Independent contractor taxes in Michigan: freelancer tax management guide

Looking to pursue freelance work while also spending time in the outdoors,‌ in the breathtaking forests and lakes of Michigan? Or are you just tired of arranging your life around your boss’s schedule? 

If you answered yes to either of those questions, then becoming an independent contractor may help you experience the flexibility and freedom you crave in your life and career.

However, freelancing is not all travel and excitement. It brings many new challenges, from registering as a contractor to complying with employment and tax laws. 

In fact, one of the biggest hurdles independent contractors face is managing taxes. 77% of freelancers in the US said they struggle to understand deductions. Contractors in Michigan must not only comply with US federal laws but also remain compliant with state laws. Not to mention the complications of working with employers outside the country. 

But don’t let taxes stop you from enjoying the many benefits of independent contractor life. This article will cover all that contractors need to know about taxes and payments. You will also learn how to get started, avoid misclassification, and understand contracts. 

Let’s begin with some basics that every freelancer should know before taking on the challenge of managing independent contractor taxes in Michigan. 

How do independent contractor taxes work in Michigan?

The first step to becoming an independent contractor in Michigan is understanding how taxes work in the state. 

Unlike employees, independent contractors typically file their own tax returns. Rather than an employer withholding taxes from each paycheck, as a contractor, you must put money aside and make payments to the IRS (Internal Revenue Service). Self-employed individuals should file their taxes with a 1040 or 1040-SR form.

You must also file a W-9 form with each employer you work with. The employer must report contractor payments over $600 to the IRS using a 1099-NEC form. 

So, what taxes do independent contractors have to pay in Michigan? 

The primary payment is the US self-employment tax, which freelancers must pay on any income earned over $400 (or $108.28 for church employment). The self-employment tax rate is 15.3%, covering Social Security (12.4%) and Medicare (2.9%) contributions. Independent contractors in Michigan are responsible for paying the self-employment tax in its entirety. As an employee, your employer would typically cover a portion of this.

Michigan has no other state taxes for self-employed individuals, and the US does not have a Value Added Tax (VAT) system.

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How do independent contractors pay taxes in Michigan?

Here’s all you need to know to compliantly pay independent contractor taxes in Michigan.

Withholding taxes

Under US law, an employer does not have any obligation to withhold taxes for you. As an independent contractor, you must withhold your own taxes. This means estimating earnings and remembering to put aside money each month. You must also file your tax return. 

Withholding taxes can be a challenge for many independent contractors, especially those used to working as employees. Experts suggest putting away a flat percentage of 30% of every paycheck into another account to cover taxes payments.

Quarterly tax payments 

Independent contractors that pay over $500 in taxes must split their payments into four separate payments during the year — one each quarter. 

Tax payments are typically due on:

• April 15

• June 15

• September 15

• January 15

Quarterly payments can be made with Form 1040-SR online, by mail or phone, or through the IRS app.

Damage and loss

Unlike with employees, employers typically cannot be indemnified by independent contractors. This means they are not liable to pay for damages. 

Independent contractors can protect themselves here by adding an indemnity clause to their contracts. There may also be some questions around liability if the employer was negligent when hiring the independent contractor or gave them non-delegable tasks.

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Independent contractor tax deductions 

Most independent contractors don’t fully understand how to make the most of tax deductions, which can cost individuals hundreds or thousands of dollars every year. 

Independent contractors can apply for various deductions when filing a tax return. Some common deductions for freelancers and contractors include:

• Home office 

• Transport and travel

• Internet and phone bill

• Medical insurance policy

• 401(k) contributions

• Interest accrued on business-related expenses 

How to file Michigan self-employment taxes: step-by-step guide

Filing your taxes with the IRS can feel overwhelming, especially when you’ve never done it. Follow these steps to complete the process with ease.

1. Apply for a social security number — If you don’t already have an SSN, you can get one using the SS-5 form. If you are not eligible for an SSN, you can apply for an individual taxpayer identification number (ITIN) with the W-7 form.

2. Calculate tax due — Based on your previous year’s earnings or projected income, you can estimate your quarterly payments using form 1040-ES. You can use Schedule SE (schedule of Form 1040) to determine the tax due on your annual net earnings from your business. 

3. Make quarterly payments — After creating an account on the IRS website, you can make payments online or using an alternative payment method. Be sure to complete this step, as failing to pay due taxes by each date can result in financial penalties.

4. File your annual tax return — File your tax return online with the IRS.

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What is an independent contractor according to Michigan law?

In Michigan, the law defines independent contractors by the nature of their work. Unlike employees, contractors:

• Complete a specific piece of work 

• Have autonomy over when, where, and how they complete their work 

• Are not eligible for employee benefits, protections, and tax contributions

Michigan courts highlight this distinction. They describe a contractor as an individual that undertakes independent business “according to his own methods, and without being subject to the control of his employer.”

All independent contractors must register as self-employed to undertake contract or freelance work legally. Plus, there are several different ways to work as an independent contractor in Michigan. 

Sole proprietorship

Most independent contractors and freelancers choose to work as sole proprietors. This is the simplest structure to begin earning for providing services. In a sole proprietorship, you work under your own name and are considered the same entity as your business, taking on all liability.

Partnership

A partnership is similar to a sole proprietorship, but instead of just you in the business, you choose to provide services with one or more other people. All partners are jointly liable for all obligations.

Single-member Limited Liability Company (LLC)

In Michigan, you can also choose to set up an LLC, which is a separate legal entity. The structure is a little more complex, but you pay taxes like a sole proprietorship, paying only personal income tax. As an LLC, you can choose to have corporate tax status. However, multi-member LLCs must file a business tax return.

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The dangers of contractor misclassification in Michigan

In the US, there are several legal differences between independent contractors and employees. These relate to the nature of the working relationship with the employer. While employees work for one employer and have little freedom in how they do work, contractors can work for multiple employers and enjoy more autonomy in their work methods.

It may be appealing for employers to hire workers as contractors, as by law, they do not need to provide statutory employee benefits, make tax contributions, or offer other protections. However, misclassifying a worker as a contractor — when they are really performing as an employee — can lead to disastrous financial sanctions and legal repercussions. These can include paying penalties, paying back missed benefits and contributions, and losing intellectual property (IP). 

For a contractor, misclassification can lead to missing out on worker protection and financial benefits, and they could even face liability issues. For example, a contractor in Michigan is liable for medical bills or lost wages if injured on the job. 

Worker-employer relationships are nuanced and can change over time. Therefore, as a contractor, it is vital you understand if your employer misclassifies you and the possible risks associated with it.

If you feel that your duties match those of an employee, but you are working as a contractor, you could be missing out on critical benefits, rights, and income security. You can address this with your employer to discuss them converting you from a contractor to an employee.

Remote’s employee and independent contractor misclassification guide can help you dive deeper into how to manage misclassification.

How do I ask the company I’m working with to convert me to an employee?

It can be uncomfortable to bring up this topic with an employer. But it may be necessary to rectify the misclassification and start receiving the appropriate rights and benefits. 

Approaching the topic professionally and knowledgeably usually breeds a fruitful interaction. You may even make them aware that converting a contractor to an employee can benefit the employer and help them mitigate risks.

Before you speak to your employer, understand when is the right time to convert a contractor to an employee. Usually, this is when you take on additional duties, work for solely one client, follow the employer’s guidelines for how you carry out work, or are no longer compliant with employment laws.

Many employers have misconceptions about the complexity of converting contractors to employees, especially when operating in different countries. Hiring employees abroad usually requires businesses to set up a local legal entity in the country of hire. Employers may have concerns about the costs of this, along with the additional administration and financial commitments of managing an employee over a contractor. 

The different options for hiring remote employees abroad can help you minimize some of your employer’s fears, help them stay compliant, and save them time and money. And working with an Employer of Record (EOR) service like Remote allows employers to hire remote employees worldwide without opening an entity in that country. It is a very simple, quick, and cost-effective solution that helps employers remain 100% compliant with local labor laws.

If you suspect misclassification, speaking out to protect yourself from legal and financial risks is important. Remote’s toolkit for remote workers includes expert advice on broaching challenging professional topics while providing additional information for remote workers. 

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How do I get paid as an independent contractor in Michigan?

Many independent contractors face challenges when getting paid. Creating invoices and working with multiple payment methods can be confusing — 74% of freelancers even claim to receive late payments.

As an independent contractor in Michigan, you will typically want to create an invoice for your services. You will then choose a preferred billing structure and payment terms and decide on a method to receive payments. 

Multiple popular methods of payment work for paying independent contractors.

Bank transfer 

If your employer is in Michigan or the US, asking employers to pay you directly into your bank account is a fast and secure option. If your clients are international, be aware bank transfers can incur additional transfer fees, high exchange rates, and take longer. 

Online transfer tools 

Platforms like PayPal and Wise are great for making instant payments online. They can handle international payments in different currencies but often have high fees and commissions. 

Contractor management platform 

A simple way to avoid the high transfer and currency exchange fees is to use a contractor management platform like Remote’s Contractor Management. Our all-in-one software allow employers to automate processes, make payments directly into bank accounts in the local currency, and reduce payment errors. 

Using Remote’s software looks like

1. Onboard contractors with an invite from the employer

2. Sign a contract with compliant global templates 

3. Submit an invoice inside the platform

4. Approve the invoice and creating a payment request

Pay the contractor in local currency and automate payments.

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The best way to get paid as a contractor 

Having one single system to manage all invoices and payments can help you track your payments and be more professional in running your business.

Remote’s Freelancer Hub for contractors allows you to do just that while organizing all your payments in one place. Whether your employers are in Michigan or Australia, you can receive international payments in over 170 countries. You can access templated contracts to always stay compliant and automate invoices to avoid late payments and errors. It can even help with managing health insurance and independent contractor taxes in Michigan. 

Becoming an independent contractor in Michigan is easy with Remote

Taxes, invoices, and compliance can be easier than you think as an independent contractor. You just need to understand your and your employer’s obligations so that you can stay compliant and choose the best systems to use for payment. 

To successfully get started, make sure you are clear on:

• Registering as self-employed 

• Understanding what taxes you owe

• Managing relationships with employers

• Navigating invoices and payments

With Remote's Freelancer Hub, you can automate your administrative tasks and always get paid on time. Our system saves you hours of work by creating contracts and invoices, and taking care of payments. Remote takes care of the admin so you can focus on your work and stay compliant with employment laws.

Discover how Remote can help you and your clients make contractor management a simple and efficient process today!

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