Employee Classifications – Are You on the Right Side of the Law?
When you hire a new employee, their classification is essential as it allows you to pay the proper taxes and appropriately distribute employee benefits. If guidelines for employee classification are ignored or not adequately followed, employers risk facing penalties if audited, such as hefty fines from the IRS or even prison time.
Employers should thoroughly review employee classifications and ensure their employees are properly classified to avoid these severe consequences. ESS – Employer Support Services has a team of HR professionals and experts to help your company follow these guidelines. Contact us today for comprehensive employer solutions.
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Employee Classifications: W-2 Employee vs. 1099 Independent Contractor
There are several key differences between a W-2 employee vs. a 1099 independent contractor employee classification. One difference is that W-2 employees are payroll employees, while 1099 contractors are non-payroll workers.
Typically, independent contractors choose how and where they work and what tools and methods are needed to complete their work. Businesses generally hire these employees when they need specialized work done for a defined period of time with conditions stated within a contract.
Businesses consider the W-2 employee classification when they intend to hire an individual to work for an undetermined length of time. W-2 employees are usually salaried employees that operate according to a company’s guidelines and schedule. An employee who falls into this employee classification also enjoys benefit programs offered by a business.
Correctly classifying employees to the IRS is important as you could face penalties from the IRS or a lawsuit against your business. The IRS looks at several factors to determine whether sufficient control exists to establish an employer-employee relationship or an independent contractor-client relationship. These factors include whether or not:
- A worker is paid by the job or the hour.
- A worker furnishes the tools and materials needed to do work.
- A worker sets their own working hours.
- A worker is told in what sequence or order to work by the employer.
- A worker receives training and performance evaluations from the employer.
- A worker pays for their own business and travel expenses.
Employee classifications can be confusing and intimidating, as misclassification could mean critical ramifications for your business. Avoid misclassification issues and IRS penalties when you contact ESS today. Our experts can help keep your company compliant so you can stay focused on growing.
[Related: 5 Most Common Payroll Errors And How to Avoid Them]
Employee Classifications: Exempt vs. Non-Exempt
When classifying your employees, you need to determine whether they are in an exempt or non-exempt position. According to the FLSA, these employee classifications have several differences.
Exempt employees primarily perform work not subject to minimum wage and overtime pay provisions. If employees receive a minimum of $684 per week in salary, they fall under the exempt employee classification.
For the non-exempt employee classification, employees must be paid a salary or hourly wage which meets or exceeds the federal minimum wage. Additionally, non-exempt employees are protected by FLSA regulations and are entitled to overtime pay.
Employee Classifications: Full-Time vs. Part-Time
Full-time and part-time employee classifications are not as simple as they may first appear. The FLSA has no clear definition for part-time or full-time employment. However, according to the Affordable Care Act (ACA), employees working at least 30 hours a week qualify for benefits regardless of if the company considers them full-time or part-time.
For employers, this is an important distinction to follow. If employers were to inadvertently misclassify an employee as part-time when they fall under the full-time employee classification under the ACA, the employer could face benefits-related penalties, such as costly legal fees.
Avoid the legal fees and harsh penalties you could face if you misclassify an employee. Contact ESS today and speak to our dedicated team of HR professionals and experts to help your company and its employees. Call us today at 225-364-3000 for more information about employee classifications.