Payroll taxes are one of your most important responsibilities as a Michigan business owner, whether running a small "mom and pop" operation or a large company. It is a complicated process and is required by law. Here are some important things you should know about Michigan payroll taxes.
Michigan Payroll Taxes Overview
Michigan requires that employees be paid on the 1st and 15th of each month. They can also be paid weekly or biweekly, so long as it is on a fixed schedule, or once per month if all wages are paid within 15 days after the end of the monthly pay period. Employers are required to withhold state income tax from each employee's paycheck and remit it to the Michigan Department of Treasury. Federal withholdings are also required, but that is a separate issue; we're focusing on Michigan's rules for this post.
The Michigan Withholding Tax (state income tax) is a flat rate for all workers. In addition to employee taxes, employers are also required to pay into State Unemployment Insurance (SUI) for all workers. The rates for this are governed under the Michigan State Unemployment Tax Act (SUTA). The Michigan Unemployment Insurance Agency handles the funds collected under SUI, and the money is exclusively used to pay unemployment benefits for Michigan workers.
Michigan Withholding Tax
Michigan uses a flat tax rate for employees. This is usually fixed at a rate of 4.25 percent, but the rate can fluctuate slightly if revenues for a fiscal year exceed the inflation rate for that same time period. For example, the withholding tax rate for 2023 is 4.05 percent, which is a 0.2 percent reduction over the previous year. If general fund revenues don't exceed inflation in 2023, the rate will revert to 4.25 percent in 2024.
Here is an important thing to note about this occasional fluctuation of rates. The Michigan Department of Treasury does not update its rate tables when it makes a change like this, although it does notify employers. This is why it's important to have the services of a payroll company like Cello HR because we constantly stay on top of changes like this for you.
Several other states have reciprocal agreements on employer taxes with Michigan. These include:
- Illinois
- Indiana
- Kentucky
- Minnesota
- Ohio
- Wisconsin
If you employ a worker who lives in one of those states, you are not required to withhold Michigan state income taxes for those workers.
Certain cities in Michigan also require local income tax withholding. The rates can range from 1 to 2.4 percent for Michigan residents and 0.5 to 1.2 percent for non-residents.
Michigan SUTA Tax
Unemployment insurance is where it starts to get complicated in Michigan. During the first two years that a business operates, its effective insurance tax rate is 2.7 percent. The exception to this rule is unemployment insurance for construction workers. In the first two years for a construction business, the rate is set at the average for construction companies in Michigan. Over the past few years, that rate has fluctuated between 5.3 and 8.1 percent.
The rate is set in years three and four based on an employer's unemployment insurance experience. This includes your business' taxable payroll and benefits payouts.
Starting in year five, your unemployment insurance rate is determined annually based on three factors. These are:
- Account Building
- Chargeable Benefits
- Nonchargeable Benefits
Based on the annual calculations of those three items, your unemployment insurance rate could change from year to year. If many former employees are drawing unemployment, you will pay a higher SUI rate. If fewer workers draw unemployment, you will pay a lower rate.
Payroll Tax Compliance
Quarterly wage reports must be filed with the Michigan Department of Treasury no later than the 25th of the month following the end of each fiscal quarter. There are fines and penalties for filing wage reports late, incorrectly, or erroneously, and for non-reporting. This is why working with a trusted payroll company like Cello HR is important to ensure your Michigan payroll taxes and wage reports are filed correctly and on time.
Questions? Contact Cello HR Today
Our experienced team at Cello HR can help you navigate complex regulations, maximize deductions, and minimize liabilities. Contact Us today to schedule a meeting and explore our comprehensive tax solutions.