As freelancing and independent contracting become a more common way to earn a living in Michigan, it is essential to know how employment laws and tax laws may affect you. While it may be evident in some business relationships, there are subtle distinctions that are not always apparent.
The general definition of a contractor is an individual or company that provides labor, services and materials to complete a contracted job. The contractor and the entity requiring services sign an agreement outlining the objectives and compensation for a completed contract. The contractor then provides those services in exchange for payment.
According to the IRS, arrangements like these do not denote “employment,” and as such, do not require the entity requesting services to provide employee benefits, such as paid time off, federal tax withholding or workers’ compensation. The contracted body is responsible for maintaining these aspects of its business.
While this seems relatively clear, the line between contractor and employee blurs regarding three key factors:
- Behavioral—Control over how the workers do their jobs or what they do to complete the contract
- Financial—Business aspects such as supply reimbursement, who provides tools and materials and worker compensation
- Relationship—Agreements regarding benefits like insurance and pension plans, continuation of the business relationship after the contract is complete and whether the work is a significant aspect of the business
Companies and workers need to understand and define their relationship prior to engagement to determine the relationship. However, individual cases vary, and there is no one exact set of factors that indicates an independent contractor or employee.
The purpose of this information is to give you an idea of the differences between independent contractors and employees but is not intended as legal advice.