Businesses often face significant challenges when it comes to accurately determining the capacity in which a worker is employed. While they may know that an individual is on payroll and performs specific tasks, the way this person is classified within a human resources management system may be entirely incorrect. In many cases, businesses are unsure of the correct classification, especially when it comes to distinguishing between regular employees and independent contractors. This is a particularly difficult task, even for experienced HR professionals, as the lines between the two can often blur, and improper classification can lead to complications.
Tax authorities place a high level of scrutiny on companies to ensure that they properly classify their workers, as misclassifying an employee or independent contractor can affect payroll remittances and ultimately create errors on tax returns. Correct classification impacts the amount of tax withheld from each paycheck, and if this system is not handled properly, it can lead to compliance issues and financial consequences.
Moreover, worker classification is crucial in areas like compensation, benefits, and unemployment payments. Misclassifying workers can complicate the application of compensation rules, including wage and hour laws, as well as make it more difficult for employees or contractors to receive unemployment benefits if they lose their job. Therefore, businesses must pay careful attention to their classification system to avoid any potential legal or financial challenges.
Keep reading for valuable insights on employee status and other tax-related information from the experts at First United Bank & Trust.
What’s the Difference Between Employees and Contractors?
All workers are classified as individuals who receive funds from a business in return for rendering services, but that does not make a distinction between employees or contract staff on its own. The clarification comes when considering who has control over what that person does. If the company is entitled to give commands to a person, that individual is an employee. If an entity is only allowed to assign a task and oversee a process, but not interfere or provide direct supervision, that typically qualifies as a contract worker.
Once that distinction has been made, entering these two categories into payroll should be simple, and then further splicing employees based on exemption stated should follow suit. Professionals like doctors, lawyers and independent tradesmen are usually considered contract workers by the IRS, dependent on their circumstances. They pay employment taxes manually, unlike employees who get automatic deductions.
Who is Exempt?
Employees are either exempt or non-exempt in terms of overtime pay, depending on job title, salary and duties performed. The FLSA strictly lists the guidelines for qualifying workers, and those who are non-exempt are entitled to time-and-a-half pay on all work carried out in excess of 40 hours per week. Also, any employee that earns less that $23,600 is considered non-exempt by the FLSA. These entities provide thorough classification information at their websites, so that any small business owner can easily familiarize himself with what each of his workers is, does and qualifies for.
Payroll Implications
Just like with IRS compliance guidelines, failure to properly determine exemptions in payroll calculations can result in significant penalties for the employer. Exemptions refer to certain employees who are not subject to specific payroll taxes, and the rules surrounding these exemptions are complex and constantly evolving. If an employer mistakenly classifies an employee as exempt when they are not, or fails to apply the correct exemption for tax purposes, the IRS may impose fines or back taxes.
In addition to financial penalties, improper payroll calculations can lead to legal disputes, damage to the company’s reputation, and issues with employee trust. To avoid these consequences, it’s essential for businesses to stay up to date on tax laws and work with payroll professionals who can ensure that exemptions are correctly determined and applied. Properly following exemption guidelines helps ensure compliance with federal and state tax regulations while minimizing the risk of costly errors.
Professional Financial Tools and Resources From First United Bank & Trust
Partner with First United Bank & Trust and take advantage of the many professional financial resources we offer. We can help with a variety of expert financial services including business checking and business savings accounts that are secure and flexible. We also provide business loans and debit cards to help you guide your business to its full potential.
Find a First United Bank & Trust community office near you today to get started!