Your small business must properly classify workers as either employees or independent contractors. Typically, an employee receives a W-2, while an independent contractor is given Form 1099 MISC.
Worker classification affects tax and reporting requirements to federal and state governments. It's an area where you'll want to pay attention because misclassifying workers may result in IRS-imposed financial penalties.
It is important to keep in mind that a worker may qualify as an employee under the various IRS guidelines outlined above, but the determination of employee status may be different under laws, including wage/hour laws, workers' compensation, or unemployment insurance.
You will want to evaluate the worker's status as an employee or independent contractor under all applicable laws, including the Fair Labor Standards Act (FLSA), Workers' Compensation, Employee Retirement Income Security ACT (ERISA), Affordable Care Act (ACA), Unemployment Insurance (UI) and similar state laws in order to determine whether the worker is covered under those provisions.
Once you determine the proper classification (employee or independent contractor), an employee is then categorized as either exempt or nonexempt. Whether an employee is classified as exempt or nonexempt is determined by the Fair Labor Standards Act (FLSA) and is based on job responsibilities and salary level.
Exempt employees are typically paid a salary and there are no minimum wage requirements or overtime pay requirements. The FLSA defines an exempt employee as one not covered under certain FLSA regulations. Nonexempt employees are protected by the FLSA, which provides guidelines for minimum wage, overtime, record keeping and child labor.