If you own a business and hire workers, you need to understand how to classify them. There are important differences between interns and temporary part-time workers, full-time employees and freelancers, and these classification differences determine how you pay them. It also dictates whether or not they are entitled to benefits, how they’re taxed, and what insurance coverage they’ll need. To comply with employment rules and regulations, you need to understand the differences, what they mean, and how to classify workers appropriately.
Types of Employees and Workers
The classifications of workers can be broken down into the following categories based on employee expectations and how many hours they work:
- Full-time– A full-time employee typically works 40 or more hours per week, has taxes withheld from their pay, and is entitled to benefit plans.
- Temporary Full-time– Usually, a full-time worker who puts in 40 or more hours per week for 90 to 180 days is considered temporary. After 180 days, they’re let go or given regular status. Typically they do not receive benefit plans until they have worked a certain number of hours.
- Part-time– A part-time worker spends between 20 and 40 hours per week on the job and may be entitled to benefits if they meet certain requirements.
- Temporary Part-time– This classification is similar to temporary full-time, but for 20 to 40 hours per week.
- On-call– An on-call worker is hired on an as-needed basis. This arrangement can be extended, but the worker typically cannot put in more than 400 hours in a 180-day period, and they do not receive benefits.
- Interns– Interns are temporary and usually work to fulfill an academic requirement. They do not receive company benefits.
- Freelancers or Independent Contractors– These workers are hired for projects or specified periods of time but are not considered employees with benefits.
One reason it’s critical to classify workers correctly is that classification impacts how you offer benefits. If you hire full-time employees in the U.S., you typically have to provide the following benefits:
- Health Insurance– As summarized by Nolo, “No law directly requires employers to provide health care coverage to their employees. However, the Affordable Care Act imposes penalties on larger employers that fail to provide health insurance. Under the ACA, employers with 50 or more full-time employees (or the equivalent in part-time employees) must provide health insurance to 95 percent of their full-time employees or pay a penalty to the IRS.”
- Family and Medical Leave– The Family and Medical Leave Act “entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons with continuation of group health insurance coverage under the same terms and conditions as if the employee had not taken leave.”
You should also know the laws in your state and local jurisdiction, as some states require companies to offer certain benefits to part-time workers, and there may be additional benefits required for full-time employees.
Employee Classification and Taxation
In compliance with IRS mandates, employers must withhold certain taxes from full-time, part-time, and temporary or seasonal workers:
- Federal income tax
- Social Security and Medicare taxes
- Additional Medicare tax, effective in 2013 and applied to compensation over a certain threshold
You do not need to withhold these taxes from independent contractors and freelancers, as they are not considered your employees. Instead, they are responsible for paying the self-employment tax on their earnings.
Employee Classification and Business Insurance
Employee classification may also impact your mandatory insurance coverage. For example, workers’ compensation insurance is required when you have a certain number of full-time, part-time, or temporary employees, depending on your state’s specific laws. Some states include contractors in this group, but others do not, so you should check your state’s requirements before considering bringing on contract workers.
While you don’t legally have to have liability insurance for independent contractors, many companies choose to purchase this coverage since you can still be sued for the actions of a contractor, even if they aren’t a traditional employee.
Liability insurance is one of the most important types of coverage you can buy to protect your business. It covers the costs incurred if your company causes injury to a customer or client or causes damage to their property. A general liability insurance policy will also cover legal costs for advertising injury.
Classifying workers is nothing to take lightly, as it impacts your insurance needs, taxes, and the benefits you offer. If you misclassify an employee, you risk violating state or federal laws, which can be costly. Or, you may not have ample insurance coverage, and a single lawsuit could devastate your business. But if you understand proper classifications and document them correctly, your business will be in the clear.