Employee vs. independent contractors
As your business grows and you find yourself ready to hire staff, there are determinations to make about the type of hire you want to bring onboard. There are two types of hires, a full-time employee and an independent contractor. It is important to understand the differences between the two and decide what is best for your business in advance of hiring because this classification will impact how you manage, pay, and file taxes for the worker.
Employee — The work of an employee is defined by the IRS as being directed and controlled by you, the employer. A traditional 9 to 5 employee that receives specific direction on how and when to complete work will likely fall under the employee classification.
Independent contractor — On the other hand, the work of an independent contractor is not directed by the employer. Rather, the results of the work are directed by the employer. This means independent contractors do not receive explicit instructions on what will be done and how it will be done, only the end result.
These two classifications can be tricky, and it is important to get it right, otherwise, you could find yourself paying penalties or fees. If you still aren't sure whether you are hiring an independent contractor or an employee, check out the IRS's regulations first.
The rest of this article applies only to employees. If you have determined that you are hiring an independent contractor, check out our article on how to pay an independent contractor.
Is my employee exempt or non-exempt?
The second determination to make is the exemption status of your employee. This decision only applies to employees, not to independent contractors. Employee exemption status is governed by laws under the Fair Labor Standards Act or FLSA. Under the FLSA, employees are either exempt or non-exempt. You may also hear these people refer to these as salary and hourly employees.
To determine the exemption status, you can utilize tests provided by The Department of Labor. These tests include the salary level test, the salary base test, and the duties test. These three exemption tests measure an employee's duties, span of independent judgment over their work, and salary.
So, what does it mean if your employee is non-exempt? Non-exempt employees are protected by FLSA laws and must be paid at least the minimum wage for every hour of work. They also must be paid overtime pay for any hours worked over 40 per week at a rate no less than one and a half times their regular pay rate. Exempt employees must earn more than the salary threshold and pass the duties test. Exempt employees are not required to be paid for overtime.
Taking the time to evaluate the exemption status of your employees is worthwhile, getting it wrong can end up being a costly mistake.