This is the question that I'm asked most often.  The answer is very simple:  You can do whatever you want.

The use of an Employee Leasing Company (ELC) or Professional Employment Organization (PEO) was extremely effective in sheltering compensation from the Single Business Tax (SBT).  However, under the Michigan Business Tax (MBT), compensation is a good thing; it qualifies for a credit.

Provisions in the Michigan Business Tax Act (MBTA) will result in the ELC or PEO paying very little MBT.

For a professional employer organization, any amount received that represents the actual cost of wages and salaries, benefits, worker’s compensation, payroll taxes, withholding, or other assessments paid to or on behalf of a covered employee are subtracted from the Modified Gross Receipts Tax Base.  Therefore, the ELC or PEO will pay MBT only on the administration or management fee. 

For purposes of the Compensation Credit, a Professional Employer Organization (PEO) may not take the Compensation Credit computed on payments made to employees and officers of a client entity.  They don't need it.   The client entity may include payments made by the PEO to employees and officers of a client entity for purposes of calculating the Compensation Credit.

I often hear firms suggesting that a ELC or PEO not be terminated because it will show the state that the only reason for its existence was to shelter SBT compensation.  The SBT has no business purpose test and the state officials know how it works.

If the ELC or PEO no longer serves a useful purpose, it should be terminated.  However, if it does serve a non-tax business purpose, it can be retained with little tax consequences.  However, if there is greater than 50% ownership or control by another entity, directly or indirectly, it may be part of a "unitary business group" and required to file a single combined return. 

If you decide to terminate your ELC or PEO, make sure it doesn't result in negative unemployment tax or worker comp consequences.