As hybrid work arrangements and mobile workforces continue to expand, employers operating within the City of Detroit face increasing complexity when determining how to properly withhold local income tax for non‑resident employees. Detroit’s non‑resident withholding rules apply only to compensation for services physically performed within city limits, yet the practical application can vary depending on the nature of the employee’s work, their history of work locations, and how severance or travel is treated. The following scenarios illustrate how employers should approach these rules when employees reside outside the City of Detroit.

Scenario 1: Severance Paid to a Non‑Resident Living in in Metro Detroit
For severance payments, Detroit requires employers to apply the same work‑location ratio used for the employee’s regular wages. This means severance is taxable to Detroit only to the extent the employee previously performed work within the city. If the employee performed none of their services in Detroit, then no portion of the severance is subject to Detroit withholding. If, however, the employee historically performed a portion, say 40 % of their work within Detroit, then 40% of the severance should be subject to the non‑resident withholding rate. This system ensures that severance reflects the same taxable sourcing pattern as prior employment.

Scenario 2: Employee Living in Metro Detroit but Working Primarily at the Detroit Office
A non‑resident whose predominant place of employment is Detroit is generally subject to Detroit withholding on most or all wages. Even if such an employee occasionally works from home  Detroit does not allow routine work‑from‑home days to be treated as “outside the city” for allocation purposes, unless the employer can substantiate the work locations with reliable documentation. As a result, an employee based in Detroit will often have nearly 100% of their wages subject to Detroit withholding unless detailed work‑location logs justify a lower percentage.

Scenario 3: Out‑of‑State Employees Who Visit the Detroit Office Periodically
If an employee lives outside Michigan and travels to Detroit only a few times a year, local tax applies only to the days physically worked within Detroit. Employers must allocate wages based on the days or hours spent in the city, and no Detroit withholding applies to work performed elsewhere.

Determining the Detroit‑Sourced Portion
Employers can use methods such as total workdays, total hours, or historical ratios to calculate the taxable amount. Regardless of method, accurate documentation calendars, timesheets, and travel logs are essential to support the allocation.

For more information visit https://www.michigan.gov/taxes/citytax/detroit/business/withholding.

Disclaimer: Tax laws can change, and interpretation can depend on specific circumstances. It is recommended to consult a tax professional for complex payroll scenarios.