Complete Guide to Michigan LLC Taxes in 2025
Michigan stands out as one of the most business-friendly states in the Midwest for LLC owners. With a flat 4.25% individual income tax rate, a minimal $25 annual statement fee, and no entity-level tax on pass-through LLCs, the Great Lakes State offers a straightforward and affordable tax environment. This comprehensive guide covers everything you need to know about operating an LLC in Michigan from a tax perspective, including the unique city income taxes that apply in certain municipalities.
How Michigan Taxes LLCs
Michigan treats LLCs as pass-through entities for state tax purposes, meaning the LLC itself does not pay Michigan income tax. Instead, the LLC's profits and losses "pass through" to the individual members, who report their distributive share of income on their personal Michigan income tax returns using Form MI-1040.
For a single-member LLC, income flows directly to Schedule C of the owner's federal return and then to Michigan Form MI-1040. For a multi-member LLC, Michigan does not require a separate state-level partnership return if the LLC files a federal Form 1065. Each member receives a federal Schedule K-1 and reports their share on their individual Michigan return.
Michigan eliminated the Michigan Business Tax (MBT) in 2012 and replaced it with the Corporate Income Tax (CIT), which only applies to C-Corporations. Pass-through LLCs are completely exempt from the CIT, making Michigan significantly more favorable than states like California (which charges an $800 minimum franchise tax) or Texas (which imposes a margins tax).
Key Point: Michigan's flat 4.25% rate applies to all taxable income levels. Whether your LLC earns $10,000 or $10,000,000, the Michigan income tax rate remains the same. Combined with the $25 annual statement fee, Michigan offers one of the lowest total compliance costs for LLC owners in the country.
Michigan Income Tax Rate for LLC Members
Michigan uses one of the simplest income tax structures in the country: a single flat rate with generous personal exemptions.
| Tax Component | Rate / Amount | Notes |
|---|---|---|
| State Income Tax | 4.25% flat | All income levels |
| Personal Exemption | $5,600 per person | 2025 amount (inflation-adjusted) |
| Corporate Income Tax | 6.00% | C-Corps only, not pass-through LLCs |
| City Income Tax (Detroit) | 2.40% / 1.20% | Resident / Non-resident rates |
| City Income Tax (Others) | 1.00% / 0.50% | Typical rates for smaller cities |
Michigan LLC Annual Filing Requirements
Michigan requires LLCs to file an Annual Statement with the Department of Licensing and Regulatory Affairs (LARA). The requirements are minimal:
- Annual Statement: $25 fee, due February 15 each year, filed with LARA
- State Tax Returns: Individual members file Form MI-1040 with the Michigan Department of Treasury
- Estimated Tax Payments: Required if you expect to owe $500 or more in state income tax
- Sales Tax Filing: If applicable, file returns with the Department of Treasury on a monthly, quarterly, or annual basis
- City Income Tax: Separate filing required for each applicable city (Detroit uses Form D-1040)
Pro Tip: Michigan's Annual Statement can be filed online through LARA's CSCL website for just $25. This is one of the cheapest annual compliance requirements among all US states, second only to states that charge no annual fee at all.
Michigan City Income Taxes
One of the most important and often overlooked aspects of Michigan LLC taxation is the local city income tax. Michigan is one of the few states where cities can levy their own income tax. As of 2025, approximately 24 Michigan cities impose a local income tax. This directly affects LLC members who live or conduct business in these cities.
Key cities with income taxes:
| City | Resident Rate | Non-Resident Rate |
|---|---|---|
| Detroit | 2.40% | 1.20% |
| Grand Rapids | 1.50% | 0.75% |
| Highland Park | 2.00% | 1.00% |
| Saginaw | 1.50% | 0.75% |
| Flint | 1.00% | 0.50% |
| Lansing | 1.00% | 0.50% |
| Pontiac | 1.00% | 0.50% |
| Other Taxing Cities | 1.00% | 0.50% |
If your LLC operates in one of these cities, members must file a separate city income tax return reporting their share of LLC income attributable to that city. Non-residents who work in a taxing city pay at half the resident rate. This can add 0.50% to 2.40% to your total tax burden depending on location.
Michigan Self-Employment Tax Considerations
Self-employment tax is a federal tax, not a Michigan state tax, but it significantly impacts overall tax liability. Active LLC members must pay the 15.3% self-employment tax (12.4% Social Security up to $176,100 in 2025, plus 2.9% Medicare on all earnings). An additional 0.9% Medicare surtax applies above $200,000 for single filers ($250,000 married filing jointly).
Michigan does not impose any additional payroll-type taxes on LLC members beyond the federal self-employment tax, which is another advantage of the state's business-friendly approach.
Michigan Sales Tax for LLCs
Michigan imposes a 6% state sales tax with no local additions, making it one of the simplest sales tax environments in the country. Key points:
- Rate: Flat 6% statewide -- no local or county additions
- Taxable goods: Most tangible personal property is subject to sales tax
- Services: Most services are not taxable in Michigan
- Food exemption: Grocery food items are exempt from sales tax
- Use tax: Michigan imposes a 6% use tax on purchases from out-of-state sellers
- Remote sellers: Out-of-state businesses with $100,000+ in Michigan sales must collect
Michigan LLC vs. Other States: Tax Comparison
| State | Income Tax Rate | Annual Fee | Key Feature |
|---|---|---|---|
| Michigan | 4.25% flat | $25 | Simple flat rate, city taxes possible |
| Ohio | 0-3.75% | N/A | Commercial Activity Tax on gross receipts |
| Indiana | 3.05% flat | $31 biennial | Lower rate, county taxes add 0.5-3% |
| Illinois | 4.95% flat | $75 | Higher rate, PTE tax available |
| Wisconsin | 3.5-7.65% | $25 | Graduated brackets |
| Minnesota | 5.35-9.85% | $0 | High top rate, no annual fee |
Michigan Estimated Tax Payment Schedule
Michigan requires estimated tax payments if you expect to owe $500 or more in state income tax after subtracting credits. The schedule mirrors the federal quarterly dates:
- Q1: April 15, 2025
- Q2: June 15, 2025
- Q3: September 15, 2025
- Q4: January 15, 2026
Use Michigan Form MI-1040ES for estimated payments. To avoid underpayment penalties, pay at least 90% of your current-year tax liability or 110% of the prior year's tax through estimated payments.
Michigan LLC Formation and Initial Costs
Forming an LLC in Michigan is straightforward and affordable:
- Articles of Organization: $50 filing fee with LARA
- Operating Agreement: Not required by law but strongly recommended
- Registered Agent: Required; can be a member or professional service ($50-200/year)
- EIN: Free from the IRS
- Annual Statement: $25/year starting after the first year
- DBA (Assumed Name): Filed with the county clerk, typically $10-25
Total first-year cost estimate: approximately $100-275 (formation + registered agent). This makes Michigan one of the most affordable states for LLC formation.
Tax Deductions Available to Michigan LLC Owners
Michigan generally conforms to federal tax deductions with some notable differences:
- Personal exemption: Michigan allows a generous $5,600 per-person exemption (inflation-adjusted for 2025), unlike the federal $0 personal exemption
- Half of self-employment tax: Deductible on both federal and Michigan returns
- Health insurance premiums: Self-employed deduction allowed
- Home office deduction: Follows federal rules
- Retirement contributions: SEP-IRA, SIMPLE, or solo 401(k) deductible
- Qualified Business Income (QBI): Michigan does not conform to the federal QBI deduction -- it is not allowed on the Michigan return
Important: Michigan does not allow the federal Qualified Business Income (QBI) deduction on the state return. However, Michigan's generous personal exemption ($5,600 per person in 2025) partially offsets this difference. Make sure to add back the QBI deduction when calculating Michigan taxable income.
Michigan Flow-Through Entity (FTE) Tax
Michigan enacted a Flow-Through Entity (FTE) tax effective for tax years beginning on or after January 1, 2021. This is an elective entity-level tax designed to work around the federal $10,000 SALT deduction cap:
- The LLC can elect to pay an entity-level tax at 4.25% on the Michigan taxable income of its members
- Members receive a refundable credit on their individual Michigan returns for their share of the FTE tax paid
- The entity-level payment is deductible on the federal partnership return, effectively bypassing the $10,000 SALT cap
- The election must be made annually by the entity
This election is particularly valuable for LLC members who are limited by the federal SALT deduction cap and could benefit from deducting state income tax at the entity level.
Common Michigan LLC Tax Mistakes to Avoid
- Overlooking city income tax: If your LLC operates in Detroit, Grand Rapids, or another taxing city, you must file a separate city return
- Missing the February 15 deadline: Michigan's Annual Statement has an unusually early due date compared to most states
- Not adding back QBI deduction: Michigan does not conform to the federal 20% QBI deduction
- Ignoring the FTE election: The flow-through entity tax election can provide significant federal tax savings for members subject to the SALT cap
- Underpaying estimated taxes: The $500 threshold for estimated payments is relatively low
- Forgetting use tax: Purchases from out-of-state sellers that escape sales tax still owe 6% use tax
Strategic Tax Planning for Michigan LLC Owners
- Evaluate FTE election: If you are subject to the $10,000 SALT cap, the flow-through entity tax election can save thousands
- Location planning: Operating outside of cities with income tax can save 1-2.4% on your effective rate
- S-Corp election: High-earning LLC members may save on self-employment tax with an S-Corp election
- Retirement maximization: Contribute to tax-deductible retirement plans to reduce both federal and Michigan income
- Personal exemption optimization: Michigan's $5,600 per-person exemption is valuable -- ensure all eligible exemptions are claimed
Michigan Resources for LLC Owners
- Michigan Department of Treasury: michigan.gov/taxes -- tax forms, payment portal, guidance
- LARA (Licensing & Regulatory Affairs): michigan.gov/lara -- business filings, annual statements
- Michigan SBDC: Small Business Development Center for free business counseling
- Treasury Customer Service: (517) 636-4486 for tax-related questions