What an Employer Needs to Know About Michigan Payroll Taxes

Successful entrepreneurs often have more willpower, independence, and individualism than others. But while these are seen as important success factors, those who are just starting out can end up having a “superman complex,” and trying to do everything themselves.

Business owners already have so many roles to play in the first place. Many start out thinking that they’ll just be selling a product, how hard could that be? Then they quickly realize that they need to pay the lawyer, the accountant, the marketing director, the human resources director, and many other different roles at different times. Established companies often have entire departments to handle each of these, but small business owners are often faced with the difficult choice between spending what little capital they have on outsourcing or saving that money and doing it themselves.

Spoiler alert: payroll is almost always one of the things you will want to outsource.

While other tasks are easy enough to learn and manage on top of actually running your business, payroll can be quite complex and tedious. It is also one aspect of your business that can have severe ramifications if mistakes are made. First of all, employees will leave or underperform if they are not paid enough or on time. Violations of minimum wage and other laws regulating pay will have severe legal consequences. The taxes, especially, can drown you in confusion and IRS penalties. Numerous forms for the different taxes, such as Form 940, Form 941, Form 1099 (and its many variants), the W-2 Form, and the W-4 Form are just some of the IRS forms you will usually have to deal with.

Aside from the specific tax types and rates that may apply (a topic that can be worth a whole other blog post), there are things to remember that may be unique to Michigan (information is from the official state website).

– All employers who are required to withhold federal income tax are also required to register for and withhold state income taxes.

– Those with companies located in a different state, but with employees working in Michigan, are also required to register for and withhold taxes in Michigan. They would have to create a “nexus” or a physical presence of the company in the state.

– For companies out of state with no nexus in-state, but have employees who are residents of Michigan, things get more complicated. Those located in Wisconsin, Indiana, Kentucky, Illinois, Ohio and Minnesota may voluntarily register for and withhold taxes in Michigan; otherwise, the employees are required to make estimated income tax payments directly to Michigan. Companies in all other states are only required to withhold that state’s withholding tax.
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– Non-profit organizations are all also required to withhold state income tax in Michigan.

– Businesses are required to send a copy of their Form 1099 to the Michigan Department of Treasury if state taxes were withheld. This is submitted along with any 1099-MISC forms at the same time as Form 165 (Annual Return for Sales, Use and Withholding Taxes).

– Specific cities also impose their own income tax, with their own corresponding city tax forms. These cities are Albion, Battle Creek, Big Rapids, Detroit, Flint, Grand Rapids, Grayling, Hamtramck, Highland Park, Hudson, Ionia, Jackson, Lansing, Lapeer, Muskegon, Muskegon Heights, Pontiac, Port Huron, Portland, Saginaw, Springfield and Walker.

This is just a general overview of payroll taxes. The situation can change depending on location, type of business, and even from one employee to the next. Sure, if you have a strong background in accounting and have studied the IRS Employer’s Tax Guide (it’s 67 pages long), you may be able to save some money and handle payroll yourself.

Because of all the complexity and risks involved with payroll and taxes, payroll service providers are growing in number and sophistication. There are companies that focus solely on handling others’ payrolls, going as far as “hiring” their clients’ employees themselves. Such services can be complicated, however, and quite expensive. Unless you’re running a large operation, hiring an experienced accounting firm that offers full payroll services can be much more cost effective.

Khaled Hazzouri is a Michigan CPA with over 16 years of expertise in helping local companies with all their accounting needs. Hazzouri Accounting offers complete payroll services for all your business payroll requirements. Contact us today at 734-844-1614 for more information.

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