If you own a business in Michigan, understanding the proper way to classify your workers is imperative. The most confusion comes up when distinguishing between employees and independent contractors. Classifying a worker as one when he or she is the other is a huge mistake that could cost your business a lot of money. The authority on the subject is the IRS.

According to the IRS, the distinction between these two worker classifications is the relationship you have with the worker. In general, if the worker is an independent contractor, you will not have much control over his or her work. If the worker is an employee, you usually have a lot of control over the worker.

For example, an independent contractor generally makes his or her own schedule. You may give the worker certain time frames where he or she can work, but you cannot dictate the exact working hours. If you do give the worker a schedule, then that would change the classification to an employee.

Another example is when it comes to how you pay the worker. Most often, independent contractors get payment for each project completed whereas employees generally earn hourly pay. Of course, there are exceptions, but this is a general guideline.

Finances come into play also when it comes to the investment in the job. Independent contractors usually buy their own tools and other items needed for the job whereas you supply employees with that stuff.

Do note these examples are all generalizations. The IRS looks at things cumulatively to make a determination of the worker classification. This information is for education and is not legal advice.