Your small business must properly classify workers as either employees or independent contractors. Typically, an employee is someone you plan to hire full time and receives a W-2, while an independent contractor is brought in for project-based work and 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 to because misclassifying workers may result in IRS-imposed financial penalties. 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 FLSA rules. Nonexempt employees are protected by the FLSA, which provides guidelines for minimum wage, record keeping, child labor laws and equal pay.