of the days worked outside the city. Employers should provide employees with a letter stating the dates that employees were directed to work from home. The employees are not required to submit the work log and employer letter with a city income tax return, but taxpayers should still retain the documents and may be required to furnish the documents upon request by a city tax administrator.
How did the Michigan Department of Treasury conclude that telecommuters are not subject to city income tax?
There is no provision in the City Income Tax Act (CITA) that permits cities to tax wages earned outside of the city. CITA defines “compensation” as:
“….salary, pay or emolument given as compensation or wages for work done or services rendered, in cash or in kind, and includes but is not limited to the following: salaries, wages, bonuses, commissions, fees, tips, incentive payments, severance pay, vacation pay and sick pay.” MCL 141.604(2)
Nonresidents are taxed on:
“…salary, bonus, wage, commission, and other compensation for services rendered as an employee for work done or services performed in the city…” MCL 141.613(a)
Therefore, nonresidents of a city that imposes a city income tax under the City Income Tax Act are not subject to city income tax on compensation earned while telecommuting from a location that is physically outside of the city.