Business Taxes Overview

Forms of Ownership

Sole Proprietorship is a type of business entity which legally has no separate existence from the business owner. Hence, the limitations of liability enjoyed by a corporation and limited liability company do not apply to sole proprietors. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in their own name and there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made. Therefore, business owners have personal tax liability for income from the business and for Social Security taxes on the profits. These taxes are paid with the business owner’s personal tax return. If the business has employees, the taxes that are withheld from the employee and the employer taxes will be paid through federal tax deposits and federal and state employment tax returns. 

Partnerships, Limited Liability Companies, and S-Corporations as entities do not owe taxes as a business. The profit or loss becomes part of the business owners’ returns and taxes are paid at the owner’s personal tax rate (profit or loss flows through to the business owner). Personal Social Security taxes are paid on the profits by each owner. These entities are responsible for the federal and state tax withholding payments and employer taxes and filing of employee reports.

Corporations (not S-Corporations) pay taxes on profits and are responsible for federal and state tax deposits from employee withholding and employer taxes. Additional taxes are due the State of Michigan for the corporation and for employees. There is also a state informational form that is due annually.

Payroll Taxes

Any business with employees of any type must comply with federal and state payroll requirements. This is true even if you are the sole employee of a corporation that you own. It is critical that you understand the various deadlines and requirements, or that you use the services of someone who does. The major types of payroll taxes in Michigan are:

• Income Tax Withholding (federal, state, and, if applicable, local)
• Federal Social Security Tax (FICA)
• Federal Unemployment Tax (FUTA)
• Michigan Unemployment Tax

Michigan Unemployment Insurance 

Unemployment insurance protects workers who lose their jobs through no fault of their own. The funds used to pay workers who are covered under this type of insurance are accumulated from taxes on the wages of employees during their employment. Both state and federal unemployment taxes are paid by employers. No deductions can be made from an employee's wages to cover these taxes.

Any business that employs one or more persons in Michigan is required to register with the Unemployment Insurance Agency (UIA) by the end of the month following the month in which it becomes an employing unit. All employers must register, although not all employers are liable under the law. Liable employers are required to pay state unemployment taxes quarterly at a rate based on a "required reserve" balance and any unemployment insurance benefits paid to employees. A new business will pay 2.7% of the first $9,000 of every employee's wages for the first two years of liability (new employers in the construction industry may pay a higher rate). When buying a business or buying the assets of an existing business, the rate may be significantly higher.

The Unemployment Insurance Agency (UIA) produces an Employer Handbook with information about a variety of employer subjects. To obtain a copy of this publication, visit the UIA website at http://www.michigan.gov/uia, print the order form and mail the form along with a $15.00 check or money payable to the State of Michigan to: Unemployment Insurance Agency the UIA, 3024 W. Grand Blvd., Suite 13-600, Detroit, Michigan, 48202 or you may call (800) 638-3994. 

Federal Unemployment Insurance

Federal Unemployment Insurance (FUTA) is collected by the Internal Revenue Service (IRS) for the U.S. Department of Labor to pay administrative expenses of operating the state unemployment systems. When filing an "Application for Employer Identification Number" with the IRS, indicate that employees will be hired. The IRS will mail a packet of information with coupon forms for FUTA tax deposits and an Annual Report form. For more information about the FUTA tax, forms, and deposit requirements, contact the IRS at (800) 829-3676 or www.irs.gov. 

Income Tax Withholding

Any employer of one or more persons must withhold federal and state income taxes from wages paid to employees. A city income tax may also apply.

Each employee should complete the following forms:

• W-4 Form, withholding exemption certificate at www.irs.gov/pub/irs-pdf/fw4.pdf
• MI-W4 at www.michigan.gov/documents/mw4f_76761_7.pdf. 

Based on the certificate's information, a certain amount of taxes are withheld from the employee's wages.

You may be required to deposit the federal taxes collected. Business owners must file quarterly returns with the IRS and file an annual reconcilement of the quarterly returns. If returns are neglected or filed improperly, penalties and excess payments may be levied.
In addition to federal income taxes, federal law also requires that employers withhold (and deposit) Social Security taxes from employees' wages. The employer must also pay an equal amount. Tax rates and maximum earnings subject to tax may vary from year-to-year, so employers should contact the IRS at (800) 829-1040 or www.irs.gov for the latest information.

Michigan income tax withholding filing requirements may vary based on the amount of state taxes withheld. If employees are hired, an employer must file Form 518, "Application for Registration" with the Michigan Department of Treasury at www.michigan.gov/taxes. The Michigan Department of Treasury will then notify the employer of filing deadlines and provide the needed forms. An annual return is also required. Michigan's withholding tax tables are available from the Michigan Department of Treasury at (517) 636-4660 or www.michigan.gov/taxes.

Contact your city treasurer to determine if a city income tax is applicable for any new employees. If your city does have an income tax, the city treasurer can provide the required registration forms and any information that is needed.

Workers’ Compensation

There are a number of organizations involved in workers' compensation. It is important to understand who they are and what they do. First of all, workers' compensation benefits ordinarily are not paid by the State of Michigan. Workers' compensation is the responsibility of an employer. Benefits are paid either directly by an employer or through an insurance company on behalf of an employer.

All employers that regularly employ three or more part-time employees at one time, or employed one or more persons for at least 35-hours per week for at least 13-weeks during the preceding 52-weeks, are required to have workers' compensation insurance. The majority of employers in Michigan obtain workers' compensation through policies sold by commercial insurance companies.

The premium rates for workers' compensation insurance are competitively determined. Insurers use about 500 different rating classifications based on the type of business an employer operates. Since premium rates for a given classification vary widely among insurers, it pays to shop carefully. Insurers also have different merit and experience rating plans, schedule-rating plans, and premium discount tables, which can affect an employer's final premium cost.

Additional information is available at the Workers' Compensation Agency of the Department of Labor and Economic Growth at (888) 396-5041 or www.michigan.gov/wca.