Workers in Michigan’s 24 cities with local income taxes still need to file a 2020 tax return with the city where their employer is based — even if most of last year was spent working from home.
It’s a new dynamic this tax season as the COVID-19 pandemic kept many employees at home to protect public safety. It has also raised budget concerns among Michigan cities that rely on income tax revenues from non-resident employees who commute to work.
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Tax experts say a 2020 local income tax filing is still needed for these non-resident employees since they presumably spent about two-and-a-half months commuting to work early last year. Only income earned outside the city is not subject to a city income tax. If an employer never withheld city income taxes, the employee would still have to pay on what was earned prior to working from home in 2020.
“You’re not exempt from filing a city tax return in 2020 just because you worked remotely,” said Derik Rynearson, a tax partner at Beene Garter LLC in Grand Rapids. “If there was any day you worked inside the city limits, then you have taxable wages that should be reported on a return.”
The accounting and consulting firm has run into the situation “pretty frequently” during the pandemic with clients who are based in a city with an income tax and had staff working from home in the pandemic.
Individual cities have dealt with the situation in varying ways, Rynearson said.
Grand Rapids initially wanted a letter from employers indicating that they sent their workforce home, that an employee did not work within city limits and detailing the period of time. The city has since come out with a form that walks taxpayers through a series of questions to figure out what percentage of their 2020 compensation was earned outside of the city.
The employee needs to attach the form — which employers have to cosign after verifying the information — to their 2020 Grand Rapids city income tax return, Rynearson said.
“File that return and be prepared to file some additional COVID-related forms,” he advises.
If employers are unclear or find the requirements too burdensome, Rynearson suggests calling their local city tax department for guidance or “to see if there’s some alternative to what’s being proposed currently.”
Employers as well should “just kind of keep their eyes and ears open for continuing development as cities kind of work through how this is all working.”
“Certain cities have shown different amounts of flexibility,” he said. “They’re doing the best they can with the resources they have to try to make sure they’re still able to collect all of the dollars they’re entitled to, and they’re facing a cash crunch.”
