Operational Gaze:
How to Run Payroll in Michigan?

April 4th 2024

Running payroll is more than just giving out paychecks; it’s about taking care of the people who take care of your business. But while it is a vital aspect of managing your workforce, it definitely isn’t the easiest thing to do, especially for new businesses.

From calculating wages and handling deductions to navigating the intricacies of payroll tax procedures and maintaining meticulous records, the payroll process can quickly become overwhelming without the right guidance. This is why we’ve put together this guide to simplify the payroll process for you, providing a detailed roadmap to navigate each pay cycle effectively within Michigan’s regulations.

Whether you’re a seasoned business owner or just embarking on this journey, our insights and instructions are tailored to ensure that your payroll operations run seamlessly and compliantly in the Great Lakes State.

This Article Covers

Laws That Affect Payroll Procedures in Michigan
Worker Classifications in Michigan
Payroll Forms and Relevant Bodies in Michigan
Applicable Taxes in Michigan
Key Pay Elements That Impact Payroll in Michigan
Step-by-Step Guide to Payroll in Michigan

Laws That Affect Payroll Procedures in Michigan

In Michigan, like in many states, payroll procedures are subject to specific state and federal laws. These regulations cover crucial areas such as minimum wage, overtime, leaves, and breaks. Comprehending and adhering to these laws is paramount to ensure fair compensation for your employees and to steer clear of potential legal pitfalls arising from non-compliance.

Michigan Laws

  • Minimum Wage: As of January 1,2024, Michigan’s minimum wage increased to $10.33, as part of a phased increase under the Michigan Improved Workforce Opportunity Wage Act of 2018.
  • Overtime: Overtime rules in Michigan require non-exempt employees to receive 1.5 times their regular pay rate for all hours worked beyond 40 hours a week, ensuring that employees are fairly compensated for those extra hours. This is in line with the rules set by the Federal Labor Standards Act.
  • Paid Breaks or Lunch Period: There are no rules about breaks or meal times for employees who are 18 or older. However, if you have employees under 18, they can’t work more than five hours straight without a 30-minute break. But are these breaks paid? Well, according to the Department of Labor (D.O.L.), you should pay employees for short breaks (20 minutes or less) because they boost productivity. But for longer lunch breaks (30 minutes or more), where employees are completely off-duty and not working, you don’t need to pay for that time.
  • Pay periods: Employers can choose to pay their employees every week, every two weeks, or once a month, but once they pick a schedule, they have to stick with it. If they pay weekly or every two weeks, they must give their employees their wages within 14 days after the work period when they earned the money. And if they pay once a month, they have to pay on or before the first day of the next month after the one in which the money was earned.
  • Paid Time Off and Leaves: In November 2018, Michigan passed the Paid Medical Leave Act. This law lets qualified employees get up to 40 hours of paid sick leave each year. If a Michigan business has 50 or more workers, it must create a paid sick leave policy, and it must provide the full 40 hours of paid sick time to eligible employees.
  • Payroll Recordkeeping: Michigan requires employers to keep a record for each employee that includes their name, address, birth date, job title or category, total pay rate, total hours worked per pay period, total wages paid per pay period, a detailed list of deductions, and a breakdown of any extra benefits they receive. If they have 10 or more employees with the same extra benefits, they can keep one combined list for that group as long as it specifies which group they are in. These records must be kept for at least three years and can be checked by a department representative at any reasonable time.
  • Payroll Taxes: Michigan employers are subject to various types of payroll taxes, including state income tax withholding and unemployment taxes. State income tax is withheld from employees’ wages and then paid to the Michigan Department of Treasury. Employers also pay unemployment taxes to the Michigan Unemployment Insurance Agency to fund unemployment benefits for eligible workers.
  • Final Pay: Employees who have voluntarily resigned or been terminated are entitled to receive their final compensation by the upcoming regular payday. Any accrued benefits should be disbursed following the terms outlined in a written employment contract or the company’s established policy. It’s important to note that if the employer is subject to the state’s paid sick leave law, there may be no obligation to compensate employees for any unused, accrued paid medical leave upon their separation from employment.

Federal Laws

  • Family and Medical Leave Act (FMLA): The FMLA lets qualified workers at certain companies take time off from work without pay but with job security, all while keeping their health insurance as usual. Eligible employees can have up to twelve weeks off in a year for reasons like having a baby, adopting a child, taking care of a family member with a serious health issue, dealing with their own serious health problem, or handling urgent military family needs when their spouse, child, or parent is on active duty.
  • Fair Labor Standards Act (FLSA): The FLSA plays a pivotal role in establishing vital federal benchmarks encompassing minimum wage, overtime compensation, child labor protection, and employee categorization. While Michigan has its own minimum wage regulations, it does align with FLSA standards when it comes to overtime.
  • The Federal Unemployment Tax Act (FUTA): Many businesses are obligated to contribute to the FUTA, a payroll tax that supports unemployment insurance programs, offering crucial assistance to individuals facing unemployment. It’s worth noting that FUTA taxes are solely the responsibility of employers, sparing individual taxpayers from this obligation. For the year 2023, the unemployment tax rates vary, spanning from a minimum of 0.06% to a maximum of 10.3%.

HR Laws

  • Child Labor Laws: In Michigan, there are laws called the Youth Employment Standards Act (YESA) that regulate child labor for individuals under 18, regardless of their employment type. To work legally, minors must obtain a signed work permit, agreement, or contract from both their employer and their school’s chief administrator. YESA also covers rules on permitted jobs for minors, posting guidelines, meal and rest breaks, and more.
  • New Hire Reporting: Employers are legally obligated to promptly submit details regarding newly hired or rehired personnel within a 20-day window from the date of hire. This information is crucial not only for tax records but also enables the cross-referencing of new hires with child support cases, aiding in the identification of parents, the establishment of court-mandated support orders, and the enforcement of pre-existing support arrangements.
  • Posting Requirements: To ensure compliance with labor regulations, it is imperative for employers to post Michigan Minimum Wage Law posters within their workplaces prominently. This requirement applies in cases where the business is not subject to the provisions of the FLSA or when adherence to federal minimum wage standards would result in a lower minimum wage than what Michigan’s law mandates.

Worker Classifications in Michigan

Worker classification is a critical aspect of labor regulations in many states, and Michigan is no exception. The state employs a comprehensive approach to determine whether individuals should be classified as employees or independent contractors.

Among the tests used, the Economic Reality Test stands out as a fundamental tool in this evaluation. This test is designed to comprehensively assess the worker’s status, ensuring that they receive the appropriate benefits, protections, and remuneration. And in this section, we’re going to look at the Economic Reality Test in greater detail.

Employees and Independent Contractors

Understanding and adhering to the correct worker classification is vital for both employers and workers in Michigan. It not only impacts payroll management but also extends to worker rights, benefits, and legal protections.

If someone is considered an employee, their wages are subject to state unemployment taxes, and they might qualify for unemployment benefits. On the other hand, if they’re classified as an independent contractor, the employer doesn’t have to pay state unemployment taxes on their earnings, and their work isn’t counted as covered employment.

Independent contractors also don’t have the same level of legal benefits as employees, such as:

  • Minimum wage
  • Overtime pay
  • Worker’s compensation, and so on.

Economic Reality Test

Under common law, Michigan courts employ the Economic Reality Test to determine the classification of an independent contractor. This test encompasses several key considerations, including but not limited to:

  • Whether the employer assumes any liability upon terminating an at-will relationship.
  • Whether the work performed constitutes an integral part of the employer’s business.
  • If the worker primarily relies on wages from the employer to cover their living expenses.
  • Whether the worker provides their own materials and equipment.
  • If the nature of the work is typically carried out by an individual functioning as an independent contractor.

Michigan also uses the Economic Reality Test to determine eligibility for Unemployment Insurance and Workers’ Compensation.

It is crucial to bear in mind that even if you consider an individual to be an independent contractor, they may not legally qualify as one and instead may warrant classification as an employee. Misclassifying a worker can lead to additional costs, fines, and potential civil and criminal liabilities under various laws, including the Workers’ Disability Compensation Act, the Michigan Employment Security Act, and the Workforce Opportunity Wage Act.

To learn more about the entitlements of both salaried and hourly employees, you can refer to our articles on your rights as a salaried employee in Michigan, and your rights as an hourly employee in Michigan.

Payroll Forms and Relevant Bodies in Michigan

Managing payroll in Michigan involves complying with a range of state and federal regulations, which often require employers to complete various mandatory payroll forms. In this section, we’ll delve into the essential payroll forms and the pertinent bodies in Michigan that employers need to be familiar with to maintain compliance and effectively handle payroll responsibilities.

Payroll Forms in Michigan

Forms for Federal Payroll

  • W-4 Form: Assists employers in determining the correct tax withholding for employees.
  • W-2 Form: Shows total annual earnings for each employee.
  • W-3 Form: Summarizes total pay and taxes for all employees.
  • Form 940: Reports unemployment taxes to the IRS
  • Form 941: Reports quarterly income and FICA taxes withheld from paychecks.
  • Form 944: Reports annual income and FICA taxes withheld from paychecks.
  • 1099 Forms: Gives contractors the information they need to calculate the taxes they owe the IRS based on their earnings.
  • Form I-9: Used to confirm the identity and work eligibility of people who are working in the United States. 

Federal and Michigan Payroll/ Tax Bodies

  • Michigan Department of Treasury: The Michigan Department of Treasury handles various financial matters for the state. They collect and manage state taxes and provide resources on payroll tax rates, tax returns, and other information.
  • Internal Revenue Service: The Internal Revenue Service (IRS) is a branch of the U.S. government responsible for handling taxes. It operates under the Department of the Treasury and oversees federal tax regulations. The IRS performs various tasks, including collecting taxes, managing tax forms, assisting taxpayers, and conducting tax audits. Its primary objective is to ensure that individuals and businesses comply with tax laws and fulfill their tax obligations.
  • The Social Security Administration: The Social Security Administration (SSA) ensures Americans’ financial security throughout life, managing retirement, disability, survivor benefits, and family assistance. It helps enroll in Medicare and issues essential Social Security Numbers for employment and government services.
  • Wage and Hour Division: The Wage and Hour Division (WHD) has a vital role in maintaining labor standards and protecting workers’ rights. It does this by enforcing important laws, with the Fair Labor Standards Act being a key one. This act covers crucial areas like minimum wage, overtime pay, accurate work-hour records, and rules for employing minors. Besides this main legislation, WHD also ensures compliance with other essential labor laws, including the Migrant and Seasonal Agricultural Worker Protection Act, the Employee Polygraph Protection Act, and the Family and Medical Leave Act, all aimed at safeguarding workers’ rights in various job settings.
  • Michigan Unemployment Insurance Agency: The Michigan Unemployment Insurance Agency (UIA) is in charge of a program that offers financial help to people who lose their jobs without any wrongdoing on their part. This assistance is funded by taxes collected from employers who fall under the Michigan Employment Security Act.

Applicable Taxes in Michigan

All Michigan employers must deal with various payroll taxes, both state and federal. Some of these need to be withheld from their employee’s paychecks, while others are the responsibility of the employer to contribute. Understanding, which is very important to ensure compliance with tax laws and avoid hefty penalties for breaking Michigan labor laws.

Employer Contributions

  • State Unemployment Tax: Employers must pay unemployment taxes to support terminated employees. In Michigan, new businesses (two years or less) pay a 2.7% rate, except in construction, where it’s based on industry averages (usually 6.8%-8.1%). For businesses that have been around for 3-4 years, the rate will depend on their payroll and benefits paid. From year five, it’s determined by using a formula established by the State of Michigan. In essence, more benefit claims mean a higher tax rate.

Withheld from Employee’s Wages

  • Income Taxes: Michigan has a flat-rate tax of 4.25% on each employee’s gross pay. In addition, some Michigan cities levy an additional income tax for residents and non-residents. The rate of the local income tax can vary per city. Keep in mind that these rates may change, so it’s best to reach out to the local city government for the most up-to-date information.
  • Workers’ Compensation: Michigan employers are required to cover worker’s compensation insurance if they have at least one employee working more than 35 hours a week for 13 weeks or more in a year. They must also have a minimum of three employees at any given time, including part-time workers. The cost of worker’s compensation is roughly 70 cents for every $100 of payroll you process.
  • Social Security (FICA) Withholding: Social Security withholding, also known as the FICA tax, is a deduction from employee earnings calculated at a rate of 6.2% on the first $137,700 of their income. The maximum withholding is set at $8,537.40. Additionally, there’s another part called Medicare, specifically the Hospital Insurance part, which is a 1.45% deduction applied to all employee earnings.

Additional Relevant Subtractions to Employee Paychecks

The federal Fair Labor Standards Act (FLSA) and Michigan’s Payment of Wages and Fringe Benefits Act (PWFBA) let employers deduct money from their paychecks if it’s allowed by law or if an employee agrees to it. Aside from the taxes stated above, here are other examples of deductions that are allowed by law:

  • Certain expenses for things like meals, housing, and transportation.
  • Money you owe to your employer, such as for loans or advances.
  • Court-ordered deductions from your wages.
  • Money you owe to the government.
  • Child support and alimony payments.

Employees can also agree to other deductions, such as:

  • Paying union dues.
  • Giving money to charities.
  • Paying for insurance.
  • Contributing to your retirement fund.

Key Pay Elements That Impact Payroll in Michigan

Minimum Wage

Michigan has a minimum wage of $10.33 per hour, up from $10.11 in 2023. All employers are required to pay their employees at least this amount aside from certain exemptions set by the FLSA. These exemptions include:

  • Farm workers
  • Taxi drivers
  • Outside salespeople
  • Salaried employees in administrative, executive, or professional roles who earn more than $684 per week

According to the FLSA, employers in Michigan can also pay workers aged 16 to 19 a lower training wage of $4.25 per hour for up to 90 days when they first start working. After this training period, they must be paid at least the regular minimum wage.

Overtime

When it comes to overtime, Michigan has its own laws in addition to FLSA overtime rules.

The basic rule is that if an employee works more than 40 hours in a week, they should get paid 1.5 times their regular wage. Given Michigan’s current minimum wage of $10.33 per hour, this would put the overtime rate at $15.495 per hour.

Some states have a daily overtime rule where employers pay extra if employees work more than 8 hours in a day, but Michigan doesn’t do that. In Michigan, they only look at how many hours an employee worked in a whole week to decide if they get overtime pay.

Learn more in detail about Michigan Overtime Laws.

Tip Credit

The Michigan Improved Workforce Opportunity Wage Act, Public Act 337 of 2018, allows employers to use something called “tip crediting.” This means that they can pay workers who usually get tips a lower minimum wage of $3.93 per hour as long as the tips the worker receives can make up the difference to reach the regular minimum wage.

When considering tip crediting for your employees and the state minimum wage rate, remember these important conditions:

  • Minimum Wage Guarantee: However, it’s crucial to ensure that when you add up your employee’s tips and the lower hourly wage, the total equals or exceeds the regular minimum wage.
  • Verification of Tips: Make sure that your employees can prove the tips they receive. Usually, this can be confirmed through their federal tax records.
  • Inform Your Employees: It’s your responsibility to inform your employees about this arrangement so they are aware of how their pay is structured.
  • Recordkeeping: If you choose to use tip crediting, keep thorough records of your employees’ tips for each pay period. Additionally, have them sign and date a statement regarding their tips before they receive their paycheck. This documentation is essential for compliance.

Pay Stub Laws

Michigan employers must give each employee a pay stub or wage statement whenever they get paid. This document should show the following information:

  • Hours the employee worked
  • How much money they earned before deductions
  • Which pay period it covers
  • A breakdown of the deductions.
  • For hand harvesters who are paid based on the amount of work they do, the document should also show how many units they harvest.

You can provide this document electronically, but the employee should be able to print it when they receive their wages. The company must follow the same method for all employees.

Workers’ Compensation Insurance

Workers’ Compensation (WC) is a benefit that covers medical expenses when an employee gets hurt or sick because of their job. Even public employers in Michigan usually have to get worker compensation insurance for their employees by law.

As a private employer, you must have workers’ compensation insurance if:

  • You have at least one employee who works more than 35 hours per week for 13 weeks or longer in a year. This also applies to homeowners who hire domestic workers.
  • You have at least three employees at any given time.
  • The agricultural industry is an exception. They need workers’ compensation insurance if they have three employees working more than 35 hours per week for 13 weeks or longer in a year.

There are also some exemptions for WC under state law, this includes:

  • Agricultural employers, unless they have three or more employees who work over 35 hours per week for 13 weeks.
  • Domestic workers, such as housekeepers.
  • Partners and officers of a partnership and corporation.
  • Sole proprietors who are classified as self-employed. Employees of sole proprietorships will need workers’ compensation coverage.
  • Family members who work for a relative as employees.
  • Independent contractors hired by a business to perform specific tasks.

The cost of workers’ compensation insurance is about $0.70 for every $100 of payroll. For instance, a company with a $300,000 payroll can expect to spend around $2,100 on insurance.

Michigan Pay Frequency Laws

Employers in Michigan can choose how often they pay their employees. They can pay them once a month, twice a month, every two weeks, every week, or even more often if they want. However, they need to decide on a regular payday schedule.

In Michigan, the frequency of paydays usually depends on the occupation.

Garnishments and Deductions

Wage garnishment is a legal process where an employer, under a court order, can deduct a portion of an individual’s earnings to satisfy financial obligations, such as child support, student loans, tax levies, and more.

In Michigan, a creditor can garnish whichever is less:

Note: “Disposable earnings” refer to a worker’s wages after mandatory deductions like taxes and Social Security, but not deductions like insurance or pension plans.

Michigan law also provides different exemptions based on a worker’s household situation:

  • If they have a family, 60% of their weekly wages can be exempt from garnishments, but not less than $15.00 per week, plus an additional $2.00 per week per dependent other than a spouse (Mich. Comp. Laws § 600.5311).
  • Other debtors can exempt 40% of their weekly wages but not less than $10.00 per week.

It’s important to note that for child support, federal student loans, or taxes, the government or creditor can garnish wages without needing a court judgment, and the garnishment limits are different from those for judgment creditors.

Final Paycheck

In Michigan, you must pay terminated employees their final wages on the next scheduled payday. While you don’t have to provide vacation days or compensate for unused vacation days, you must adhere to your company’s vacation payout policy.

If an employee leaves voluntarily or is discharged, you must pay all their earned wages on the regular payday for the relevant period.

For employees involved in hand harvesting crops, you must pay their earned wages within one working day after termination.

Step-by-Step Guide to Payroll in Michigan

  1. Identify Payroll Rules Applicable to Your Company: Before you begin the payroll process, it’s crucial to understand and identify the payroll rules that apply to your company in Michigan. This includes both state and federal regulations. In Michigan, you’ll need to consider factors such as minimum wage laws, overtime regulations, tax withholding requirements, and other key pay elements that can impact payroll. Be sure to stay updated on any changes in payroll regulations that may affect your business.
  2. Apply for an Employer Identification Number (EIN): Your Federal EIN is like a business tax ID. It’s needed for opening a bank account and handling financial transactions for your business. It’s also used for federal and state taxes. You can get your EIN. for free from the IRS website or by mail by completing Form SS-4.
  3. Register with the State of Michigan: For state registration, you’ll need to complete Form 518 and submit it to the Michigan Department of Treasury. If you require assistance during this process, you can refer to the Michigan New Business Registration Guide, which also includes Form 518. Additionally, all employers are required to complete the Liability Questionnaire (U.I.A. Schedule A) and the Successorship Questionnaire. These forms are mandatory for business registration in Michigan.
  4. Classify Your Employees: If you mistakenly classify an employee as a contractor and don’t handle their taxes correctly, you, as the employer, will be responsible for unpaid taxes and fines. In Michigan, courts use the Economic Reality Test to decide if someone is an independent contractor.
  5. Set Up Your Payroll Process: Establish a streamlined payroll process that suits the needs of your business. This includes selecting a payroll software or system, designating responsible individuals for payroll tasks, defining a clear payroll schedule, and selecting a payment method.
  6. Collect Employee Payroll Forms: When bringing in new employees, it’s important to gather their personal information, Social Security numbers, and tax filing preferences, as well as the necessary forms for payroll in Michigan. Some important forms to collect include the W-4, I-9, and direct deposit details. Additionally, remember to notify the Michigan Department of Treasury about all new hires.
  7. Collect, Review, and Approve Timesheets: Timesheets document the hours worked by each employee during a specific pay period. Make sure that employees accurately record their work hours, including any overtime or paid time off they may have taken. A great way to streamline this process is by using a timesheet app or a time and attendance software. Managers or supervisors should review and approve timesheets to verify their accuracy. Any discrepancies or questions about hours worked should be resolved before moving on to the next step.
  8. Compute Payroll, Pay Employees, and Remit Taxes: With accurate timesheets in hand, you can now calculate the payroll. This involves determining each employee’s gross pay, which includes regular wages, overtime, and any additional compensation like bonuses or commissions. Subtract applicable deductions, including federal and state income tax, Social Security, and Medicare. Finally, calculate the net pay for each employee and issue paychecks or make direct deposits. Ensure that you meet federal and state minimum wage requirements. After paying your employees, remember to remit the appropriate payroll taxes.
  9. File Payroll Taxes with the Federal and State Governments: After withholding and paying payroll taxes, you must file the necessary payroll tax reports with both the federal and state governments. Make sure to use the proper state and federal payroll forms. It’s also important to meet all filing deadlines to avoid fines and penalties. In Michigan, you’ll need to send a yearly tax report that shows how much money you’ve held back from your employees’ paychecks. You also have to send in tax reports more often, either every month or every three months.
  10. Maintain and Store Payroll Records: It’s essential to maintain accurate payroll records for each employee, including timesheets, pay stubs, tax forms, and other relevant documents. Federal and state laws require employers to keep payroll records for a specified period, typically for at least three years. Storing these records securely ensures compliance with auditing requirements and provides documentation in case of disputes or inquiries from tax authorities.
  11. Do Year-End Payroll Tax Reports: You need to fill out certain government forms, like the W-2s for employees and 1099s for contractors, and give them to your workers and contractors by January 31 of the next year. In Michigan, you also have to provide state W-2s, and you should send them by the end of February of the following year.

Final Thoughts

Running payroll in Michigan involves careful attention to detail, from wage calculations to tax compliance. Staying updated with state-specific regulations is crucial. To assist you further, we’ve compiled a list of 6 top apps to simplify the payroll process and 10 tips for enhancing payroll efficiency in the US. Remember, efficient payroll not only ensures legal compliance but also supports your employees and business success in the Great Lakes State. It’s definitely something you shouldn’t take lightly.

Important Cautionary Note

This content is provided for informational purposes only. While we make every effort to ensure the accuracy of the information presented, we cannot guarantee that it is free of errors or omissions. Users are advised to independently verify any critical information and should not solely rely on the content provided.

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