What's the Michigan Income Tax Rate for Self-Employed?

Self-employed workers in Michigan have to pay state and federal income taxes and may owe other business taxes or fees.

What’s the Michigan income tax rate?

The Michigan income tax rate is 4.25%. It’s a flat tax rate on all income, so there are no tax brackets.

Most people get a $4,900 personal exemption, so your first $4,900 in income isn’t subject to state income taxes. You can also get a $4,900 exemption for qualifying dependents.

Michigan state taxes mostly use your federal tax deductions, but there are a few federal deductions you have to add back to your Michigan income, and Michigan also has a few additional deductions.

Michigan has a number of potential tax credits for low to moderate-income earners including the:

• Homestead Property Tax Credit
• Home Heating Credit
• Earned Income Tax Credit

Michigan City Income Taxes

A number of Michigan cities charge their own income taxes. By state law, non-residents (such as commuters) pay half the rate of residents.

The following cities have an income tax of 1% on residents and 0.5% on non-residents:

• Albion
• Battle Cree
• Benton Harbor
• Big Rapids
• East Lansing
• Flint
• Grayling
• Hamtramck
• Hudson
• Ionia
• Jackson
• Lansing
• Lapeer
• Muskegon
• Muskegon Heights
• Pontiac
• Port Huron
• Portland
• Springfield
• Walker

These four cities have higher tax rates:

• Detroit: 2.4% residents, 1.2% non-residents
• Grand Rapids: 1.5% residents, 0.75% non-residents
• Highland Park: 2% residents, 1% non-residents
• Saginaw: 1.5% residents, 0.75% non-residents

Does Michigan have a self-employment tax?

The self-employment tax is a federal tax. There is no additional self-employment tax that Michigan residents have to pay.

Does Michigan have a tax on corporations and LLCs?

Michigan has a Corporate Income Tax that’s equal to a flat tax rate of 6% for most taxpayers. The tax generally only applies to business entities taxed as C-Corporations.

If you have an S-Corporation, you typically won’t have to pay the Corporate Income Tax.

LLCs also generally don’t have to pay the Corporate Income Tax unless you elected to be taxed as a C-corporation.

In most cases, the Corporate Income Tax replaces the old Business Income Tax.

Michigan Flow-Through Entity Tax

Michigan has an optional Flow-Through Entity Tax for partnerships and S-corporations. This tax is a workaround that lets Michigan taxpayers get around the $10,000 limit on the federal personal itemized deduction for state and local taxes.

Note: Schedule C filers, including single-member LLCs disregarded for federal tax purposes, are generally not eligible for this option.

When you elect to pay this tax, you generally:

• Have your business pay 4.25% in state income tax on its net profit (same rate as personal income).
• Receive a tax credit on your Michigan state income tax return so you don’t pay personal taxes on the same income.
• Deduct the full amount of business taxes paid on your federal tax return (no $10,000 limit).

In other words, if you pay more than $10,000 in Michigan income and property taxes, using the Flow-Through Entity tax option can get you a bigger tax deduction.

There are a few requirements you need to meet including:

• Select the option by March 15th of the tax year (assuming a calendar tax year)
• Continue to use the option for at least an additional two years
• File a separate flow-through entity tax return by the last day of the third month following your tax year (usually by March 31st)
• Make separate estimated tax payments (can’t combine with personal estimated payments)

Does Michigan tax retirement income?

Michigan generally doesn’t take Social Security benefits, Railroad Retirement benefits, military pensions, or Michigan national guard benefits.

Michigan does tax private pension benefits, IRAs, and 401(k)s. Most new retirees can deduct $20,000 ($40,000 for joint filers) in retirement benefits per year once they turn 67. Retirees born before 1952 may qualify for additional benefits.

There have been several recent changes to Michigan retirement taxes, and there are several active proposals to reduce or eliminate these taxes. Ask your tax advisor for the current details.

Michigan Estimated Taxes

You generally need to make Michigan individual estimated tax payments if you will owe more than $500 when you file your state income taxes.

Tip: Use accounting software to track your income during the year to make sure you pay enough in estimated taxes.

To avoid penalties, your payments generally need to be equal to:

• 90 percent of your current year’s tax
• 100 percent of your previous year’s tax, or
• 110 percent of your previous year’s tax if your adjusted gross income was more than $150,000 ($75,000 for married filing separately)

Payments are normally due as follows:

• First installment: April 15th
• Second installment: June 15th
• Third installment: September 15th
• Fourth installment: January 15th

You may also need to make separate estimated tax payments for:

• City income taxes
• Corporate Income Tax
• Flow-Through Entity taxes

The rules and deadlines for those taxes vary. For city taxes, rules can vary from city to city.