Who is an Employee?
The Internal Revenue Service (IRS) definition of an employee refers to a “common law rule” with regard to all employment tax laws. A worker is an employee under the common law rule if the person for whom he or she works has the right to direct and control him or her in the way he or she works, both as to the final results and as to the details of when, where and how the work is to be done. This remains true even if the employee has some freedom in how things are done.
Employees maintain a relationship with the employer who gives them directions and training, with regard to work hours and locations. Employees also may qualify for any company benefits. Employees receive protection and are subject to the requirements of the federal employment laws listed as the end of this article. Investigate state rules and regulations that may also apply.
The 40 hour per week standard helps define a full time employee; however, the laws of states vary as to who constitutes a full-timer. In some states 1,500 hours per year is the standard. Check your State definitions since full-time classification may require meeting various federal and state employment laws, anti-discrimination laws, payroll tax requirements, and other benefits.
Part-time employees generally work less than the mandated hours for full-time status. While they may not be eligible for company benefits, part-time employees still receive protection under federal anti discrimination laws and their paychecks are subject to payroll taxes.
According to the IRS, a person may be an independent contractor if you have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result. The Fair Labor Standards Act offers a test to determine whether an individual is an Independent Contractor.
See their website
In addition, the IRS keeps an eye out for employers attempting to use Independent Contractors as a loophole for not paying employment tax and has complex 20 point test in place to determine whether or not an individual is an independent contractor or in reality an employee. Both tests investigate the control that an employer has over that individual. Independent contractors must not be under the direct control of the employer. Blurring the lines of employee vs. independent contractor could result in serious legal and financial ramifications, as the IRS does not look kindly on it.
The IRS makes the ultimate decision on whether someone is a contractor or an employee, and you may face serious fines and penalties if that decision is not on agreement with yours. Any small business owner flirting with the idea of using an Independent Contractor should read the IRS publications on the topic so they know the facts. IRS information can be found at:
Resources: IRS Training Guide
Independent Contractor v. Employee http://www.irs.gov/pub/irs-utl/emporind.pdf
Temporary Employees are employees for the temporary agency which is responsible for hiring and paying the employee. Personnel issues with temps may also be handled through the temporary agency. Anti-discrimination laws protect temporary Employees and your business may be subject to the legal consequences if these laws are infringed upon.
Students may be interested in working for your company in return for college credit rather than salary. If you hire interns, you should allow them to gain experience relative to their course of study, rather than using them as a free file clerk or for some other menial task. Most colleges and universities require employers to work with them on internship requirements and expectations.
In order to avoid any issues with the student or the university, interns should be treated in a professional manner, and not discriminated against in any form. Remember, when employing an intern, you are in essence acting as a mentor in their first career experience – it can be a great experience for the intern and a very positive experience for your business!
Hiring family members may save money, but legal issues still apply.
Children: Children who work as an employee of your business may not be subject to withholding and FICA taxes until the child reaches 18. You may not have to pay FUTA taxes on your child until age 21. Children should be at least age 16, but consult your State regulations and special federal exceptions for employees ages 14 and 15.
Spouse and parents: Employers may not be required to pay FUTA taxes to a spouse or parent who works as an employee of your business. FICA taxes may still apply.
Other relatives: In general, you get no payroll tax breaks for hiring other relatives—they receive the same benefits as employees who are not related to you.
Properly classifying your employees and/or contractors is an important piece of your business, tax, and legal requirements. Be sure to document your employee categories in your operations or employee manual for reference. Consult your attorney and your State laws/requirements to ensure you are in full compliance. Below are some resources and websites we've found helpful in documenting our own Employee classifications.
Employment Laws Resources
The following employment law resources outline many of the protections and requirements that affect employers and employees. Website addresses are provided for more information.
Fair Labor Standards Act (FLSA) outlines mandates for wage and labor issues
Occupational Safety and Health Act (OSHA) guarantees safe workplaces regardless of business size
Federal Insurance Contributions Act (FICA) which outlines withholding tax requirements
Federal Unemployment Tax Act (FUTA), which requires employers pay unemployment
Employee Retirement Income Security Act (ERISA) affects employee benefit and retirement plans
Equal Pay Act - equal pay for equal work
Title VII of the Civil Rights Act - outlines anti-discrimination guidelines
Age Discrimination in Employment Act - you may not discriminate in hiring and firing based on age
Americans with Disabilities Act - employers must make reasonable accommodations for persons with disabilities.
Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers to offer individuals who would otherwise lose benefit protection the option of continuing to have group health care plan coverage.
Family Medial Leave Act (FMLA) certain employers are mandated to provide 12 weeks unpaid leave time for births, adoptions or medial conditions.