The difference between non-exempt and exempt from taxes is relatively simple. It comes down to how much you make, not what your job entails or whether you’re an employee or independent contractor.
If you’re in a “qualifying” position, then the IRS can’t choose when they want to tax your income–you’ll always owe them money for all of the work that goes into earning it on their end. But, conversely, if are receiving payments during specific windows of time where non-taxable activities take place (for example, commissions), then those transactions will be completely free from taxation by Uncle Sam’s watchful eye except at the state level. If applicable!
Exemptions have been granted under different circumstances throughout history and in other countries around the world–but there are no set criteria for who gets one and who doesn’t. In the United States, there are two sorts of employees: exempt and non-exempt. Failure to categorize personnel appropriately may result in significant compliance concerns and penalties for a company. You’ve come to the correct spot if you’re having trouble figuring out the difference between exempt and non-exempt personnel. This article will teach you how to categorize your workers to pay them correctly and stay in compliance.
What Is the Difference Between Exempt and Non-Employees who are exempt?
Employees must be classified as exempt or non-exempt by all companies. The categorization is usually based on the following factors:
- How much does a worker get paid?
- How is an employee compensated? (salary vs. hourly wages)
- The sort of labor performed by an employee
The best way to explain the distinction between these two classes is to use “exempt,” which refers to overtime. Employees classified as exempt are paid a wage and are not eligible for overtime. Conversely, employees who are not exempt are paid hourly and are suitable for overtime pay.
Exempt vs. Non-Employees who are exempt: The Basics
While the fundamental notions of exempt and non-exempt workers are simple, there are numerous more aspects to consider. The next section will dissect the essential components of exempt vs. non-exempt workers.
The Fair Labor Standards Act was enacted in 1938. (FLSA)
The Fair Labor Standards Act was enacted in 1938. (FLSA) is a US labor law initially published in 1938. It defines the federal minimum wage, overtime rules, child labor rules, and other labor standards to protect employees and how they’re paid. Employees in the United States must be paid a minimum of $7.25 per hour, according to the FLSA. The federal minimum wage is this amount, and an employee may be produced this or any amount over it. Non-exempt workers who work more than 40 hours per week are entitled to overtime compensation of at least one-and-a-half their average wage. The FLSA defines the workweek as seven consecutive 24-hour periods. The workweek may begin at any hour or on any day of the week, as long as it is set and repeating for 168 hours. Let’s assume John, a non-exempt employee, is paid $8 per hour and is scheduled to work 50 hours this week. He’ll be born $8 per hour for the first 40 hours and $12 for the last 10, for a total of $440 for the week. Unlike common assumptions, the FLSA does not require overtime compensation on weekends or holidays unless the hours worked on such days exceed 40 in the workweek.
Exempt employees
To be classified as exempt, an employee must meet three requirements:
- First, instead of being paid hourly, you are paid on a salary basis.
- Earn at least $684 per week, or $35,568 per year, as required by the FLSA.
- Perform particular job responsibilities
If an employee is exempt, their compensation stays constant regardless of how many hours they work. Assume Steve is an exempt employee who works 35 hours one week and 60 hours the next; his compensation is the same for both weeks, and he is not eligible for overtime pay. The third requirement outlined above—specific work duties—is the most challenging component of categorizing an individual as exempt. Only certain types of jobs and tasks are excluded.
Here’s a deeper look at the tasks that come under this heading:
- Executive Exemption – Executives must have a crucial responsibility for operating a company or a division of a company. This individual must have the power to recruit, discharge, promote, advance, or modify the status of at least two additional full-time workers regularly.
- To qualify for the administrative exemption, administrators must undertake office or non-manual activities directly connected to general company operations or management. In addition, independent judgment and discretion must be part of this employee’s core responsibilities.
- Professional Exemption – There are two types of professionals that qualify for the professional exemption: educated professionals and creative professionals. Learned experts are required to carry out tasks that require extensive knowledge. On the other hand, an essential work task for clever people must be tied to skill, creativity, or innovation.
- Non-salaried computer personnel paid at least $27.63 per hour may still be eligible for the exemption. The employee’s principal responsibilities must be connected to computer hardware, software, system functions, design, development, analysis, documentation, or testing.
- Outside Sales Exemption – An outside salesperson is characterized as someone who obtains contracts or orders from clients or customers while working outside the employer’s office regularly.
- Highly Compensated Employees – This exemption is available to office employees who undertake non-manual labor for a total annual remuneration of at least $107,432 and perform responsibilities about the executive, administrative, or professional functions.
For a full explanation and additional fact sheets about these roles for exempt Employees, visit this resource from the US Department of Labor Wage and Hour Division.
Non-Employees who are exempt
Non-Employees who are exempt are eligible for overtime pay. Generally speaking, these employees are paid by the hour instead of working on a salary basis. Any time spent above 40 hours in a workweek must be compensated at one and a half times the standard pay rate, according to the FLSA. How can you tell whether an employee is exempt or not? The simplest method refers to the preceding section’s exempt employee qualifying requirements. Employees that do not match all of the needs are considered non-exempt. Even if the employee fits the exemption criteria, many occupations are automatically classified as non-exempt.
Only “white-collar” workers are exempt from the FLSA. Non-exempt personnel includes manual laborers and “blue-collar” workers. The FLSA defines blue-collar workers as working with their hands and exerting physical effort. Non-exempt jobs include construction, electricians, carpenters, artisans, maintenance, plumbers, and other workers. Regardless of how much they are paid each week or year, these jobs are subject to federal minimum wages and overtime compensation. Non-exempt employees include police officers, firefighters, paramedics, and other first responders. Correctional officers, park rangers, medical employees, investigators, and others fall under this category. According to FLSA legislation, certain workers classified as non-exempt may not be eligible for overtime pay. Employees in commissioned sales, truckers, farmworkers and seasonal laborers are just a few examples.
Let’s imagine you own a retail store and pay your salespeople a commission. The employee may be excused from overtime if the commission accounts for more than half of the employee’s income and averages at least one and a half times the minimum wage requirements for each hour worked. Visit the US Department of Labor’s website for a comprehensive list of widely utilized exemptions.
Collective Bargaining Agreements and State Laws
FLSA is a federal law that provides minimum standards for exempt and non-Employees who are exempt. While these standards may be exceeded by local laws or collective bargaining, they cannot be waived or reduced. California law, for example, requires firms with 25 or fewer workers to pay at least $13 per hour and those with 26 or more employees to spend at least $14 per hour. Although the federal minimum wage is $7.25 per hour, California firms must follow state labor rules. In California, several counties and localities have their own minimum wage rules. For example, the minimum wage in San Francisco is $16.07 per hour, increasing to $16.32 per hour in July 2021. Businesses must adopt whatever norm is most favorable to workers if there is contradictory legislation from multiple government sources.
Some farmworkers are not entitled to overtime under the FLSA. Local labor regulations in certain states, such as New York, compel employers to pay farmworkers an overtime rate for any hours worked beyond 60 in a calendar week. While the FLSA is a good beginning point for assessing exempt and non-exempt status, you should always verify with your local labor department to make sure you comply.
3 Tools to Improve Exempt vs. Non-Employees who are exempt
There are tons of great tools on the market to help you manage your exempt and non-Employees who are exempt alike. The following three options are my favorite:
1. Deputy
Deputy is a must-have tool if you’re managing non-Employees who are exempt. The software is branded as an all-in-one solution for employee scheduling and timesheets, but its functionality goes above and beyond those primary use cases. That’s why 250,000+ companies worldwide rely on Deputy. The program includes options to assist you in lowering pay expenses, such as the ability to compare worker hours to profits. You’ll also benefit from Deputy’s automated wage compliance capabilities, which guarantee that all local, state and federal requirements are followed. To save money on overtime, you might even restrict how many hours each person works every week. Monthly plans start at $2.50 per user.
2. Gusto
Gusto has quickly become one of the best payroll and HR solutions on the market today. It’s easy to use and helps businesses remain compliant whether they have exempt or non-Employees on the payroll. Basic packages start at $45 per month, but at $161 per month, I suggest Gusto’s Concierge plan. This premium service provides you with access to trained HR consultants who will ensure that your company complies with labor rules. Compared to the expenses of a fine or a lawsuit, the additional charge is justified.
3. Namely
As previously mentioned, labor laws about exempt and non-Employees vary by state. So if you’re running a more extensive operation with employees working in multiple jurisdictions, it can be tough to keep track of these regulations. Namely, fortunately, it provides an integrated HR compliance database with a state comparison tool. So you can understand how to deal with various employment categories across state boundaries. Time and attendance monitoring, payroll, benefits administration, and more are all available with Namely. To get started, request a demo and a free quotation.
3 Tips For Exempt vs. Non-Employees who are exempt
There are a few recommended practices to bear in mind when deciding whether or not to designate an employee as exempt or non-exempt.
1. Non-Employees who are exempt Offer More Flexibility For Businesses.
Employers and supervisors have greater latitude with non-exempt employees regarding how they might be utilized. You may adjust their schedule depending on demand since there are no minimum standards for how many hours they must work each week. You’ll still have to pay minimum wages and overtime, but if you keep track of your schedules and hours worked, you can easily avoid overtime. Generally speaking, exempt non-Employees are better for hourly, temporary, or seasonal positions.
2. When writing job descriptions, keep exemption rules in mind.
When it comes to employing new employees and identifying principal duties, you should consider whether the job is exempt or non-exempt. If the employment fits other qualifying salary requirements, executive, administrative, and other professional functions are excluded. For example, you wouldn’t recruit a CFO or CMO as a non-exempt employee and pay them by the hour. These are often salaried positions, and they should be compensated appropriately.
3. Recognize the Limitations of Each Classification.
Many employers think it’s just easier to hire exempt employees because they get paid a salary and don’t qualify for overtime. While this might be simple to understand, it doesn’t necessarily translate to performance. An exempt employee isn’t motivated to go above and beyond the bare minimum. They’ll be paid the same whether they work 20 or 60 hours. To keep an exempt employee from slacking on the job, you may need to give incentives, commissions, stock options, or other forms of payment. Non-Employees who are exempt run the risk of your payroll getting out of control. If management or HR isn’t monitoring hours and scheduling shifts appropriately, you could be paying a ton of overtime.
What Should I Do Next?
Now that you have a firm grasp on the difference between exempt and non-Employees who are exempt, it’s time to get everything organized in your HR database. The easiest way to manage this is by using HR software. It will make your life easier and help you avoid compliance issues. For those of you with lots of non-Employees who are exempt, you should also be using a solid time and attendance system. This can help you track hours, schedule shifts, and ensure overtime costs aren’t getting out of control.
Frequently Asked Questions
Is it better to be exempt or non-exempt?
A: Non-exempt is better.
How do you explain exempt and non-exempt employees?
A: Exempt employees are those who qualify to be paid a salary, while non-exempt employees must meet specific requirements before they can be classified as exempt.
What are the rules for non-exempt employees?
A: The rules for non-exempt employees are as follows. Salary earned before January 1st of the current year is exempt from withholding taxes. However, income generated in 2018 must be paid by December 31st. Suppose you were hired into a new job on or after January 1st, and your salary was not already withheld during that period. In that case, it is considered taxable earnings and will be subject to withholding tax unless you can provide documentation proving otherwise (i.e., pay stubs).
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