Navigating the Benton Harbor City Income Tax

On November 7, 2017, the City of Benton Harbor (the “City”) joined 22 other cities in the State of Michigan by initiating a city income tax, under the City Income Tax Act of 1964, which took effect January 1, 2018.

Impact on Individuals

All domiciled residents of the City will be required to file an annual tax return with the City on all tax-based City income and taxed at a 1% tax rate. Nonresidents who work within City limits will also be required to file an annual tax return with the City and will be taxed at a .05% rate. In addition to a $750 personal exemption, exemptions are also available for individuals who are 65 or older, blind, deaf, or those with a permanent disability.

Impact on Businesses

Corporations doing business in the City are required to file an annual report and pay a tax of 1% on all federally taxable income. This includes businesses located outside of the City that do business inside the City limits. Corporations are required to make quarterly estimated payments if estimated tax is $250 or more.

Employer Next Steps

• All employers located in the City, including sole proprietors, partnerships, corporations and nonprofits, as well as employers located outside of Benton Harbor that do business within the City limits, are required to register with the City using Form CF-SS-4.
• Employers are required to withhold the City Income Tax from employees’ wages at a rate of 1% for all residents of the City, including those who work inside the city, and .05% for all nonresidents who have the City as their predominant place of employment. The ordinance defines predominant place of employment as “the greatest percentage of compensation of 25% or more.” Employees receiving less than 25% of their compensation in the City are not subject to the tax.
• Employers are required to make quarterly payments of city income tax withholding. Due dates for quarterly payments are April 30, June 30, September 30 and January 31.

Employee Next Steps

Employees should fill out Form CF-W-4. Information provided on Form CF-W-4 will include the employee’s city or township of residence, exemptions, and percentage of compensation earned in the City. If an employee receives compensation outside City limits they can allocate the percentage earned in all locations.

Here to Help

Several of our clients who process their payroll in-house have contacted us with questions about the City tax and the proper way to set it up in their accounting software, primarily QuickBooks. If you are using QuickBooks software, the tax needs to be set up in the local tax section under “taxes.”

QuickBooks allows for two entries in the local tax section for Michigan Cities Income Tax (tax rate and annual exemption). It does not allow for the allocation of days worked in the city, as reported on the CF-W-4. So, if you have an employee who works a significant portion of their time outside of the City limits and they would like to use the percentage of days worked in the City, give us a call. We have worked with other clients to find an efficient method to calculate the tax.

If you have questions on the Benton Harbor city income tax, what is included in the tax base, how to register, how to set it up in QuickBooks, or how to allocate percentage of days worked in the City, please call our St. Joseph office.

As an added resource, much of the information in this article was gathered from the Benton Harbor Withholding Tax Guide.

Audrey Salesberry, CPA
Senior Staff Accountant
asalesberry@klcpas.com | 269.983.0131