Are you considering starting your own business in Michigan? Understanding your tax obligations and preparing taxes can be confusing and complicated, especially for someone who hasn’t had any training for it. If returns are neglected or filed improperly, you may be fined by the IRS. It is always a good idea to consult a tax adviser or accountant to help you understand and prepare your returns. At Dominion, we make sure that your local, state, and federal taxes are paid on time, every time. Our Tax Team is only a call or email away and is always willing to help you find the answers you are looking for. In this blog you will find useful information that will help you understand everything you need to know about Michigan payroll taxes and Michigan payroll processing for your new business.
Get Your Federal Employer Identification Number (FEIN)
The first thing you need to do if you haven’t already is get your Federal Employer Identification Number (FEIN). Your FEIN is a tax ID assigned to you for your business. It is required to open a checking account and to facilitate other financial transactions and it also identifies a business for federal and state tax purposes. An FEIN must be obtained if the business pays wages to one or more employees no matter how they are set up (i.e. partnership, corporation for profit or nonprofit, a limited liability company, a trust or estate, a sole proprietorship, etc.
It is important to know that if you become the new owner of an existing business, you cannot use the FEIN of the previous owner. Also, an existing business that adds, opens or acquires a new operation of similar type may use its current FEIN for both the existing and new operations. However, a new establishment must obtain its own FEIN if its line of business is different from the existing operation.
After you have obtained your FEIN, you will need to register with the state of Michigan for income taxes,unemployment taxes and worker’s compensation. Note that all of these are related to Michigan payroll taxes and must be withheld from your employees paychecks or paid by you as the employer.
Classify Your Employees
According to the IRS, employers have misclassified millions of employees as independent contractors. While it does happen intentionally from time to time in order to save money, we like to think that more often than not this is done by mistake due to the confusing differences between the two classifications. The fines for this misclassification can be quite hefty, especially if it looks like it was done intentionally. That is why it’s vital that you are sure whether you have hired an employee or an independent contractor.
As an employer, you are required to withhold taxes from your employees’ paychecks. With contractors, however, you simply pay them the amount agreed and they are responsible for paying their own taxes. Improperly classifying an employee as a contractor and failing to withhold and pay their taxes will make you, the employer, liable for back taxes and penalties.
There is no clear definition of an employee, which is largely why there is so much confusion around the whole topic. The IRS relies on the Common Law Test in order to sort individuals into employees (meaning taxes like social security and medicare, etc. need to be withheld) and independent contractors. Common Law means that the employer has the right to dictate exactly what will be done and how. If this is the case, you have an employee on your hands.
However, as clear as that might sound, there’s one very important thing to keep in mind: the individual is an employee even if the employer chooses not to exercise the right to control. Just because you don’t decide what or how something gets done does not mean they aren’t an employee. If you’re still confused, try looking at this the opposite way: if you’re paying for results but not methods, meaning you have no control over what materials are used, then they fail the Common Law test and are likely an independent contractor. It all comes down to control. You can read more on this topic here.
An employer is any person or organization for whom an individual performs any service as an employee. This includes any person or organization paying compensation to a former employee after termination of his or her employment.
Important information to know:
Nonprofit organizations that are exempt from income tax, such as charitable, religious, and government organizations, must withhold tax from compensation paid to their employees.
Employers located outside Michigan who have employees working in Michigan must register with Treasury and withhold Michigan income tax from all employees working in Michigan. This applies to both Michigan residents and nonresidents.
Employers located in Michigan assigning a Michigan resident employee to work temporarily in another state must withhold Michigan income tax from compensation paid to the employee for work done in another state.
Federal taxes such as income tax, federal unemployment tax (FUTA), Social Security, and Medicare must also be calculated when processing your Michigan payroll; however, certain taxes are paid on behalf of the employer and are not taken from employees pay. Federal unemployment tax is one of those taxes that the employer must pay separate from the employee (this does not come out of the employee’s paycheck). Federal income tax, however, is deducted from employee pay and will vary based on the employee.
So how can employers calculate how much to withhold from their employees? The calculation uses a worksheet in IRS Publication 15-A, Employer's Supplemental Tax Guide and you can use one of two methods for the calculation:
The Wage Bracket Method: In the tables, find the range the employee's wages fall under. Then use the allowances the employee is claiming from their W-4 to find the correct amount.
The Percentage Method: This method is more complex and it involves first finding the amount of one withholding allowance, based on the employee's payroll period. Then, multiply this number by the number of allowances the employee claims and subtract that from the employee’s wages. Then, find the range that is correct for that number and calculate the tax amount.
These calculations can be pretty tricky, and if you have many employees, you will want to find other ways of doing the calculations. I recommend partnering with a cloud-based payroll software provider like Dominion. With Dominion, you can have peace of mind knowing all local, state, and federal payroll taxes are taken care of automatically after running payroll. What’s more, Dominion is a Michigan-based company, so you can rest assured that all your Michigan tax needs will be taken care of correctly! If you are interested in seeing how Dominion can solve all your new businesses’ needs, request a free and personalized demo below!