Think Twice

Across Michigan’s vibrant startup and small business landscape, labeling new hires as independent contractors can seem like a streamlined path to growth. Issue a 1099, skip payroll complexity, and move at the speed of innovation ­­­— at least on paper. In practice, though, regulators view worker classification as a cornerstone of labor compliance and scrutinize employers who misclassify employees. The difference between the two categories is neither cosmetic nor optional; it affects taxes, insurance, and workplace protections.

A genuine employee has day-to-day tasks, schedule, and methods of work directed by a company, which also supplies the essential tools, training, and benefits, and handles tax withholdings, Social Security, Medicare, and unemployment and workers' compensation programs. By contrast, a true independent contractor operates as a separate business: they set their own hours, provide their own equipment, invoice for completed work, and handle every aspect of their own tax and insurance responsibilities.

Michigan applies the IRS three-factor framework (behavioral control, financial control, and the nature of the relationship) to decide classification. If the company dictates how a task is performed, sets or reimburses expenses, or offers company benefits, the individual almost certainly qualifies as an employee, even if the assignment is part-time or seasonal.

Businesses that overlook these distinctions often do so to avoid payroll taxes and insurance premiums. Yet, those savings are short-lived. The Michigan Unemployment Insurance Agency actively audits 1099 filings and may assess back taxes, interest, penalties, and even personal liability for workplace injuries. Misclassification can also jeopardize professional licenses and future contracts, damaging the credibility that emerging companies work hard to build.

The ripple effects extend beyond any single firm. Evading payroll obligations burdens compliant competitors, reduces state tax revenue, and denies workers unemployment benefits, employer-sponsored health coverage, and retirement contributions. For these reasons, enforcement remains a priority for both state and federal agencies.

Prudent owners take a proactive approach: drafting contractor arrangements in clear, independence-focused agreements, avoiding control over a contractor’s workflow, and consult a CPA or employment attorney whenever uncertain. In many borderline cases, treating the worker as an employee from the outset proves far less expensive than defending an audit.

Ultimately, compliance is not an administrative hurdle. It is a strategic asset. Aligning workforce practices with the law builds trust with employees, regulators, investors, and customers. Before issuing a 1099, confirm that the role truly meets independent contractor status. The diligence exercised can safeguard one’s enterprise for years to come.

When it comes to classification, it pays to get it right from the start. Let us know if our attorneys can walk through it with you.