4.3 Payroll & Tax Obligations: Federal, Michigan, Unemployment & Sales/Use Tax

Starting an Employee

• Form I-9 (Employment Eligibility Verification): the employee completes Section 1 by the first day of work. The employer examines documents and completes Section 2 within 3 business days of the start date.
• Form W-4 for federal withholding and Michigan's MI-W4 for state withholding.
• Report new hires to the state as required, and register with the Michigan Department of Treasury and the Unemployment Insurance Agency (UIA) before paying wages.

Federal Payroll Taxes (2026)

FICA is therefore 7.65% each for most wages. FUTA is reduced by a credit of up to 5.4% when state unemployment taxes are paid on time, leaving a typical net FUTA rate of 0.6%. Employers report withholding and FICA quarterly on Form 941 and FUTA annually on Form 940. They give employees W-2 forms after year-end.

Example: An employee earns $1,000 in a week. The employer withholds $62.00 Social Security and $14.50 Medicare and pays a matching $76.50. Early in the year, the employer also accrues FUTA of $6.00 at the 0.6% net rate.

Michigan Income Tax Withholding

Every employer that must withhold federal income tax must also register and withhold Michigan income tax. Michigan Treasury set the 2026 individual income tax rate at 4.25%, after deducting the personal exemption allowance claimed on the MI-W4 ($5,900 per exemption in the 2026 withholding guide). Some Michigan cities also levy a city income tax that employers in or working in those cities may have to withhold.

Michigan Unemployment Insurance (UIA)

• Taxable wage base: the first $9,000 of each covered employee's wages each calendar year.
• New employer rates: 2.7% for the first two years of liability, then phasing into an experience rate. Construction employers pay the average construction contractor rate for the first two years, then blend toward their own experience.
• File quarterly wage and tax reports. An employer may protest a rate determination within 30 days of mailing.

Employees vs. Subcontractors

Misclassifying workers creates tax, unemployment, and workers' compensation liability. Michigan's workers' compensation test (MCL 418.161(1)(n)) treats a worker as an employee unless the worker maintains a separate business, holds themselves out to and serves the public, and is an employer subject to the act. The IRS uses its own common-law control test. For true subcontractors:

• get a W-9 and file the required federal information returns;
• get certificates of liability and workers' compensation insurance;
• use a written subcontract.

Sales and Use Tax on Roofing Materials

Michigan's sales and use tax rate is 6%. The key rule for contractors comes from Michigan Treasury:

1. A contractor who constructs, alters, repairs, or improves real estate for others is the consumer of the materials affixed to the property.
2. The contractor pays sales tax to the supplier, or use tax directly to Treasury when no Michigan tax was charged, such as on an out-of-state purchase.
3. The contractor does not need a sales tax license and does not charge sales tax to the homeowner on a real estate improvement contract.

Exemptions are narrow. Michigan Treasury's construction FAQ says the only contractor exemptions cover materials affixed and made a structural part of:

• a qualified nonprofit hospital;
• qualified nonprofit housing;
• the sanctuary of a church;
• a pollution control facility with a State Tax Commission exemption certificate.

The contractor gets Form 3520 (Contractor Eligibility Statement) from the owner and gives the vendor Form 3372. Public schools, universities, and government buildings are not on the list. The contractor pays tax on materials for those jobs even though the owner is tax-exempt on its own purchases. Materials affixed to real estate in another state are exempt from Michigan use tax. There is no matching sales tax exemption for items bought from a Michigan retailer.

Business Income Taxes

• C corporations: Michigan Corporate Income Tax of 6% on apportioned business income.
• Pass-through entities (sole proprietors, partnerships, most LLCs, S corporations): owners pay Michigan individual income tax (4.25% for 2026) on their share. Self-employed owners pay federal self-employment tax.

Common Traps

• The Social Security wage base changes every year. $184,500 is the 2026 figure.
• The Michigan unemployment wage base ($9,000) is not the FUTA wage base ($7,000).
• Materials for a school roof are taxable to the contractor in Michigan.
• Charging a homeowner "6% sales tax" on a reroof invoice is wrong. The tax belongs in the contractor's material cost.