Michigan discusses reciprocal agreements

The Michigan Department of Treasury has issued a revenue administrative bulletin describing the relevance of reciprocal agreements to Parts 1 and 3 of the Michigan Income Tax Act and nonresident taxpayers. The bulletin addresses the effect of reciprocal agreements between Michigan and other states on income tax liability and withholding requirements. A Michigan resident will be exempt from any income tax imposed by a reciprocal state on compensation (salaries, wages and commissions) earned for personal services performed in the reciprocal state. Similarly, a resident of a reciprocal state who earns compensation for services performed in Michigan will be exempt from Michigan income tax. Reciprocal agreements do not apply to independent contractors, local taxes, or income other than compensation. Michigan has reciprocal agreements with Wisconsin, Indiana, Kentucky, Illinois, Ohio, and Minnesota. A Michigan resident working in a reciprocal state may ask his or her employer to voluntarily withhold Michigan income tax on compensation. The employer may voluntarily register with the department to withhold Michigan income taxes for the Michigan residents working in its state. In case the Michigan resident’s reciprocal state employer does not withhold income taxes from his or her compensation he or she must pay quarterly estimates of tax if his or her annual tax liability is expected to exceed $500. Employers located in Michigan must withhold income tax from all compensation paid to nonresident employees for work done in Michigan, unless subject to a reciprocal agreement. However, if a Michigan employer has erroneously withheld and remitted income taxes on compensation exempt under a reciprocal agreement from a nonresident worker from a reciprocal state the nonresident taxpayer can claim a refund. (Revenue Administrative Bulletin 2017-13, Michigan Department of Treasury, June 1, 2017.)

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