Michigan Cottage Food Tax Requirements: Sales Tax, Income Tax, and Recordkeeping

Does Michigan Charge Sales Tax on Cottage Food?

Most food sold for home consumption in Michigan is exempt from the state's 6% sales tax. That exemption covers the vast majority of cottage food products — breads, cookies, jams, granola, dry mixes, and other shelf-stable items buyers take home and eat later.

The exception is "prepared food" served for immediate consumption, which does not apply to the usual cottage-food sale of prepackaged, non-heated products intended for off-premises consumption at farmers markets, pop-up events, or through online orders. For those exempt sales, you generally do not collect or remit sales tax.

You still need to register with the Michigan Department of Treasury and file the required sales-tax returns, even when your cottage food products are exempt. If you later transition to a licensed commercial kitchen and begin selling prepared food at a retail counter or food truck, you must collect and remit sales tax on taxable prepared-food sales.

Federal and State Income Tax Still Apply

The sales tax exemption does not extend to income tax. The IRS and the State of Michigan both consider cottage food revenue taxable income.

If you operate as a sole proprietor (which most cottage food businesses are by default), you report your business income and expenses on Schedule C of your federal Form 1040. Michigan state income tax — 4.25% for the 2026 tax year — applies to taxable income after applicable deductions and exemptions.

Common deductible expenses for cottage food operators include:

• Ingredients and packaging materials
• Labels, stickers, and printed materials
• The $50 MSU Product Center registration fee (if you register for address privacy)
• Farmers market booth fees and event entry fees
• Kitchen equipment used exclusively for business production
• Liability insurance premiums (policies from providers like FLIP typically run around $299/year)
• Mileage for delivery runs and market trips

Keep receipts for everything. The IRS expects documentation, and the cleaner your records, the simpler your filing.

Self-Employment Tax

Sole proprietors and single-member LLCs generally owe federal self-employment tax when net earnings reach $400 or more. The 15.3% rate covers Social Security (12.4%) and Medicare (2.9%) and generally applies to 92.35% of net earnings.

With Michigan's $50,000 cottage food sales cap, a profitable operation can generate meaningful self-employment tax liability. If your net profit reaches $30,000, you owe roughly $4,239 in self-employment tax alone under the regular calculation, on top of federal and state income tax.

Quarterly estimated tax payments (Form 1040-ES) prevent a large April surprise. The IRS generally expects estimated payments if you will owe $1,000 or more in taxes for the year.

What Records to Keep

Michigan does not require cottage food businesses to file revenue reports with MDARD, but the $50,000 annual gross sales cap (or $75,000 if every product is priced at $250 or more) means you need to track every dollar of revenue — not just for taxes, but to prove you stayed within the exemption if a question ever arises.

At minimum, maintain:

• A running sales log with the date, product, quantity, and amount for every transaction
• Separate records for each sales channel (farmers market, online orders, home pickup)
• Bank statements from a dedicated business checking account
• Ingredient and supply receipts organized by month

A basic spreadsheet works. The Michigan Cottage Food & Home Food Business Guide includes a revenue tracking worksheet and production batch log designed specifically for cottage food operators, so you can track sales against the cap in real time.

When Tax Rules Change at the Commercial Transition

Once you exceed the cottage food sales cap or start selling TCS (temperature-controlled) foods, you move into commercial licensing territory. At that point, several tax rules shift:

• Sales tax collection becomes mandatory if you sell prepared food for immediate consumption
• Business personal property tax may apply to commercial kitchen equipment
• Employer taxes kick in when you hire employees (FICA, FUTA, Michigan unemployment insurance)

The cottage food stage is the simplest your tax situation will ever be. Use it to build clean financial habits — a dedicated bank account, monthly reconciliation, quarterly estimated payments — so the commercial transition does not overwhelm your bookkeeping.

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