There are two types of people working for your company or project: Employees
and Contractors. Employees in turn can be classified as
Exempt or Non-Exempt Employees.
Employees or Consultants
This classification is important because an employer must withhold taxes
(Social Security and Medicare) for Employees. Consultants are
independent business persons who have contractual relationship with the company and
they are responsible to pay their taxes.
Employers often makes mistake in classifying
them correctly. Individual state laws in the United States make this more complicated.
Internal Revenue Services (IRS) has designated
how to classify between employees and consultants.
In simple terms, the following may be pointing to an employee:
If the business can control (it does not matter whether the business exercises
the control) the worker's place and time of work.
If the business provides training or detailed instruction for work.
If the ongoing work is evaluated regularly then the work may be an employee.
However, if only the result is evaluated then it points to the consultant.
Is the worker using significant resources from the employer (like equipment, office space, etc.)?
Is the worker paid in regular intervals or the worker has a lot of unreimbursed expenses?
The written contract between the worker and employer is not very clear.
Worker is provided benefits like health insurance, allowances etc.
How much of the worker's service is key factor in running the business.
Exempt or Non-exempt Employees
In short Non-Exempt employees are eligible for
overtime when they work more
than 40 hours a week. Exempt employees mostly do executive and administrative
management and do not receive any overtime. Exempt employees receives bonuses
and other perks from the company. As of Jan 1, 2020, workers who
do not earn at least $684 per week
should be paid overtime.
There are federal and state laws governing the classification of the employee's
exempt status. These laws changes very often, here we will attempt to
provide the most recent information and provide reference to the up-to-date
information in this regard: