Michigan Wants Money

Today TaxMama hears from Rick in Maryland. He has a problem.  “I am a partner in a C Corp based in Michigan and live in Maryland. I have been paying state taxes in Maryland but not paying Michigan state tax. Michigan contacted me this year requesting that I pay tax on my income from the Michigan C Corp I’m involved in. They want 5 years of back taxes. How do I handle this?” http://taxmama.wpengine.com/forum/taxquips/filing-past-state-returns/

Hi Rick,  

What is it about these silly states? Why do they insist on asking for tax returns when they get notified that you earn income there?  Tsk. Tsk. Tsk. So greedy.

 First of all, you cannot be a partner in a C corp.  You can only be a partner in a partnership.  You are a shareholder. In fact, you might even be an officer.

But, as Tracy asks, were you ever an employee? Good question.  Is Michigan asking you for corporate tax returns – or personal tax returns?  

If you were on payroll, and the payroll is filed with the State of Michigan,  you need to report the income in Michigan. It makes perfect sense, doesn’t it?

 If you never worked in Michigan, you can file a Non-Resident tax return.  Since the payroll is sourced in Michigan, you have two choices:

1) Show -0- income in the Michigan column and put all the income in the out-of-state column.

or

2) Show the wages in Michigan. But reduce the Michigan taxes due with the taxes you paid in Maryland. Maryland tax rates are higher. So you will wipe out all the Michigan taxes.

Simple. You won’t owe any taxes.  But, unless you close the statute of limitations, MI will always have you on the books as a non-filer.

 If you want to prepare the Michigan returns yourself, you can either do the returns manually,  by printing out prior year forms. Or here are two companies that  still have prior year software available. TaxAct  and TaxCut (now, H&R Block @ Home).  In fact, you can get it cheaply, new, from a number of sources by searching Google Products.

For the future (the current year), if you are working for your MI C Corp, but live in Maryland,  perhaps your corp should register as a foreign corporation in MD and establish a payroll for you there. That way, you will not have a personal filing requirement in MI. And, you will build up unemployment and disability credits in your own state, should you ever need them.  Of course, then you’d have to file a corporate income tax return in MD, too. Never easy, all these requirements, are they?

And remember, you can find answers to all kinds of questions about understanding your own business and other tax issues, free. Where? Where else? At www.TaxMama.com.

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