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New Law Clarifies Withholding Requirements for Flow-Through Entities

Tax withholding requirements in Michigan are set forth in MCL 206.703.  Every Michigan employer that is required to withhold federal income tax under the Internal Revenue Code is also required to register and withhold Michigan income taxes.  Effective January 1, 2012, companies that pay pension and retirement benefits are also required to withhold Michigan income taxes on those payments to retirees. The withholding rate is generally 4.35%.

Flow-through entities (e.g., partnerships, LLCs and S-Corporations) are also subject to withholding requirements. Flow-through entities are required to withhold Michigan income tax on the distributive share (i.e., income available for distribution) of taxable income of nonresident individual members.

A flow-though entity with more than $200,000 of business income is also required to withhold Michigan income tax on the distributive share of the business income of any member that is a corporation or another flow-through entity.  Recently passed legislation (2012 Public Act 217) specifies that, for purposes of calculating the $200,000 withholding threshold, the business income of a flow-through entity is apportioned to Michigan by multiplying the business income by the entity's sales factor, which is the total sales of the entity in Michigan during the tax year divided by the total sales of the entity elsewhere during the tax year. If a flow-through entity receives an exemption certificate from a corporation, the flow-through entity is not required to withhold a tax on the distributive share of the business income of that corporation if certain conditions are met.

A flow-through entity subject to the withholding requirement must file quarterly returns (Form 4917) and an annual reconciliation (Form 4918).

Categories: Income Tax

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focuses his practice in the areas of Michigan non-property tax disputes, business entity selection, corporate transactions, and information technology.

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