An Ohio resident who owns at least 20% of an S corporation is an employee of that S corporation and receives wages for services performed in Michigan. Does the reciprocity agreement between Michigan and Ohio apply to this shareholder-employee wages?
The state of Michigan must decide if such income is exempt for Michigan income tax withholdings (based upon Ohio Revised Code Section 5733.40(A) (7) such income is not “compensation” for Ohio income tax purposes). In any event, since Ohio residents are taxed on their world-wide income but receive a resident credit for income taxed by another state, this shareholder-employee can claim the credit if Michigan were to impose an income tax on such salary (and at this point we understand that Michigan would treat such income as income sitused entirely to Ohio in accordance with the reciprocity agreement)..
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