Definition of “out-of-state business activity”
August 8, 2013 12:01 PM Subscribe
What does “out-of-state business activity” mean in the below quote?
“If you are a Michigan resident, all of your income is subject to tax, no matter where it is earned, except income earned from out-of-state business activity.” From this web page – here
I can’t believe I’m asking a taxes question on metafilter, and if this is really a question I should be asking a professional, feel free to tell me to do just that. I am a resident of Michigan and have just started a year long work assignment in Texas. Michigan has income tax, Texas does not have income tax. My company has stopped withholding state income taxes from my check. I questioned this, citing this web page above.
My company says I am earning income from “out-of-state business activity.” I can’t figure out what “out-of-state business activity” really means. Can anyone define that for me? What makes one job out-of-state business activity and another not?
I can’t believe I’m asking a taxes question on metafilter, and if this is really a question I should be asking a professional, feel free to tell me to do just that. I am a resident of Michigan and have just started a year long work assignment in Texas. Michigan has income tax, Texas does not have income tax. My company has stopped withholding state income taxes from my check. I questioned this, citing this web page above.
My company says I am earning income from “out-of-state business activity.” I can’t figure out what “out-of-state business activity” really means. Can anyone define that for me? What makes one job out-of-state business activity and another not?
Best answer: Better yet, call the State of Michigan department of Treasury: (517) 373-3200
I didn't think that number up.
posted by Ruthless Bunny at 12:09 PM on August 8, 2013 [1 favorite]
I didn't think that number up.
posted by Ruthless Bunny at 12:09 PM on August 8, 2013 [1 favorite]
In this case "out-of-state business" is one phrase, meaning essentially "money earned by you based on a business you own that is not in Michigan." If you're a Michigan resident, then you're on the hook for money earned in Texas. I pay Michigan taxes on my military pay despite not (generally) serving in the state itself.
Your company is wrong, but may not be equipped to handle withholding for Michigan, so set some money aside for taxes.
posted by Etrigan at 12:12 PM on August 8, 2013
Your company is wrong, but may not be equipped to handle withholding for Michigan, so set some money aside for taxes.
posted by Etrigan at 12:12 PM on August 8, 2013
Where is the company located?
Where are you located? Are you physically in Texas?
posted by mibo at 12:15 PM on August 8, 2013
Where are you located? Are you physically in Texas?
posted by mibo at 12:15 PM on August 8, 2013
Do not take my word for it. Ask a Michigan accountant; the cost will be nothing or next to it.
My interpretation: If you have investments with a financial institution outside of Michigan, Michigan wants to tax you on it. If you earn money in a business activity of your own outside of Michigan, Michigan will not tax it; it will leave it to that state to impose what tax it will. But, and this is important - if you earn money as an employee, it is not your out of state business activity. It's wages or salaries from out of state employment, and Michigan wants to tax it. It will credit you with taxes you paid to the other state, if any.
But don't take my word for it.
posted by megatherium at 12:19 PM on August 8, 2013
My interpretation: If you have investments with a financial institution outside of Michigan, Michigan wants to tax you on it. If you earn money in a business activity of your own outside of Michigan, Michigan will not tax it; it will leave it to that state to impose what tax it will. But, and this is important - if you earn money as an employee, it is not your out of state business activity. It's wages or salaries from out of state employment, and Michigan wants to tax it. It will credit you with taxes you paid to the other state, if any.
But don't take my word for it.
posted by megatherium at 12:19 PM on August 8, 2013
I talked to my payroll guy, here at work. When one of our engineers goes to a different state to work for an extended period of time, we change the state of residence to the one where they are working, for the purposes of tax withholding. This is because they are earning a salary in that state, and that is where it is subject to tax. I believe that this is the case in Michigan, as the rule states. Of course, you should verify this with an accountant.
posted by Midnight Skulker at 12:27 PM on August 8, 2013
posted by Midnight Skulker at 12:27 PM on August 8, 2013
As someone who has run payroll for companies with work-from-home employees in different states, they are supposed to be withholding MI taxes.
Getting set up to do so is a pretty giant pain in the ass and also will likely mean that they will need to do other stuff like files sales taxes in MI as well now since they technically have a business presence there. Small companies do not like doing this.
posted by magnetsphere at 12:45 PM on August 8, 2013
Getting set up to do so is a pretty giant pain in the ass and also will likely mean that they will need to do other stuff like files sales taxes in MI as well now since they technically have a business presence there. Small companies do not like doing this.
posted by magnetsphere at 12:45 PM on August 8, 2013
Best answer: Speaking as somebody who has spent years and years on out-of-state work assignments for employers that are incredibly anal-retentive about tax accounting (although I am not an accountant and this is not tax advice), your company is completely wrong.
The way it works when you're on an out-of-state assignment is, your company should file a W2 in your home state for all of your income for the period where you were a state resident, including that from when you were working for them out-of-state, and then W2s in every other state you worked (that have income tax) for just the amount you earned while you were physically in that state. You will file a non-resident tax return in every non-resident state you worked that taxes income, for just your W2 income for that state, and then a resident tax return in your home state for all of your income, even that earned in other states, but claiming a credit for state income tax paid to other states.
What this means in practice when you're on an assignment to a state like Texas where there's no income tax is that you'll end up paying Michigan income tax on all your income just as if you'd been working in Michigan the whole year, because you're not paying any Texas state income tax to claim a credit from Michigan on.
The rules get more complicated if you're on assignment to the same travel location for more than a year, but this is a problem for another day and has more to do with whether your travel expense reimbursements are considered taxable income.
If your employer continues to refuse deducting Michigan income tax, you probably need to get an accountant who can figure out the estimated payments you need to make every quarter so you don't owe Michigan a bunch of penalties once you file. Actually, getting an accountant is advisable in any situation where you're traveling for work a lot and your payroll/HR people don't understand all the rules - there all sorts of ways this can lead to unpleasant and expensive surprises.
posted by strangely stunted trees at 12:47 PM on August 8, 2013
The way it works when you're on an out-of-state assignment is, your company should file a W2 in your home state for all of your income for the period where you were a state resident, including that from when you were working for them out-of-state, and then W2s in every other state you worked (that have income tax) for just the amount you earned while you were physically in that state. You will file a non-resident tax return in every non-resident state you worked that taxes income, for just your W2 income for that state, and then a resident tax return in your home state for all of your income, even that earned in other states, but claiming a credit for state income tax paid to other states.
What this means in practice when you're on an assignment to a state like Texas where there's no income tax is that you'll end up paying Michigan income tax on all your income just as if you'd been working in Michigan the whole year, because you're not paying any Texas state income tax to claim a credit from Michigan on.
The rules get more complicated if you're on assignment to the same travel location for more than a year, but this is a problem for another day and has more to do with whether your travel expense reimbursements are considered taxable income.
If your employer continues to refuse deducting Michigan income tax, you probably need to get an accountant who can figure out the estimated payments you need to make every quarter so you don't owe Michigan a bunch of penalties once you file. Actually, getting an accountant is advisable in any situation where you're traveling for work a lot and your payroll/HR people don't understand all the rules - there all sorts of ways this can lead to unpleasant and expensive surprises.
posted by strangely stunted trees at 12:47 PM on August 8, 2013
Response by poster: I am physically located in Texas for the duration of this assignment. We are a huge company with offices in many states and I have been told they do have the mechanism to keep withholding the tax. The person I was talking to made me feel like I was crazy to be thinking about this and I should be super happy that they were telling me that I didn't have to pay income tax. I will definitely be calling the Michigan Department of Treasury (this is why I need Ask Metefilter – to give me the obvious answer that I should have thought of myself) and if I’m not 100% comfortable with what they tell me, I will talk to an accountant, especially since it is starting to look like I should have an accountant anyway.
And strangely stunted trees has really hit the nail on the head - “you're traveling for work a lot and your payroll/HR people don't understand all the rules” seems to be the new story of my life.
posted by Sabby at 12:58 PM on August 8, 2013
And strangely stunted trees has really hit the nail on the head - “you're traveling for work a lot and your payroll/HR people don't understand all the rules” seems to be the new story of my life.
posted by Sabby at 12:58 PM on August 8, 2013
If you are physically located in Texas you need to be very, very sure about where your "residence" is -- generally it's defined by where you sleep most nights, not by like... where you have a driver's license or are registered to vote. This is definitely something you should talk to an accountant about, to make sure you are paying taxes to the correct states.
posted by brainmouse at 1:21 PM on August 8, 2013 [3 favorites]
posted by brainmouse at 1:21 PM on August 8, 2013 [3 favorites]
Another item to think of when talking to your accountant/HR/whomever: Who is your employer? If your "huge company" has different legal entities, are you working for "Global Management, a Michigan Company," or were you, for the purposes of your work in Texas, transferred to and now employed by "Texas Management Information, a Texas Company."
It may (or it may not) make a legal difference.
IAAL, IANYL, IANATaxL.
posted by China Grover at 1:33 PM on August 8, 2013
It may (or it may not) make a legal difference.
IAAL, IANYL, IANATaxL.
posted by China Grover at 1:33 PM on August 8, 2013
One year I had to file taxes as a part-year resident of Ohio, a part-year resident of Vermont, and a non-resident employee in Massachusetts. A couple other years I had to file as a part-year Mass. resident, and part-year non-resident. I had to explain to the Vermont tax officials that yes, my return was correct, because I did in fact pay Massachusetts income tax as a non-resident employed in Massachusetts, and that I was allowed to exempt that tax from my Vermont tax bill.
My takeaway for you, based on my experience, is that you should talk to a tax professional, perhaps after consulting the Michigan *and* Texas revenue departments. One thing that may be a big factor is whether your year-long assignment corresponds to a tax year or not. If it doesn't, then both states may consider you a part-year resident for each of the tax years it overlaps.
You also need to know what each state considers the criteria for establishing residence, and the formula that they use for apportioning income and deductions. Some states base deductions on the proportion of income you earn in the state, while others base them on the number of days in the tax year that you are a resident. If I remember correctly, Ohio did the first, Vermont did the second, and neither was advantageous for us. But it was many years ago, so I may be wrong, and I don't feel like dragging those returns out of cold storage tonight. :-)
posted by brianogilvie at 8:17 PM on August 9, 2013
My takeaway for you, based on my experience, is that you should talk to a tax professional, perhaps after consulting the Michigan *and* Texas revenue departments. One thing that may be a big factor is whether your year-long assignment corresponds to a tax year or not. If it doesn't, then both states may consider you a part-year resident for each of the tax years it overlaps.
You also need to know what each state considers the criteria for establishing residence, and the formula that they use for apportioning income and deductions. Some states base deductions on the proportion of income you earn in the state, while others base them on the number of days in the tax year that you are a resident. If I remember correctly, Ohio did the first, Vermont did the second, and neither was advantageous for us. But it was many years ago, so I may be wrong, and I don't feel like dragging those returns out of cold storage tonight. :-)
posted by brianogilvie at 8:17 PM on August 9, 2013
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Call the IRS and get a confirmation from them. 1-800-829-1040 (I'm so proud, I gave them that 800 number 25 years ago, it spells TAX-1040.)
posted by Ruthless Bunny at 12:07 PM on August 8, 2013 [1 favorite]