How Your Corporation Will Be Taxed
In this guide, you'll learn about the
main Michigan taxes that apply to
corporations, including sales,
self-employment, corporate and federal
taxes.
How your Corporation
is taxed will depend on whether it's
an S Corp or a C Corp.
Michigan Taxes for Corporations
There are two types of MI state tax
you must pay to the Michigan
Department of Treasury: income and
sales. Depending on how your business
is set up, you may also need to pay
use tax.
Important:
All of these taxes apply whether you
have a C Corp or an S Corp.
Michigan Income Tax
Michigan is one of 10 states that
have a single flat rate income
tax.
Anyone who takes
earnings out of your Michigan
corporation will need to pay Michigan
state income tax and will be taxed at
Michigan's standard rates. Any
employees will also need to pay state
income tax. The current income tax for
Michigan is 4.25 percent.
Michigan Sales and Use Tax
These tax types are similar enough that they're often categorized together. It's still important to understand the differences between them.
Sales Tax
If you sell physical products (such
as electronics, books, cars,
furniture, appliances, raw
materials, etc.) or
certain services, you may need to collect MI sales
tax at the point of purchase. You'll
remit the taxes you collect to the
Michigan Department of Treasury.
Most
states, including Michigan, don't
levy sales tax on goods considered
to be necessities, such as gas,
clothing,
medication, and some grocery
items. The state's
General Sales Tax Act contains an extensive list of MI
sales tax rules and exemptions
applicable to numerous
organizations, services and
products.
The MI sales
tax rate is
6 percent statewide. Unlike many other states, local
jurisdictions, such as cities and
counties, cannot impose additional
sales tax. Use our
sales tax calculator
to get an idea of what you'll need
to pay, but always check with your
accountant and the MI Department of
Treasury to find out whether your
business is required to collect
sales tax and ensure you remain in
compliance.
Use Tax
If you purchase physical products
outside the state for use in
Michigan from a seller who doesn't
charge Michigan sales tax, you may
need to pay use tax. You may also
hear this referred to as the
Michigan sales and use tax.
For example, if you buy
products for your corporation from a
company in a state that either
doesn't have a sales tax or has a
sales tax that is lower than the MI
sales tax, you'll be responsible for
paying the use tax.
The
current use tax rate is
6 percent, and you'll pay it directly to the
Michigan Department of Treasury.
Federal Taxes for Corporations
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Michigan Corporation is paying the correct amount, and that you're paying the correct individual amount.
Federal Self-Employment Tax
Whether and how you pay this tax depends on whether you have a C Corp or an S Corp.
Federal Taxes for C Corps
All shareholders who earn wages or a
salary from a C Corporation must pay
self-employment tax. This tax is
administered by the Federal Insurance
Contributions Act (FICA) and covers
Social Security, Medicare and other
benefits. The current self-employment
tax rate is 15.3 percent.
You’ll
be able to deduct some of your
business expenses from your income
when calculating how much
self-employment tax you owe.
Here are some examples of how much self-employment tax you may need to pay, depending on your earnings:
- On a salary of $25,000, you would pay self-employment tax of $3,825.
- On a salary of $50,000, you would pay self-employment tax of $7,650.
- On a salary of $75,000, you would pay self-employment tax of $11,475.
- On a salary of $100,000, you would pay self-employment tax of $15,300.
Federal Taxes for S Corps
The Internal Revenue Service allows a
corporation to be treated as an
S Corporation
for tax purposes, provided your
business
meets certain requirements. This can help you reduce the amount
of self-employment tax you pay by
allowing you to declare some of your
income as salary and other income as
distributions or withdrawals.
You
do this by filing Form 2553, also
known as an
S Corp Election form, with the IRS. Bizee can also file
the form for you. Use our
S Corp Tax Calculator
to get an idea of how much money you
could save with this election.
Consult
with your accountant or tax advisor
for more information on reducing your
self-employment tax through an S
Corporation tax election.
You can do this by making an “S Corporation Tax Election” with the IRS using Form 2553. We can file your Form 2553 with the IRS on your behalf.
Federal Income Tax
You must pay regular federal income
tax on any wages or salary your
Corporation pays you, regardless of
its type. The amount of income tax
you pay depends on your earnings,
current income tax bracket,
deductions and filing status.
Speak
to your accountant or tax
professional for more information.
Taxes Specific to C Corporations
Regardless of the state where your Corporation is based, corporate taxes can get pretty complicated. We provide some basic information here, but we strongly encourage you to consult with a tax professional to ensure your Corporation pays the right taxes in the right amounts to help you avoid penalties, fines and worst of all, tax audits.
Corporate Tax
Unlike a Limited Liability Company
or an S Corporation, a C Corporation
is required to file a corporate tax
return and pay taxes on any profits.
When those profits are
paid to shareholders as dividends,
they will also be subject to
taxation on the shareholders'
personal tax returns.
This is often referred
to as “double taxation,” and is one
reason many business owners prefer
to file their taxes as S
Corporations.
Note:
It is possible for a C Corp to file
taxes as an S Corp. Consult with
your accountant or professional tax
advisor for more information.
Stock Dividends
A C Corporation may pay shareholders
dividends as a share of the profits
of the company. The value of
dividends to which each shareholder
is entitled depends on how many
shares they own.
Dividends distributed to
shareholders are taxed twice — first
at the corporate level as profit (on
the corporation’s Form 1120, the
U.S. Corporation Income Tax
Return) and again at the individual level
as stock dividends (on the
shareholder's Form 1040, the
U.S. Individual Income Tax
Return).
Taxes Specific to S Corporations
You must pay Federal income tax on both your salary and any distributions you take from the business.
Bizee provides a complete Business Tax Filing service.
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
Employer Payroll Tax Withholding
All employers are required to
withhold federal taxes from their
employees’ wages. You’ll withhold
7.65 percent of their taxable wages,
and your employees will also be
responsible for 7.65 percent, adding
up to the current federal tax rate
of 15.3 percent.
Speak to
your accountant for more
information.
Employees May Need to File Tax Returns
Regardless of whether you withhold federal and state income tax, your employees may need to file their own tax returns.
Employee Insurance and Other Requirements
You may also need to pay insurance for any employees, such as employee compensation insurance or unemployment tax.
Other Taxes and Duties
Depending on your industry, you may be
liable for certain other taxes and
duties. For example, if you sell
gasoline, you may need to pay a tax on
any fuel you sell. Likewise, if you
import or export goods, you may need
to pay certain duties.
Speak
to your accountant about any other
taxes or duties you may need to
withhold or pay.
Estimated Taxes
Most Corporations must pay estimated
taxes throughout the year—on a
quarterly basis—depending on the
amount of profit and income you
expect to make. Per the IRS:
"Corporations
must generally make estimated tax
payments if they expect their
estimated tax (income tax less
credits) to be $500 or more."
The
most common types of estimated tax
are:
Federal income tax
Federal self-employment tax
C Corporation
If you expect to owe $500 or more in income tax, you must make four quarterly estimated tax payments to the IRS. You'll estimate your total tax on Form 1120-W, then pay 25% on each due date. Please note that the IRS will no longer be updating Form 1120-W, so follow up with your accountant with any questions on estimated tax payments after 2023.
Important:
This applies to you as the owner of
the C Corporation, not the business
itself. A C Corporation does not pay
income tax.
S Corporation
It's a little less straightforward
for an S Corp, which will pay
estimated taxes by filing an IRS
Form 1120-S, which is the income tax return
form for S Corps.
Also,
as the owner of an S Corp, you'll
need to make estimated payments on
self-employment tax.
Learn more on the IRS website, and speak to your accountant for more information. Or use Bizee's Business Tax Filing service.
FAQs on Corporate Michigan Taxes
Yes. Michigan does have a statewide sales tax. Depending on how you run your business, you may also need to pay use tax. You can find more information above.
Yes. Michigan has a statewide income tax rate. You can find more information above.
No. Michigan does not levy a tax for the privilege of doing business in the state.
Yes. In most cases, you must pay estimated taxes to the federal government, whether you run a C Corp or an S Corp. You'll find more information above.
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