What is an employee?

An employee is someone that another person or company hires in order to perform a service. Business owners compensate employees for their work to grow and maintain their businesses. As an employer, you typically specify an employee’s pay rate and provide them with a written or implied employment contract.

What are the key characteristics of an employee?

However, some hired workers have a separate tax classification and are not legally classified as employees. The IRS has three main standards when determining who qualifies as an employee:

• Financial: Whether the business aspects of a worker’s job are controlled by the payer (the business), such as how the worker is paid, whether expenses are reimbursed and whether the business provides the worker with tools and supplies.
• Behavioral: If the company controls or has the right to control what a worker does and how the worker does their job.
• Type of relationship: The type of business relationship you have with a worker influences their employee classification. Providing contracts and employee-type benefits can both indicate an employee-employer relationship. If you hire someone to fill an essential role with the understanding that they’ll keep working for you indefinitely, they’re probably an employee.

What does an employee do?

Employees work for an agreed-upon number of hours or shifts and perform the duties their employer outlines for them. After going through the interview process and successfully securing the role, an employee provides their employer with personal information such as their taxpayer ID and direct deposit payment information. 

New employees might sign an employment or employee handbook agreement that outlines their job duties. Depending on the type of employee they are, they may have different obligations for completing their assigned work.

How can you determine if someone is an employee?

There are several ways to determine someone’s status as an employee. These are:

• The Common Law Control test: According to the IRS’s common law rules, anyone who provides a service to you is typically considered your employee if you can control what they do and how they do it. This test determines if a worker is economically dependent on an employer or is operating an independent business. Please refer to the relevant IRS website page for more details on this test.
• Worker classification: This helps you determine whether someone is an independent contractor or if they are an employee. Some states use the ABC test to identify worker classification, and the common law control test is also typically used by the IRS for the same purpose. 

Types of employees

You can hire multiple classifications of workers depending on the needs of your company. Having different types of employees on your team allows you to adjust your staffing needs based on demand. As a business owner, you may want to understand what differentiates each type of employee so you can comply with labor and tax laws. An employee’s classification determines the following:

• Eligibility for overtime pay
• Entitlement to health insurance and other benefits
• Tax status
• Legal protections

While some states have their own labor laws that may influence how you should classify employees, here’s an overview of some common employee classifications:

Full-time

Full-time employees typically work 30 to 40 hours a week or 130 hours per month, according to the IRS. If you have 50 or more full-time employees, you may have to offer them health benefits under the Affordable Care Act or pay a fee to the IRS.

Part-time

Part-time employees work 30 hours or less. You’re not typically legally obligated to offer benefits to part-time employees. However, many companies offer a health plan and days off to retain talent and reward employees. You have the same tax obligations for both part-time and full-time employees. 

Remote

According to the IRS, in their guide to independent contractors vs. employees, a remote worker is considered an employee if they perform services for your business in a location other than an office you own or operate, as long as you control what they do and how they do it while they work for you. In other words, you control the details of how that worker performs such services on behalf of your business.

There may also be different rules for remote workers who are US citizens or permanent residents/green card holders but are employed outside the United States. For more information, please visit the US government website.

Seasonal/temporary

Temporary employees work for an employer for a set period of time or for the duration of a project. If you use a recruitment agency to find and place temporary employees, they usually handle tax withholding. When hiring a temporary or seasonal employee directly, you typically need to pay them directly and take taxes out of their paycheck.

Exempt

An exempt employee doesn’t have a legal right to overtime pay according to the Fair Labor Standards Act. Exempt employees receive a salary, so they’re paid the same amount regardless of how many hours they work. Exempt employees must earn a minimum of $684 per week to qualify under current regulations.

Non-exempt

The Fair Labor Standards Act gives non-exempt employees the right to earn the federal minimum wage and overtime pay. Non-exempt employees have to be paid overtime at a rate of at least one and a half times their salary for every hour they work over 40 hours each week.

Contract

Because contract employees are brought on for specific projects, their employment is temporary. They are typically paid an agreed amount, which is reported using Form 1099. If they are on your payroll, they are usually considered non-exempt. However, if they are hired as independent contractors, they are most often exempt.

Tips for hiring employees

Hiring employees is a critical step to growing a small business. Here are a few tips to help you hire:

• Check regulations in your area: Read your state and local labor laws to understand your legal obligations to potential employees. Knowing regulations in your area can help you decide whether you want to hire full-time or part-time employees.
• Envision their work week: Write out all the tasks you want to delegate to an employee and estimate the number of hours they’ll take to complete. This can help you determine how many people to hire and begin writing job descriptions.
• Prepare your forms: When hiring a new employee, you’ll need to provide them with tax forms and other new employee paperwork. Consider having copies ready before making a job offer.
• Research insurance: Not all states require insurance, but obtaining workers’ compensation insurance and disability insurance may help protect you from liability and provide security for your employees. Offering this type of insurance can also make your business’s employer brand stand out, as it can make you a more attractive prospect.
• Offer benefits: Basic benefits like paid time off or flexible hours can attract quality candidates. This is because they can help your business stand out against other competitors, particularly for roles that are difficult to fill. For example, jobs with specialized skill sets, such as software engineers, may look for flexible hours or remote working options.
• Create human resources policies: Even if you’re only hiring one employee, you might want to consider developing workplace policies and plans for addressing misconduct, sick leave and other HR issues.

Read more: How To Hire Employees: A Step-by-Step Guide

Understanding the definition of an employee can be important for tax reasons. Different types of employees have different rules for overtime pay, paying taxes and more. Consult this guide to make sure you understand your different obligations concerning hiring employees.