What is an Employee? - Definition & Types

What is an Employee? - Definition & Types
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  • 0:04 What Is An Employee?
  • 1:20 Types of Employees
  • 3:14 Lesson Summary
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Lesson Transcript
Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

The definition of an employee directly impacts the tax and benefits administration activities required of employers. Let's look at what defines an employee and how employees can be classified into different types for the purpose of providing benefits.

What Is an Employee?

As a small business owner of a retail shop, John's workers are classified as employees in the eyes of the Internal Revenue Service (IRS). Why are John's workers considered employees rather than contractors?

What is an employee? In simple terms, an employee is someone who works for another person who controls what is to be done and how the job is performed. John provides the store, inventory, and equipment for the employees to do their job. Employees at his store are required to wear uniforms and work when they're scheduled. All the employee has to do is show up to work on time and prepared and do his or her job as instructed.

Having employees means that John must withhold income taxes and offer benefits, among other things. If he could hire contractors, he would not have to take these additional steps. Contractors are given a general outcome, but have tremendous autonomy to complete the job as they see fit, providing their own resources. Contractors are often paid more than employees to make up for the fact that contractors are responsible for buying their own health insurance and other benefits on the open market. Classifying employees as contractors can be attractive because of the reduced administrative burden.

Types of Employees

Now that it has been established that John's workforce is made up of employees, these workers can be further subdivided into different types of employees. Classifications are typically made on the basis of the amount of hours worked in the business; full-time, part-time, and temporary employees are the most common types. Why bother to classify employees? Benefit programs offered by employers often have eligibility restrictions based on hours worked. Separating employees into different types makes it possible to easily account for who's eligible for certain benefits.

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