Navigating the complex world of labor law and payroll can be difficult for a small business owner who already has plenty of other concerns. If you’re new to managing payroll, or if you’ve ever wondered what all those words on your paychecks mean, here is a brief glossary of terms to help you get started understanding payroll.
Employee versus independent contractor
Designating whether someone is an employee or an independent contractor is a big deal to the IRS as it impacts taxes for both the employer at the worker.
An employee works directly for and is supervised by the company. The company invests in supervising the employee’s tasks and supplying the necessary equipment, tools and training. The company withholds any local, state and federal income tax from employee paychecks, and pays payroll taxes to the state for the employee.
With an independent contractor, the company is only concerned with the end result. How the contractor completes the work is at his or her discretion. Costs for expertise and materials are paid by the contractor, who will receive payment from the company. Companies issue Form 1099 at year-end noting how much they paid the contractor, who will then report the earnings on his or her taxes.
Exempt versus nonexempt
The exempt and nonexempt classification relates to whether or not an employee is covered under the Fair Labor Standards Act (FLSA). FLSA governs overtime pay eligibility, minimum wage and other labor issues.
Exempt employees generally earn a salary and are therefore ineligible to earn overtime pay for working more than 40 hours a week. They must earn at least $455 a week to be exempt. In some situations, exempt employees do not qualify for earning minimum wage. Exempt employees mostly work in jobs where they perform executive, professional or agricultural work.
Non-exempt employees are entitled to overtime pay at 1.5 times their usual rate after working more than 40 hours. They are usually paid hourly but could also be salaried workers. There are no income restrictions for non-exempt employees, and they perform work in any field.
Salary versus hourly
Whether are not your employees are paid an annual salary or an hourly wage will be related to whether the employee is exempt or nonexempt.
Hourly workers receive a preset amount for each hour of work they complete. They record their hours in a timesheet which they submit each pay period. Non-exempt workers may receive overtime compensation if they meet the requirements noted above.
Salaried workers are paid a predetermined amount of money each year, divided into paychecks during each pay period.
Other common payroll terms
When it comes time to finally hand out the paychecks, you’ll also come across these terms:
Pay period: Pay periods are the length of time for which employee time is recorded and for which the employee is paid. You can decide whether pay periods are weekly, bi-weekly, monthly or whatever makes sense for your business.
Timesheet: Once paper and now increasingly digital, employees use timesheets to track their hours during a pay period.
Off-cycle payroll: An employee (or independent contractor) payment that occurs outside of the normal payment cycle, such as a bonus.
If you’re looking for help managing payroll at your small business, our financial specialists are ready to help. Contact Patin and Associates today to get started.