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How to Classify and Pay Employees

Part 1 of 3: How Do I Pay Employees Accurately and Handle Payroll Tax Deposits and Returns?

Employers have many payroll-related obligations, including compensating employees for time worked. If you have not been responsible for payroll in the past, understanding how to handle the proper tax deductions, deposits, and returns can seem daunting. Starting with a general understanding of some common payroll terms will help.

Employee or Independent Contractor?

It is important to determine if individuals providing services for your business are employees or independent contractors. If you misclassify an employee as an independent contractor you may be held responsible for paying back employment taxes for that worker as well as back pay and overtime.

An employee is defined differently under different regulations, but generally includes workers who perform services where the employer has the right to control what will be done and how it will be done, even if the individual has been granted some freedom of action.

An independent contractor is generally, a business owner or contractor who provides services to other businesses and is considered self-employed. The employer of an independent contractor will generally have the right to control or direct only the result of the contractor’s work and not how it will be done.

Paying Employees

How often employees are paid is generally determined by state statute. Popular frequencies include weekly and monthly. Refer to the e-book for others.

Where permitted, employers may elect to (or may be required to) pay employees using a mixed pay frequency. That is, some employees could be paid weekly, and others monthly.

What Is Compensation?

Compensation includes but is not limited to remuneration for all compensable hours worked. Workers may be compensated in cash, or other forms of payment where permitted under applicable law. A worker’s total compensation may include regular pay, overtime, vacation pay, sick pay, commissions, bonuses, and fringe benefits.

For some types of businesses, like restaurants, payrolls can be more complicated, with several forms of compensation and varying tax treatments. Refer to the e-book for the various types of food service and hospitality compensation and how they are taxed.

This has been an abbreviated version of one chapter in the free e-book 7 Questions Every Small Business that Hires Employees Will Have to Answer. For complete details on this topic, download the e-book at

* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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