Michigan LLC Taxes
Michigan LLCs are taxed as pass-through entities by default, meaning that LLCs don’t pay taxes directly. LLC profits and losses are passed on to LLC members, who then pay individual income tax on what they earn. Under default filing status, LLC member income is subject to the 15.3% federal self-employment tax rate plus Michigan’s 4.25% individual income tax rate. Other taxes to keep in mind include Michigan’s sales tax, industry-specific taxes, and unemployment insurance tax.
In this article, we’ll cover:
How Are Michigan LLCs Taxed?
The default filing status of your LLC is based on how many members you have. A single-member LLC (SMLLC) is taxed as a “disregarded entity” (i.e., a sole proprietorship), and a multi-member LLC is taxed as a partnership. In either case, as an LLC member, you’ll pay individual income taxes on the earnings passed on to you through your LLC. At the federal level, the self-employment tax rate is 15.3% (12.4% for social security and 2.9% for Medicare). Here are the federal tax forms you’ll need to file under default status:
- Single-member LLC—Form 1040 (usually Schedule C, but some SMLLCs file C-EZ, E, or F)
- Multi-member LLC—Form 1065
Your Michigan LLC can also elect to file as an S-corp or a C-corp.
Michigan LLCs taxed as S-corp
If your LLC meets IRS requirements for S-corps, your LLC may benefit from filing under S-corp status. Despite being designated as corporations, S-corps are not subject to corporate income tax. S-corps are taxed as pass-through entities, much like LLCs. However, unlike LLC members, S-corp owners don’t need to pay the 15.3% federal self-employment tax on distributions. (S-corp members still need to pay self-employ tax on salary.)
Before changing your filing status, consult with an accountant to find out if filing as an S-corp will pay off for your LLC. You’ll need to submit Form 2553 to the IRS to switch your tax election and Form 1120-S to file your taxes as an S-corp.
LLCs taxed as C-corp
LLCs can also be taxed as corporations by electing C-corp filing status. While filing under C-corp status as an LLC is less popular than filing under S-corp status, there are some advantages to C-corp election. C-corps are subject to double taxation—being taxed once at the corporate level and then again at the shareholder level—but they are also eligible for more tax deductions.
Additionally, LLCs filing as C-corps are more attractive to investors. In Michigan, filing as a C-corp will mean that your LLC must pay federal corporate income tax at 21% and state corporate income tax at 6%.
Filing as a C-corp is more complicated than filing under default status, so seek advice from an accountant to decide if C-corp status is right for your LLC. To file as a C-corp, you’ll use Form 1120.
Michigan State Income Tax
Filing under default or S-corp status, you’ll be required to pay Michigan’s individual income tax, which is levied at a flat rate of 4.25%. You can file using the form MI-1040 or online using one of the free or paid e-File services suggested by the state.
If your LLC is filing as a C-corp, you may be subject to Michigan’s 6% Corporate Income Tax (CIT). Your business is required to pay CIT if you have more than $350,000 in gross receipts for the fiscal year and/or more than $100 in annual tax liability. Michigan requires CIT-qualifying businesses to file a quarterly return using Form 4913 or the MTO portal.
Flow-Through Entity Tax
Multi-member LLCs and LLCs filing as S-corps can also elect to pay taxes at the entity level instead of at the individual level using the Michigan Flow-Through Entity (FTE) tax. A business filing under the FTE tax pays tax on certain income at the 4.25% individual rate, and business members are eligible for a refundable income tax credit equal to the tax already paid by the business. This can help reduce the amount of tax paid by the LLC overall.
FTE tax returns must be submitted online through the Michigan Treasury Online (MTO) portal using Form 5772. Members claim their income tax credits on their individual returns.
Michigan Business Tax
Michigan also imposes a Michigan Business Tax (MBT) on the business income of all taxpayers with $350,000 or more in gross receipts annually. MBT tax is calculated by combining a modified gross receipts tax (purchases from other companies are excluded) of 0.8% and a business income tax of 4.95% on federal adjusted business income.
MBT must be filed quarterly if your estimated tax liability for the year is over $800. Michigan enforces an e-file mandate for MBT and provides a Find An E-File Provider search tool to assist businesses with e-filing.
Sales and Use Tax
Michigan has separate sales and use taxes, both generally collected at 6%. Sales of electricity, natural or artificial gas, and home heating fuels for residential use are taxed at a lower sales tax rate of 4%.
Sales tax applies to the sale of tangible personal property within Michigan, while use tax applies to sales of all taxable items brought into the state via internet, mail, or phone from out-of-state retailers. Additionally, use tax is also required for certain services, including telecommunications and hotel/motel accommodations.
You can register to collect sales or use tax, along with additional business taxes, by filing Form 518 or through the Michigan Treasury Online (MTO) portal.
Local Michigan Taxes
Multiple cities in Michigan collect income tax from individuals who live or work within their bounds. Most cities levy a tax of 1% on residents and 0.5% on non-residents, though some cities have higher rates. For example, Detroit’s income tax is 2.4% for residents and 1.2% for non-residents.
Many cities—including Detroit, Lansing, and Grand Rapids—also charge a business income tax to businesses filing as corporations and partnerships.
If your LLC owns property, you may also need to pay property tax to your local city or county government.
To discover which local taxes apply to your LLC, contact your local jurisdiction.
Other Taxes in Michigan
Your LLC may also encounter industry-based or employee-related taxes.
Michigan State Employer Taxes
If you employ workers, you’ll need to pay into unemployment insurance and obtain workers’ compensation coverage.
- Unemployment Insurance (UI) Tax—Employers in Michigan are required to pay into state UI insurance on the first $9,500 paid to each employee. As of 2022, the UI tax rate for new employers is 2.7%. However, new employers in the construction field are required to pay at a higher rate, with recent rates ranging between 6.8% and 8.1%. New employer rates are adjusted after two years, taking into account an employer’s history of benefit changes and taxable payroll.
- Workers’ Compensation—With a few exceptions, employers with at least one employee working 25 or more hours a week are required by Michigan law to purchase workers’ compensation insurance. You can buy workers’ comp insurance from a private insurer or from the Compensation Advisory Organization of Michigan’s assigned risk pool. If your business qualifies, you can also self-insure. Rates for workers’ comp depend on the level of risk your employees are exposed to in the workplace.
The Michigan Department of the Treasury levies additional taxes on businesses operating in certain industries, including:
- Tobacco Tax
- Motor Fuel Tax
- Marijuana Retailers Excise Tax
- Severance Tax
Find a full list and tax details on the Department’s Business Taxes page.
Do Foreign LLCs in Michigan Need to Pay Michigan Taxes?
Yes. If you have registered an out-of-state LLC as a Michigan foreign LLC so that you can conduct business in the state, you’ll be required to pay all applicable business taxes. This includes Michigan Business Tax (MBT), sales and use tax, and local business taxes.