How to Calculate Michigan Payroll Taxes

If you haven’t worked in payroll before you may find the tax calculations daunting and downright confusing. Without the proper tools and training, you can easily find yourself miscalculating tax deductions and ultimately having to reissue paychecks to fix your mistakes. There are a few things you can do to avoid miscalculations for your in-house payroll - mostly referencing the correct (and most up-to-date) resources and keeping a calculator handy. Here are a few ways to ensure you are properly calculating your Michigan payroll taxes.

Think Local and State

When looking at state taxes, you need to remember that you must account for the local tax authority as well, keeping in mind that your employees may live in different tax authorities than those of which they work. To simplify we will start off with Michigan income tax withholding. Employer’s in the state of Michigan who are required to withhold federal income tax must also withhold Michigan income tax. Even Nonprofit organizations that have exemption from income tax are still responsible for withholding tax from their employee’s compensation. The Michigan withholding tax rate for 2016 is 4.25%. You will also want to look into your local tax authority to see the withholding rate. For example, if you own a business in Grand Rapids, the tax rate to withhold is 1.5% for residents and .75% for nonresidents. If you’re unaware of your city tax withholding, start by checking your city website. 

FUTA, SUTA and More

Federal taxes such as income tax, federal unemployment tax (FUTA), Social Security, and Medicare must also be calculated when running payroll; however, certain taxes are paid on behalf of the employer and are not taken from employees pay. Federal unemployment tax is one of those taxes that the employer must pay separate from the employee (this does not come out of the employee’s paycheck). Federal income tax however, is deducted from employee pay and will vary based on the employee. To calculate income tax withholding, you will refer to the employee’s W-4 as well as the withholding tables in Publication 15 (Circular E), Employer’s Tax Guide. Social Security and Medicare tax will be calculated similarly, but you will also need to refer to Publication 15-A. Employer’s Supplemental Tax Guide. For more assistance on these tax rates, visit the IRS website here

Tax Reporting

Now that you have calculated your tax withholdings, there are two more steps before you can wash your hands clean of this tax talk (until next pay period, of course). You will need to deposit the taxes on behalf of the employee and the employer. Before the calendar year starts, you will need to determine your deposit frequency by visiting Publication 15 or Publication 51. If you do not make a timely deposit of taxes you will face a penalty of up to 15%. You will only need to deposit FUTA tax when the tax amount exceeds $500. This deposit must be made by the end of the month following the end of the quarter in which the tax amount exceeded that $500 threshold. Also, note that when making federal tax deposits you are required to use electronic fund transfer or EFT. Due dates for employment taxes can be found here. Lastly, you will need to report wages, tips, and other compensation paid to your employees as well as the taxes you deposited. You can view the various forms required by visiting the IRS website here.

Source: Michigan Department of Treasury 

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