How to Classify Employees, Explained
As a business owner, you might have wondered how to classify employees.
Employee classification is important when it comes to federal and state taxes, as well as payroll. Also, it’s a great way to dictate the employee-employer relationship when there are several different types of people working at your business. You want to set clear guidelines when interacting with your employees and classification is the first step in establishing those interactions.
The IRS outlines two key points of classification: control and relationship. Control and relationship create the parameters around the work that needs to be done and the way the person doing the work feels about the job. If a business exercises control over the ways in which a task is performed and shoulder the financial cost of that task, the worker has a clear understanding of how much effort to place in a job and able to determine the investment they want to put into a project.
When evaluating the relationship, it’s important to outline the length of the interaction, the project the interaction is intended to create, and how this interaction will impact the company’s day-to-day production. The amount of investment each participant has in the project and in the business will be dictated by the classification of one’s employment.
Your Options for How to Classify Employees
Luckily, classifying employees doesn’t have to be difficult. There are laws in place to aid employers with employee classification, such as the Fair Labor Standards Act. This act gives you step-by-step instructions to follow when establishing the employer-employee relationship. The first step is defining the employee as non-exempt or exempt under government wage and labor laws.
Non-Exempt vs. Exempt Employees
When reporting payroll information to the tax department, it is vital that you classify your employees properly.
Non-exempt employees are not exempt from the minimum wage and overtime restrictions outlined in the Fair Labor Standards Act. This means that they are entitled to earning at least the federal minimum wage and can earn overtime pay when they work over the standard 40-hour work week.
Exempt employees are exempt from the minimum wage and overtime restrictions outlined in the Fair Labor Standards Act. This classification is usually given to high-level executives of the company, sales staff who work outside of a central office, some administrative staff members, and certain managers who meet the exemption criteria.
Exempt employees do not qualify for overtime pay when they work over-40-hour weeks. They do not qualify for the standard minimum wage, but it is because these employees tend to earn more. The minimum wage varies depending on your state, so it’s best to look confirm your state’s requirements when figuring out employee classification.
As mentioned above, establishing employee classification is vital to determining the relationship between the employer and the employee. One of the most common payroll mistakes is misclassifying an employee. This mistake could cost a company thousands of dollars in fines from the government and even a hefty prison sentence.
You want to make sure your employees are clear in their designation as either an independent contractor, a regular full-time or part-time employee, or a temporary full-time or part-time employee. Here’s how you can tell the difference.
An independent contractor is someone who is self-employed. This person provides services for other businesses and may be considered the sole proprietor for their own company. Independent contractors may be subject to the self-employment tax. For business owners using the services of an independent contractor, it’s important that you have this type of worker fill out a W-9 tax form and you fill out the 1099-MISC form on your end.
Generally, you wouldn’t take taxes out of your payment to an independent contractor as you would with any other type of employee.
Regular full-time employees
Regular full-time employees qualify for your company’s complete benefits package, including health insurance and 401K opportunities, depending on what you offer. These employees are termed or temporary and tend to work 40-hour workweeks.
Regular part-time employees
Regular part time employees tend to work less than a full, 40-hour workweek. Typically, part time employees work anywhere between 10 to 20 hours per week. They may be eligible for some of your company benefits, depending on the terms you’ve outlined. Part time employees are also not temporary and considered regular employees.
Temporary full-time employees
Temporary full time employees may be considered additional staff to supplement your workforce. These employees have been hired to complete a specific project or work for a certain amount of time. They work whatever your company’s standard full time schedule is for a short period of time. There’s a start and end date for this employee.
Temporary part-time employees
Temporary part time employees are possible replacements or supplemental staff that work less than your company’s full-time schedule. These employees will keep part-time hours and have a designated period of time of employment.
With every employee classification, it is important to have an understanding of hours worked and duration of employment. It’s understandable that employee classification is a confusing issue, which is why the best solution is to let a third party human resources company bring relief.
How to Classify Employees with Canal HR
Let Canal HR take employee classification and payroll off your hands. Employers have enough to worry about when running a business. Whether you work with independent contractors or exclusively full-time regular employees, Canal HR is a company that can provide resources for clients all across the Gulf South.
Contact us today to receive a consultation for your needs.