Learn About Payroll Terms
Exempt vs. Non-exempt, Salaried vs. Hourly, and More
Yes, payroll is confusing. If you don't work with it every day, it sometimes seems like the terms don't make any sense. Terms are tossed around by regulators and people in the area without any explanation. Common terms like salaried/hourly, exempt/non-exempt, and employee/independent contractor aren't that difficult once you see the explanations.
Salaried employees are professional and managerial workers who are paid based on an annual salary, while hourly employees are all other workers, paid hourly. Read this article to learn more about the distinctions and the differences in calculating pay for each type of employees.
The terms "exempt" and "non-exempt" refer to two different classifications of employees, depending on whether employers pay overtime to these employees. The Fair Labor Standards Act (FLSA) requires that all employees receive overtime pay if they work more than 40 hours in a work week. But the law has designated several categories of employees as being exempt from these overtime requirements, because of the nature of their jobs. Professionals, executives, administrative positions and some computer jobs are considered to be exempt if they meet certain criteria.
Employees are considered to be non-exempt unless the employer can show that an employee position meets the qualifications for being exempt.
An independent contractor works for a company but has his or her own business. Everyone else is an employee. The IRS considers workers to be employees unless it can be proved otherwise that the worker is independent. If you misclassify a worker as a contractor, you could be subject to fines and penalties from the IRS and your state.
Why the confusion? Many companies try to classify workers as independent contractors to avoid payroll taxes and other costs of employment, such as benefits. But just saying "you're a contractor" doesn't make it so. The IRS looks at three key factors in its determination: behavioral control, financial control, and nature of the relationship.
We'll cover this subject in more detail in the last lesson.