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Michigan PTET

I work as a W-2 employee and I pay around 20,000 a year in state taxes and an additional $10,000 a year in property taxes. I also have a side gig that pays around 10–$15,000 a year via 1099 income. I currently file my 1099 income as a sole proprietor.

 

I am trying to take advantage of Michigan's PTET tax law that allows for a state and local deductions to be paid through certain pass-through entities. Based on Michigan law, if I form an LLC with my wife is a partner, I will be allowed to take advantage of this law.

 

1-would someone like me with both the W-2 income and 1099 side income be able to take advantage of this? 

 

2-what are the specific logistics involved with initiating this? Do i have to pay taxes throughout the year to a separate account to get this deduction?

 

3-Is the max amount of tax deducted of state and local taxes based on my 1099 income? ie if I make 10K of 1099 income, can I only deduct 10K from federal taxes?

 

thanks

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1 Reply
LindaSh
Employee Tax Expert

Michigan PTET

You are able to take advantage of Michigan Flow-through Tax if your business (side gig) is structured as an LLC with 2 or more members, partnership, or an S-Corp.  Your W-2 wages do not affect this.   You can have multiple W-2s and businesses.

 

As a side note, an LLC is automatically considered a partnership unless you elect to have it treated as an S-Corp.  An LLCs with only 2 - 100 members can elected to be treated as an S-Corp.

 

There are a number of pros and cons to determine which structure is best for you - continuing as a sole proprietorship or restucture into a partnership or S-Corp.  It is recommended that you talk to a tax expert who specializes in tax anaylsis and can provide a report which illustrates the tax affect based on your actual business financials.  Such reports will show which structure would provide the best and highest tax advantage for you.

 

Taxes for partnerships and S-Corp are based on the net income passed through to your personal return.  Note that with an S-Corp you are also required to pay yourself Reasonable Compensation as a W-2 employee of your own S-Corp.  Partnerships allow for Guaranteed Payments and/or distributions/draws.

 

Depending on your overall taxable income which would include W-2 wages, investment income, and business income, you may or may not be required to pay estimated tax payments during the tax year.

 

Here are some links which will be helpful:

Michigan PTET Link:  https://www.michigan.gov/taxes/business-taxes/flowthrough-entity-tax

Business Structures:  https://www.irs.gov/businesses/small-businesses-self-employed/business-structures

Estimated Tax Payments:  https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

 

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