Do I Need Workers' Comp for 1099 Subcontractors in Michigan?

If you hire subcontractors in Michigan, this is the sentence that matters most: issuing a 1099 does not make someone an independent contractor. The Michigan Workers' Compensation Placement Facility says so in writing — "Payment to a contractor, evidenced by IRS Form 1099, does not prove someone is an independent contractor." What actually decides it is a three-part statutory test, and getting it wrong can put an injured worker's benefits, a premium audit, and your personal assets on the line.

First: do you need coverage at all?

MCL 418.115 sets two thresholds for private, non-agricultural employers:

• Regularly employing three or more employees at one time — including part-time employees; or
• Fewer than three, if at least one has been "regularly employed by that same employer for 35 or more hours per week for 13 weeks or longer during the preceding 52 weeks."

Note what that second prong means for seasonal Michigan trades. A single full-time employee from spring through the end of summer clears 13 weeks easily. Agricultural employers operate under different and legally contested rules — if you farm, get specific advice rather than relying on a general article.

The test that actually decides who is an employee

This is where most guidance goes wrong, including some you will find on state websites.

MCL 418.161(1)(n) defines an employee as a person performing service in the course of your trade or business who, in relation to that service:

• does not maintain a separate business,
• does not hold himself or herself out to and render service to the public, and
• is not an employer subject to this act.

The Michigan Supreme Court has held that each criterion must be satisfied for someone to be an employee — and failing any one of the three excludes them from employee status (Auto-Owners Ins Co v All Star Lawn Specialists Plus, 497 Mich 13 (2014)).

The statute also contains a second sentence referencing the IRS 20-factor test. In Drob v SEK 15, Inc, 334 Mich App 607 (2020), the Court of Appeals held that adding that sentence "did not replace the three-factor test of the first sentence," and that courts apply the three-part test while the 20-factor test is reserved to administrative determinations.

So, practically: in a comp claim before a magistrate, the IRS 20-factor test may be in play. In a civil suit, an exclusive-remedy fight, or an insurance coverage dispute in circuit court, the three-part statutory test governs.

The nuance that catches contractors

In Reed v Yackell, a plurality of the Michigan Supreme Court reasoned that the separate business a worker holds out must be the same service they performed for you — it is not enough that the person has some business somewhere — and that the service "cannot be placed in such broad and undefined classifications as general labor." The Court of Appeals quoted that reasoning approvingly in Drob.

The practical translation: a driver who moonlights painting houses is still your employee as a driver — different service. A roofer who genuinely runs a roofing business, advertises, invoices other customers and carries his own coverage is a different case entirely.

What MCL 418.171 makes you responsible for

This is the provision every Michigan contractor should be able to paraphrase. If you contract with someone "who is not subject to this act or who has not complied" with the insurance requirement, and does not become compliant before an injury, then:

"the principal shall be liable to pay to any person employed in the execution of the work any compensation under this act which he or she would have been liable to pay if that person had been immediately employed by the principal."

The Workers' Disability Compensation Agency puts it in plain language: "Michigan law allows the workers' compensation liability to transfer from an uninsured subcontractor to the general contractor."

Two things soften it slightly. Subsection (2) lets you recover what you paid in an action against the contractor. And subsection (4) expressly authorizes an indemnity agreement — "A principal may demand that the contractor enter into a written agreement with the principal agreeing to reimburse the principal for any loss incurred under this section." If your subcontract does not contain that clause, add it.

Also in subsection (4): principals who "willfully act to circumvent" the section "by using coercion, intimidation, deceit, or other means to encourage persons who would otherwise be considered employees … to pose as contractors" face the criminal penalty. Sham-contractor arrangements are specifically addressed by statute.

The one-man sole proprietor problem

Michigan's treatment of business owners runs opposite to many states, and the result creates a genuine trap.

Role	Default status	Can they be covered?
Sole proprietor	Never an employee of their own business	No — cannot elect in
Partner	Is an employee of the partnership	Yes; may elect out
LLC member who is a manager	Is an employee of the LLC	Yes; may elect out
Corporate officer	Is an employee of the corporation	Yes; may elect out

The WDCA states it directly: a sole proprietor "cannot receive workers' compensation benefits under a policy issued to the sole proprietorship or the general contractor when the sole proprietorship operates as an independent contractor."

So the one-man sole proprietor sub who gets hurt on your job has no comp remedy from anyone — not from himself, not from you. He is precisely the person who ends up suing you in tort instead. That is the real reason to care about who is on your site, beyond the audit.

Exclusion forms, and what they do not prove

Owners who want out file a Notice of Exclusion, Form WC-337, with the state. The mechanics: an LLC must have no more than 10 members and the person must be both a manager and a member owning at least 10 percent; a corporation must have no more than 10 stockholders and the person must be an officer and stockholder owning at least 10 percent.

Two limits worth knowing:

• You may use an exclusion form only if all your employees can be excluded and you use no subcontractors. If you hire subs, you need a policy.
• An exclusion form proves nothing about your relationship with a general contractor. The WDCA says so explicitly, and it returns exclusion forms filed by sole proprietors with no employees.

What an uninsured sub costs you at audit

Here is the financial mechanism, and it is the part that hits contractors who never had a claim at all.

The Placement Facility's guidance for insureds who use contractors states that at audit your carrier validates the status of every contractor you hired and every subcontractor they hired, and that anyone who "does not properly address their workers' compensation obligation … will have expenses not attributable to properly documented material costs treated as additional payroll on your workers' compensation policy, which can result in a significant increase in your premium cost."

In practice, if you cannot produce the sub's payroll records, the full subcontract price becomes payroll on your policy. Documented material costs can typically be deducted; undocumented ones cannot. That payroll is then rated at the classification that would have applied had the work been done by your own employees — and your experience modification is applied to it.

There is a floor worth knowing, from Insurance Bureau Bulletin 89-03, which the state's own 2026 workers' comp booklet still reprints: where investigation of a specific job shows a definite amount of the subcontract price represents payroll, that amount is used — but on labor-and-material contracts the payroll is not less than 50 percent of the subcontract price, and on labor-only contracts not less than 90 percent. Documenting your material costs is the single biggest lever you have at audit.

One caveat on all of this: these rules come from Michigan's residual market, and its own guidance notes that voluntary carriers "must establish their own guidelines." Your carrier's audit rules may differ in the details, so ask before you assume.

To see the scale: workers' comp premium is charged per $100 of payroll. A trade class rated at $8.00 per $100 turns a $60,000 undocumented subcontract into roughly $4,800 of additional premium, before your mod. Two or three of those in a policy year is a five-figure audit bill.

What to collect, and when

• If the sub is a corporation, LLC or partnership, or a sole proprietorship with employees: the WDCA says you "should require a certificate of workers' compensation insurance or a copy of a properly executed exclusion form." Get it before work starts, not at audit.
• If the sub is a sole proprietor with no employees: no comp certificate is required by the Act, but Michigan's residual market requires a Sole Proprietor Independent Contractor Worksheet completed on a per-job basis — get that, and document independent contractor status. The Placement Facility looks for a registered DBA, a commercial general liability certificate, evidence of work performed for others, advertising in the marketplace, and customer invoices.
• Track certificate expiration dates. A certificate that lapsed mid-project is the same as no certificate for the period it did not cover.
• Put the indemnity clause in the subcontract, as MCL 418.171(4) permits.

If an auditor rejects your proof, you can request another payroll audit in writing, and if the premium is still not adjusted you may appeal to DIFS and request a hearing. We cover the process in what happens if you skip your workers comp audit, and the classification side in Michigan workers comp class codes.

The penalties for going without coverage

• You lose the exclusive remedy. MCL 418.641(2) provides that an employee of an employer who violates section 171 or 611 may "recover damages from the employer in a civil action" notwithstanding the exclusive-remedy provision. Your comp policy exists partly to prevent lawsuits; without it, that shield is gone.
• Civil fines up to $1,000 per day. Under MCL 418.645(4), the director may seek a fine of not more than $1,000 for each day of noncompliance, with a three-year look-back — and it may be assessed "whether or not the employer is currently in noncompliance." This is the real financial teeth, and it is bigger than the criminal penalty.
• An injunction barring you from employing anyone. MCL 418.645 provides for an order to show cause returnable in as little as 24 hours, and an injunction that "perpetually enjoins the employer from employing any person" at any time they are not in compliance.
• Personal liability that pierces your entity. MCL 418.647(2): if the employer is a corporation, "the officers and directors … shall be individually and jointly and severally liable" for any unsatisfied portion of a judgment. For an LLC, the managers who are also members. For an LLP, the partners. Forming an entity does not protect you from this.
• A misdemeanor. MCL 418.641(1) provides a fine of not more than $1,000, imprisonment for not more than six months, or both — and "each day's failure is a separate offense." Note: the WDCA's own FAQ page still describes a 30-day minimum jail term. The current statute contains no such minimum.

Misclassification costs more than comp

Workers' comp is one of at least three agencies looking at the same worker, and they do not all use the same test.

• Unemployment insurance uses the IRS 20-factor test by statute. MCL 421.42(5) adopts it directly for Michigan UI — a different standard than the three-part test a circuit court applies for comp. Same worker, two tests, two possible answers.
• The UIA audits from 1099 data. Its guidance states the agency receives IRS nonemployee compensation filings and uses them to select employers for audit, and that continued misclassification after a finding "could be subjected to penalties that quadruple the amount of taxes owed on any misclassified wages." UIA also coordinates with the Wage and Hour Division and the Workers' Compensation Agency.
• Michigan has a Payroll Fraud Enforcement Unit in the Attorney General's office, covering worker misclassification among other practices, with a hotline at 833-221-1099.
• The IRS side. If you classify an employee as a contractor with no reasonable basis, you are liable for employment taxes. Section 530 relief can terminate that liability, but only if you meet reporting consistency, substantive consistency and reasonable basis — and reporting consistency means you actually filed the 1099s. Paying subs off the books forfeits the relief.

One 2026 change to catch

The 1099-NEC filing threshold increased from $600 to $2,000 for tax years beginning after 2025, and will be inflation-adjusted starting in 2027. A great deal of contractor guidance online still says $600.

Do not read the new threshold as relief. A contractor who pays a sub $1,800 in 2026 files no 1099-NEC — and that changes absolutely nothing about liability under MCL 418.171 or what happens at audit. The tax form and the comp obligation are unrelated.

The bottom line

The question is not whether you call someone a 1099 subcontractor. It is whether Michigan's three-part test, your carrier's auditor, and the WDCA would all reach the same conclusion — and whether you have the certificate on file to prove it. The contractors who get hurt by this are rarely the ones committing fraud. They are the ones who took a sub's word for it, never collected a certificate, and found out at audit or after an injury.

J. Jacobs & Associates has represented Michigan contractors since 1981. Send us your subcontractor list and your current comp declarations and we will tell you where your certificate gaps are before an auditor does, and compare your workers' compensation and contractor insurance across our carriers. Request a free quote or call (248) 693-6455. For the certificate side, see what a certificate of insurance actually proves.

Frequently Asked Questions

Does a 1099 make someone an independent contractor in Michigan?

No. The Michigan Workers' Compensation Placement Facility states that "payment to a contractor, evidenced by IRS Form 1099, does not prove someone is an independent contractor." Status is determined by the three-part test in MCL 418.161(1)(n). Someone is an employee only if all three negatives hold — they do not maintain a separate business, do not hold themselves out to and render that same service to the public, and are not an employer subject to the Act. Satisfying any one of those independent-contractor criteria takes the worker out of employee status.

Am I liable if my subcontractor doesn't have workers' comp?

Yes. MCL 418.171 provides that a principal who contracts with someone not carrying required coverage "shall be liable to pay … any compensation under this act which he or she would have been liable to pay if that person had been immediately employed by the principal." You may then sue the contractor for reimbursement, and MCL 418.171(4) expressly permits a written indemnity agreement in your subcontract.

Do I need workers' comp in Michigan for one employee?

Possibly. MCL 418.115 requires coverage for private employers with three or more employees at one time, or with fewer than three if at least one has been regularly employed 35 or more hours per week for 13 weeks or longer during the preceding 52 weeks. A single full-time seasonal employee working spring through summer generally crosses that threshold.

What happens at a workers' comp audit if I can't produce a sub's certificate?

The uninsured subcontractor's payroll gets charged to your policy. If you cannot supply payroll records, the full subcontract price is generally established as payroll, less documented material costs, rated at the class code that would have applied to your own employees, with your experience modification applied. If an auditor rejects your proof, you may request another audit in writing and then appeal to DIFS.

Can a sole proprietor subcontractor be covered under my policy?

No. The WDCA states a sole proprietor cannot receive benefits under a policy issued to the sole proprietorship or to the general contractor. A sole proprietor is never an employee of their own business and cannot elect coverage. That is why an injured one-man sub has no comp remedy at all — and why they tend to sue the hiring contractor instead.

What are the penalties in Michigan for not carrying workers' comp?

The employee can sue you in civil court because you lose the exclusive-remedy protection (MCL 418.641(2)). The director may seek a civil fine of up to $1,000 per day with a three-year look-back (MCL 418.645(4)), and an injunction barring you from employing anyone. It is a misdemeanor punishable by up to $1,000 and six months, with each day a separate offense. And under MCL 418.647, corporate officers and directors, or an LLC's manager-members, are personally and jointly liable for unsatisfied judgments.

Did the 1099 threshold change for 2026?

Yes. The reporting threshold for Form 1099-NEC increased from $600 to $2,000 for tax years beginning after 2025, with inflation adjustments starting in 2027. This does not reduce your workers' compensation exposure — a sub paid $1,800 generates no 1099-NEC, and MCL 418.171 applies exactly the same.