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What Is the Definition of an Employee?

Hiring employees can help small business owners expand their company and accomplish more than they might be able to alone. Some business owners hire contingent workers such asindependent contractors, while others bring employees onto their payroll. Once you recruit staff members for your business, it’s important to understand their legal classification so you can give them the appropriate benefits and file your taxes correctly. Learn more in this guide to having employees.

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What is an employee?

An employee is someone that another person or company hires to perform a service. Business owners compensate employees for their work to grow and maintain their business. Employees typically have a specified pay rate and a written or implied employment contract with the party they work for. However, some hired workers are not legally classified as employees and have a separate tax classification. The IRS has three main standardswhen determining who qualifies as an employee:

  1. Control of finances:If you control the business aspects of someone’s job, such as how and when they are paid, they could be considered an employee.
  2. Control of behavior:Employees are given instructions about policies to follow, when to do work, where to do it and where to get supplies and equipment. Having to train workers could be a sign that they’re your employees.
  3. Business relationship:The type of business relationship you have with a worker influences their employee classification. Providing contracts and 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 applying to a job, going through the interview process and negotiating a job offer, an employee provides their employer with personal information such as their taxpayer ID and direct deposit payment information. They 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.

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 should understand what differentiates each type of employee so you can stay in line 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 put in 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 must offer them health benefits 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, but 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.

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 at least $684 per week.

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 salary for every hour they work over 40 hours each week.

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 workweek.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 on hand before making a job offer.
  • Look into insurance.Not all states require insurance, but gettingworker’s compensation insuranceanddisability insurancemay help protect you from liability and provide security for your employees.
  • Offer benefits.Basic benefits like paid time off or flexible hours can attract quality candidates.
  • 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

Frequently asked questions about employees

What is the difference between an employee and an independent contractor?

Independent contractorspay their own income tax, Social Security, unemployment and Medicare taxes on earnings. Employers withhold these taxes from employee paychecks on their behalf.

How do you manage employees effectively?

Part of managing employees is providing support at a managerial level and contributing to a healthy company culture. Focus on developing your leadership style and incorporating feedback from your team.

How do you withhold taxes from employees?

When you hire an employee, theyfill out a W-4that determines how much of their paycheck you need to withhold. You can useIRS form 941 or 944to set up a regular deposit schedule for the amount withheld.

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