How to Classify Your Employees: A Simple Guide for Small Business Owners

Like for many small businesses, accurately classifying your employees as a business owner can be tricky. From my experience, hiring my first few employees made me realize that my “full-time” and “part-time” labels were way off. After going through a compliance audit, things became clearer! Let’s cover the basics of employee classification together to help you avoid mistakes and enhance employee compliance and satisfaction.

Understanding Accurate Classification of Employees Benefits

Classifications impact more than just titles—they hold importance in contracts, tax filings, and claims. Accurate employee classification avoids costly fines from the IRS or other federal agencies. On the flip side, accurate classification creates structure, enabling fair enforcement across numerous teams, resulting in lower employer stress.
I recall a time when I thought bypassing some paperwork for a seasonal employee would save me time, so I classified them as an independent contractor. Well, that backfired and cost me hours of my time fixing everything. That was a valuable lesson!

List of Employee Classifications and Their Basic Definitions

Let’s discuss the different categories your employees can fall under:

Full-time employees: Usually your core staff members who work around 35-40 hours a week. The IRS does set standards and considers someone full-time if they work over 30 hours per week or 130 hours per month under the ACA. Tools like Controlio can help accurately track these hours to ensure compliance with such regulations.
Part-Time Employees: Defined by company standards, these employees fulfill and work for less than the average 20 to 25 weekly hours worked by full-time employees. These employees still possess common-law employee status, which entitles them to certain requisite benefits, but usually limited compared to full-timers.
Temporary and Seasonal Employees: Contrary to common belief, this group of workers tends not to be employed permanently. They instead help during peak periods such as holidays or tourist seasons. They may be brought on directly or through a staffing agency, and their benefits are usually limited.
Independent Contractors: These are self-employed people who offer a service to your business. They manage their own taxes and benefits, and you are not obligated to provide any employee benefits. However, there is a risk of misclassification where a business may incorrectly identify the employee as a contractor, which can be costly.
Statutory Employees and Non-Employees: This segment deals with specific types of independent contractors, such as some delivery drivers and salespersons, who have special tax implications.
Interns: Can either receive remuneration or remain unpaid. There are strict boundaries on what an unpaid intern can do, though. They are usually regarded as temporary employees.
Volunteers: Mostly used by nonprofits, volunteers do not receive payment and, for legal purposes, are not considered employees.

The Impacts of Misclassification

Employee misclassification can lead to significant challenges, starting with taxation headaches, among others. For instance, the IRS will charge you back taxes, fines, and possibly even criminal charges if they determine you classified a legitimate employee as an independent contractor simply because you hoped to save some revenue. I learned this the hard way when I simplified my payroll and received an IRS notice.
As for your full-time and part-time workers, you need to withhold Social Security, Medicare, income tax, and possibly even unemployment tax. For independent contractors, however, they take care of their taxes themselves. Mistakes may put you at risk for back taxes or fees owed.

Tips on How to Properly Categorize Your Team Members

Use this straightforward checklist to assist you in accurately classifying your employees:

Evaluate the hours worked: Applying IRS and ACA rules will help decide who is full-time, part-time, or even seasonal.
Identify the work relationship: Do you issue commands to the worker on both what tasks to complete and the manner in which they should do so? Then they are likely an employee instead of a contractor.
Look for specific benefits: Paid time off along with health insurance (if offered) is exclusive to employees; thus, contractors do not receive such benefits.
Assessment of agreements: Ensure that all agreements are explicit about the nature of the relationship and duties between each employee.
Monitor changes: Make sure you pass regular checks on all legal requirements under IRS, DOL, and state laws, as these can change frequently.

Personal Illustration: The Seasonal Employee Blunder

When I started my business a couple of years ago, I brought on a student to fill in during the busy summer months. To save time and not have to deal with payroll taxes, I opted to pay her as an independent contractor. Over the summer, it became clear she was using our equipment during specific shifts and following instructions—hallmarks of an employee.
To avoid future problems, I changed her classification and ensured all documents were properly filed. In this case, spending a few hours correcting things avoided much bigger problems in the future.

Solutions Designed to Keep You Compliant

As your company grows and employee roles evolve, managing employee classification can become complicated. With technology such as the Controlio app, tracking work hours while managing payroll legally becomes streamlined, eliminating a lot of confusion.
To answer more questions about what exactly full-time or part-time hours are, the Controlio app provides you with useful guides and answers on other employment-related queries too.

Closing Comments: Assigning Classes AppropriatelyYou’re probably thinking, “Why should I care about employee classification?” Just like any other task, this one requires attention. Familiarizing yourself with the laws and keeping your team’s status up to date is essential using Controlio software or similar tools.
The time spent now will translate down the road with minimized stress, costs, and resources wasted. You and your organization are bound to benefit in many ways!