In this article, we will be discussing how to properly classify a small business employee (Employee classification). I know this might sound as a scary topic, but I’m going to take it from the top. If an employer needs someone to help him get a job done, he obviously needs to hire someone or several people, depending on how big the business is. He also has to decide whether that person is going to be an employee or an independent contractor, the difference is significant for a number of reasons.

Classifying Your Small Business Employee (employee classification)

Full time employee: Is any employee that averages 30+ hrs per week, any employee that works 130 hrs in his calendar per month.

Part time employee: Is any employee who averages less than 30 hrs per week or less than 130 hrs a calendar per month.

Independent contractor: Is someone who’s in a business for himself who provides services to other people or businesses.

Department of labor classification states “to determine whether the worker is economically dependent on the employer (and thus he’s an employee), or really in a business for him or herself (and thus he’s an independent contractor)”.

So if someone is working for you and you have reason to believe that you are their only source of income, you need to classify that person as an employee, another thing you need to consider is, does that person have an opportunity for profit or loss just like your business does, if they don’t, instead they make more money by simply working more hours for you, then, they are your employee, something else you can consider is whether they’re integral to your business, if they’re not, then, they are independent contractor.

First of all if it’s an employee you probably know you have to make numerous filing throughout the year, you have to deal with workers compensation and other things like that. It seems like a daunting task for small business, particularly start-ups. On the other hand, you probably must have heard of independent contractors, it is very easy in comparison, they just have to sign an agreement that shows they’re independent contractors, they have to take care of their taxes, you have to report their income, it seems so simple but sadly it’s extraordinarily risky, you really have to properly determine whether the person working for you is an employee or an independent contractor.

Why should it be done correctly?

It should be done correctly, because government agencies are really working together and they are also working very hard enforcing penalties, interest and other obligations if they find out that you mis-classified your employee and independent contractor, you might be wondering why they care. They care for a few reasons, the department of labor among others care for the reason that there are protections that your employee deserve under law, such as overtime pay, minimum wage, unemployment compensation and workers compensation so they want to be sure that the people who should get those benefits gets them.

Secondly, the government wants revenue, so if you haven’t classified or mis-classified, the truth is that the government entities that would get this money aren’t getting them.

The reality of this situation is if you have mis-classified an employee as an independent contractor the financial penalties are severe, you’ll have to pay everything you should have paid to them to the government as though they have been an employee all along, you’ll also be looking at fines and interest, and that is why it should be done carefully and correctly.