Withholding Reciprocity Examples

The general rule for employer withholding is codified at MCL 206.703(2). This rule provides that employers in this state that are required under the Internal Revenue Code to withhold on the compensation of an individual are required to withhold Michigan income tax on the compensation of an individual. Generally, employers with offices within the state or with resident employees will be required to register and withhold on the compensation paid to its employees.

The amount of Michigan income tax to be withheld is generally based on the extent by which compensation will be taxable within Michigan.  The general rule in determining the taxation of compensation in Michigan is based on whether the employee is a resident or nonresident MCL 206.110. A Michigan resident is taxed on all compensation, regardless of where the compensation was earned; thus, Michigan income tax should be withheld by Michigan employers on all compensation paid to Michigan residents. MCL 206.110(1). In contrast, a nonresident is taxed only on compensation for services performed within the state and, thus, tax should by withheld by a Michigan employer only for compensation earned by a nonresident working in Michigan. MCL 206.110(2)(a). Special rules apply for residents of states that have a reciprocity agreement with Michigan. MCL 206.256.  These reciprocity agreements provide a resident will remain subject to the income tax of their respective home state, regardless of where the services were performed. Thus, a resident of a reciprocal state working in Michigan is not subject to Michigan tax or Michigan withholding. These states include Illinois, Indiana, Kentucky, Minnesota, Ohio, and Wisconsin. See RAB 2017-13 for more info.

Example 1

A Michigan resident earns $50,000 for services performed in Oklahoma for an employer in Michigan.

Example 2

A Tennessee resident earns $50,000 for services performed in Michigan for an employer in Michigan.

Example 3

A Wisconsin resident earns $50,000 for services performed in Michigan for a Michigan employer.

Note: WI is a reciprocal state and so WI resident wages are not taxable when performed in MI.

Example 4

A Michigan resident earns $10,000 for services performed in Ohio from January through March. The employer has no physical location in Ohio. The Michigan resident moves to his employer’s office in Michigan and earns $40,000 for services performed in Michigan from April through December.

Note: OH is a reciprocal state. The wages of a MI resident earned in Ohio remain subject to MI tax. Thus, the $10,000 will be taxable in MI, in addition to the $40,000 of wages earned in MI as a MI resident.

Example 5

An Ohio resident earns $30,000 for services performed in Texas from January through June for a Michigan employer. The same individual moves to Texas, becomes a resident of Texas and earns $35,000 from July through December.

Example 5a

Same as above except the Ohio resident moves to Michigan and becomes a resident of Michigan.

Note: This individual is a part-year resident and will be subject to tax on the wages earned while a resident of MI.

Example 6

A Michigan resident earns $25,000 for services performed in Michigan from January through June for a Michigan employer. The same individual is assigned to work temporarily in North Carolina where there is another physical location of the business and earns $25,000 from July through December.

Note: Employee remains a MI resident while temporarily working outside of the state. MI employers are still required to withhold on all compensation on individuals who temporarily work outside of the state. See Form 446 instructions.

Example 6a

Same as above except the Michigan resident is assigned to work in Indiana from July through December and earns $25,000.

Example 7

A Michigan resident earns $50,000, working for the same Michigan employer, but earned half of the wages in Michigan, and the other half of the wages in Missouri. The employee was not assigned to work in Missouri but requested the transfer to stay with a relative and work from home.

Note: Assuming this is a temporary work reassignment where the residency of the individual does not change. Thus, all income of the MI resident remains subject to tax in MI and subject to employer withholding.

Example 7a

Same as above except the employee requests to be transferred to Kentucky to stay with a relative and work from home and becomes a Kentucky resident.

Note: Since the employee becomes a Kentucky resident, only ½ of all wages earned are taxable in Michigan.

Example 8

A Michigan resident earns $45,000 for work performed for an Illinois employer while working remotely in Michigan.

Example 9

An Indiana resident earns $65,000 for work performed for a Michigan employer while working remotely in Indiana.