Many of the terms we associate with deductions and classifications have an opposite meaning. While some of these terms seem rather complex, there are four comparisons that will make your payroll easier.
4 Comparisons that will Make Payroll Easier
1. Contractors Vs. Employees
Understanding the classification of your workers is one of the most vital things you can do when taking on a new hire. Typically an employee receives training for their positions and is managed by you or a supervisor. A contractor usually works for multiple companies and has total control over when and where their work is completed. Their pay is also flat fee or rate that is given once the task is completed.
So why is knowing the distinction important? As an employer, you have very different responsibilities depending on the type of worker you business employs. Everything from labor laws to health benefits will depend on this classification. Most importantly you will need to withhold and pay tax for your employees but not for any contractors you employ.
What if I misclassified my employee as a contractor? Eek, that is a bad one. This is the worst-case scenario. If your contractor is actually an employee, you will need to pay the IRS back taxes and various other expenses.
2. Hourly Vs. Salary
When you are an hourly employee, you are paid a specific rate for every hour you work. Hourly employees do not have a contract and are paid only for the hours they work. Also you the employer will determine the hours worked each week.
While salaried employees receive a set sum of money based on the yearly amount they are offered. Their salary is divided between the pay period determined by business or the year based on a 2080-hour year. Most salaried employees are offered a contract when accepting the position. These employees are also not required to sign in to work or account for their time.
3. Post-tax vs. Pre-tax
Your employee paychecks or paystubs contain a bunch of important information. It includes the money they earned
for all of their hard work but also their pre-tax deductions (Social Security, Medicare, and Federal/State income taxes.) After this amount has been removed post-tax deductions are then applied to the remaining amount.
This is actually a good thing because your post-tax deductions are applied to a smaller sum meaning your overall taxes will be lower.
Here are the two few common deductions you will see:
- Pre-tax: Health Savings (HAs), flexible savings accounts (FSAs), Commuter benefits, 401(k), Section 125 plans, and more.
- Post-tax: Wage garnishments, Roth 401(k) contributions, certain disability, and health insurances do not qualify to be withheld before taxes.
4. Exempt vs. Nonexempt
This one seems to trip up most employers. So under the Fair Labor Standard Act (FLSA), there are two separate types of employees: exempt and nonexempt.
Exempt employees are excused or exempt from protections enforced in the FLSA. These are salary employees, and you are not obligated to pay overtime and in some cases not eligible for minimum wage. Nonexempt employees are those employees who are subject to the rules of FLSA.
The good thing about these terms is that once you know one, you can quickly figure out the other. And with this blog post up your sleeve, you have a head start on upping your payroll proficiency.
If you are looking to make a difference in your payroll processing and compliance sign-up for your free PayWow trial! We are an affordable full-service payroll solution dedicated to helping you and your small business grow.
*Completely Risk-Free and No Need for Your Credit Card Information*