EMPLOYEES VERSUS CONTRACT LABOR

Individuals may provide services to a business as either an employee or a contractor.  Whatever status an individual has as an employee affects the taxes, liability, benefit costs and many other areas of a business.  The question of an employee vs. contractor is a very critical issue and is NOT a simple task.  There are many different tests the IRS may apply to determine whether an individual is an employee or contractor.  Improperly classifying someone whom the IRS considers an employee as a contractor can result in very stiff penalties.  When using contractors instead of employees for your business, it is important that you consult with a competent tax advisor prior to making a decision.

PLAN YOUR HIRING

Hiring employees is expensive and should not be approached casually.  Make sure your decision to hire employees fits in with your goals as outlined in the business plan.  Write out a job description that indicates exactly what is expected of each employee.  Interview several people and select the one you feel has the best qualifications.  The majority of employers consider attitude of potential employees as the number one trait in their hiring decision.  It is a good idea to have a 30- or 90-day trial period before taking someone on permanently.  The wrong employee can cause a great deal of damage to your business.  You may wish to order a copy of the publication, "Employees: How to Find and Pay Them" available through the federal Small Business Administration at (800) 827-5722.

TRAINING AND WORKING WITH EMPLOYEES

Training is expensive but necessary.  You want well-qualified employees who will do things the way you need them done.  A well-defined company policy handbook plus a job description outlining duties, responsibilities, ethical standards, and criteria for success will be valuable.  You may want to invest in your employees by sending them to special training.  Small business owners should pay special attention to cross-training employees in areas other than those specifically defined in their individual job descriptions.  Open lines of communication are necessary to keep employees motivated and involved with the business.  Many business owners find it beneficial to allow employee participation in the goals setting process of the business.  They then follow up with employees with constructive feedback - positive as well as negative - on the employee's progress toward those goals.

Employers have a legal as well as ethical obligation to provide a safe and equitable workplace.  You may wish to contact the Department of Labor and Economic Growth, Michigan Occupational Safety and Health Administration (MIOSHA), Consultation, Education and Training Division (CET) at (517) 322-1809.  Listed below is additional information about other programs:

AMERICANS WITH DISABILITIES ACT (ADA)

The ADA protects people with disabilities from discrimination in employment, government services and public accommodations.  For information publications, call (800) 669-3362.

DRUG-FREE WORKPLACE

Many employers are becoming interested in issues involving employees' use of drugs and alcohol and its relationship to work.  For additional information about programs to make the workplace drug and/or alcohol free, contact the Substance Abuse and Mental Health Services Administration at (301) 443-8956.

AFFIRMATIVE ACTION AND EQUAL EMPLOYMENT OPPORTUNITY

The goal of these programs is to provide equal opportunities for all qualified people in employment.  To learn more contact the Michigan Department of Civil Rights at (313) 256-2663 or (313) 961-1552 (TDD).

WELLNESS PROGRAMS

Programs that encourage mental and physical health such as exercise, stress reduction, personal counseling, smoking cessation, etc. are becoming popular as a way to keep employees healthy and working.  Participating employers have seen many benefits including, higher morale, reduced workers' compensation costs and less on-the-job accidents.  To learn more about worksite wellness programs, including grants that may be available to get started, contact the Michigan Department of Community Health at (800) 537-5666.

PAYROLL TAXES

Any business with employees of any type must comply with federal and state payroll requirements.  This is true even if you are the sole employee of a corporation that you own.  It is critical that you understand the various deadlines and requirements, or that you use the services of someone who does.  The major types of payroll taxes in Michigan are:

• Income Tax Withholding (federal, state, and, if applicable, local)
• Federal Social Security Tax (FICA)
• Federal Unemployment Tax (FUTA)
• Michigan Unemployment Tax

Unemployment insurance protects workers who lose their jobs through no fault of their own.  The funds used to pay workers who are covered under this type of insurance are accumulated from taxes on the wages of employees during their employment.  Both state and federal unemployment taxes are paid by employers.  No deductions can be made from an employee's wages to cover these taxes.

Any business that employs one or more persons in Michigan is required to register with the Unemployment Insurance Agency (UIA).by the end of the month following the month in which it becomes an employing unit.  All employers must register, although not all employers are liable under the law.  Liable employers are required to pay state unemployment taxes quarterly at a rate based on a "required reserve" balance and any unemployment insurance benefits paid to employees.  A new business will pay 2.7% of the first $9,000 of every employee's wages for the first two years of liability (new employers in the construction industry may pay a higher rate).  When buying a business, or buying the assets of an existing business, the rate may be significantly higher.

The Unemployment Insurance Agency (UIA) produces an Employer Handbook with information about a variety of subjects.  To obtain a copy of this publication, mail a $15 check or money order made payable to the State of Michigan (UIA) to: Unemployment Insurance Agency Handbook, 3024 W. Grand Blvd., Suite 13-600, Detroit, MI 48202 or you may call (800) 638-3994.  All orders must be prepaid.  A handbook order form can be found at the Unemployment Insurance Agency website.

FEDERAL UNEMPLOYMENT INSURANCE

Federal Unemployment Insurance (FUTA) is collected by the Internal Revenue Service (IRS) for the U.S. Department of Labor to pay administrative expenses of operating the state unemployment systems. When filing an "Application for Employer Identification Number" with the IRS, indicate that employees will be hired.  The IRS will mail a packet of information - there will be coupon forms for FUTA tax deposits and an Annual Report form.  For more information about the FUTA tax, forms and deposit requirements, contact the IRS at (800) 829-3676.

INCOME TAX WITHHOLDING

Any employer of one or more persons must withhold federal and state income taxes from wages paid to employees.  A city income tax may also apply.

Each employee should complete the following forms: a withholding exemption certificate (W-4) from the Internal Revenue Service (800) 829-3676 and a MI-W4 from the State of Michigan Department of Treasury (800) 367-6263.  Based on the certificate's information, a certain amount of taxes are withheld from the employee's wages.

You may be required to deposit the federal taxes collected.  One must file quarterly returns with the IRS and file an annual reconcilement of the quarterly returns.  If returns are neglected or filed improperly, penalties and excess payments may be levied.  For more information about federal income tax withholding, contact the IRS at (800) 829-1040.

In addition to federal income taxes, federal law also requires that employers withhold (and deposit) Social Security taxes from employees' wages.  The employer must also pay an equal amount.  Tax rates and maximum earnings subject to tax may vary from year-to-year, so employers should contact the IRS at (800) 829-1040 for the latest information.

State filing requirements may vary based on the amount of state taxes withheld.  An employer must file form 518, an "Application for Registration" with the Michigan Department of Treasury if employees are hired.  They will then notify the employer of filing deadlines and provide the needed forms.  An annual return is also required.  Michigan's withholding tax tables are available from the Michigan Department of Treasury at (517) 636-4660.

Contact the City Treasurer to determine if a city income tax is applicable for the new employees.  If the City does have an income tax, the City Treasurer can provide the required registration forms and any information that is needed.

WORKER'S COMPENSATION

There are a number of organizations involved in workers' compensation.  It is important to understand who they are and what they do.  First of all, workers' compensation benefits ordinarily are not paid by the State of Michigan.  Workers' compensation is the responsibility of an employer.  Benefits are paid either directly by an employer or through an insurance company on behalf of an employer.

All employers that regularly employ three or more part-time employees at one time, or employed one or more persons for at least 35-hours per week for at least 13-weeks during the preceding 52-weeks, are required to have workers' compensation insurance.

The majority of employers in Michigan obtain workers' compensation through policies sold by commercial insurance companies.  Self-insurance is an alternative for large companies that have been granted the privilege of paying workers' compensation benefits from general company operating funds.  Companies with $2,000,000 or more in an annual premium program frequently investigate the self-insurance approach as a possible coverage alternative.

The premium rates for workers' compensation insurance are competitively determined.  Insurers use about 500 different rating classifications based on the type of business an employer operates.  Since premium rates for a given classification vary widely among insurers, it pays to shop carefully.  Insurers also have different merit and experience rating plans, schedule-rating plans, and premium discount tables, which can affect an employer's final premium cost.

There are two excellent publications available to help new business owners understand Michigan's workers' compensation system.  The "Michigan Business Guide to Workers' Compensation" and "General Information Regarding Rights and Responsibilities Under the Act" provide an easy to understand overview of Michigan's workers' compensation system.  Additional information and assistance is also available at the Workers' Compensation Agency of the Department of Labor and Economic Growth at (888) 396-5041.

ALIEN EMPLOYEE

The Immigration Reform and Control Act of 1986 not only makes hiring or recruiting "unauthorized aliens" illegal, but it also places the responsibility for enforcing the law on the employer.  The law applies to ALL employers, no matter what the size of the business.  Under the law, an employer is required to check the citizenship status of every employee and to have proper documentation for those employees with temporary residency.  Contact the Immigration and Naturalization Service at (800) 375-5283 for more information or (800) 870-3676 to obtain forms.

It should be noted that many of the visas that authorize entrance to the United States do not authorize the holders of those visas to accept employment here.  Usually these visas must be obtained from the U.S. State Department in the country of origin, though in some cases an application for a change in status can be secured from within the United States.  The visas vary in eligibility requirements and in the duration of their viability.  It is the employer's responsibility to ascertain whether employees are legally entitled to work.  Consult an attorney who specializes in immigration matters or call the Immigration and Naturalization Service for assistance at (800) 375-5283.  Additional information may also be found at Michigan's Alien Labor Certification Program web site.

NEW HIRE REPORTING

A provision of the Federal Welfare Reform Act requires employers to report to the Michigan Department of Treasury basic information on all newly hired or rehired employees within 20 days of hiring.  The purpose of collecting the information is to build a strong partnership between employers and child support programs across the country, with the intent of obtaining better compliance with child support orders.  Employers may report electronically or by mail.  Required information includes: the business name, address and Federal Employer Identification Number; employee name, address and Social Security number.  For further information or to obtain forms, contact the Michigan New Hire Operations Center at (800) 524-9846.

Refer to Appendix B1 for a quick list of employer information and Appendix B2 information regarding required workplace posters.