INDIVIDUAL INCOME TAX - RECIPROCAL AGREEMENTS

RAB-88-17. This Bulletin describes the effect of reciprocal agreements between Michigan and other states on income tax liability and withholding requirements. Pursuant to Michigan's Income Tax Act, MCL 206.256(3), Michigan has entered into reciprocal agreements with each of the following states: Wisconsin (effective date 10/1/67); Indiana (effective date 1/1/68); Kentucky (effective date 1/1/68); Illinois (effective date 1/1/71); Ohio (effective date 1/1/72); and Minnesota (effective date 1/1/84).

Income Tax

Under the general terms of each reciprocal agreement, a Michigan resident will be, in effect, exempt from any income tax imposed by a reciprocal state on salaries, wages and commissions earned for personal services performed in the reciprocal state.

Conversely, a nonresident from a reciprocal state who earns compensation for services performed in Michigan will be, in effect, exempt from Michigan income tax. The nonresident from a reciprocal state need not file a Michigan income tax return if he or she has no other income subject to tax in Michigan.

Withholding Tax

Requirements of a Michigan Employer and a Nonresident Employee from a Reciprocal State

The Michigan Income Tax Act, MCL 206.351(4), provides that a Michigan employer is not required to deduct and withhold a tax on compensation paid to a nonresident individual employee who, under the provisions of MCL 206.256, is exempted from the liability for the tax.

The nonresident employee must provide his or her Michigan employer a statement of nonresidence as described by the reciprocal agreement.

Refund of Tax Erroneously Withheld by a Michigan Employer

A nonresident from a reciprocal state whose Michigan employer has erroneously collected income tax on compensation exempt under a reciprocal agreement may file a return with Michigan and make a claim for refund of the tax erroneously collected.

Voluntary Withholding by a Reciprocal State Employer

A Michigan resident may ask his or her reciprocal state employer to voluntarily withhold Michigan income tax on compensation. Although the employer is not subject to the jurisdiction of Michigan, an employer may voluntarily register as an employer with Michigan and withhold Michigan income tax.

For more information, an employer may request the Michigan Withholding Guide booklet, Form C-3260.

Estimated Tax Filing Requirement by Michigan Employee

A Michigan resident whose reciprocal state employer does not withhold tax on compensation must pay quarterly estimates of tax due if the taxpayer can expect his or her annual tax liability to exceed $500. [MCL 206.301(1)]