Exempt vs. Nonexempt Employees: What It Means for Your Payroll

There are different types of employees your business may have, including those who are exempt and nonexempt. Knowing what these categories mean is especially important when it comes to reporting income and withholding taxes. As a small business owner, these payroll considerations can be directly related to compliance with local, state, and federal regulations.

Let’s unpack what it means to have exempt versus nonexempt employees and what you need to know about guidelines, rights, and benefits.

What are exempt and nonexempt employees?

Exempt and nonexempt employees differ in terms of the duties they perform and who is (or isn’t) eligible for overtime pay. These distinctions are determined by a federal law called the Fair Labor Standards Act (FLSA), and business owners are legally required to comply with it as well as local and state laws.

Exempt Employees

Exempt employees are those who have an exemption from receiving overtime pay. This exempt status is granted because they are most often salaried employees who receive an annual salary rather than being paid an hourly rate.

Exempt employees are also generally full time and are expected to work the number of hours necessary to complete their duties and tasks, regardless of whether this means working 30 hours or 55 hours a week. Their exemption from overtime pay makes payroll calculations unnecessary for employers to make. However, for an employee to be considered exempt, their job duties must satisfy certain FLSA requirements, such as those listed below.

Nonexempt Employees

Nonexempt employees are paid an hourly wage and are eligible to receive overtime pay. Hourly employees also must be paid at least the federal minimum wage for all regular hours worked. Their pay for overtime, any hours worked beyond the amount in a standard workweek, is calculated at one and a half times their normal hourly rate. While state regulations vary in defining just how many hours there are in a regular workweek, federal regulations for overtime are based on a standard of 40 hours.

Some states have also expanded their overtime pay guidelines, so be sure to check with the United States Department of Labor for your location regarding not only overtime but also employee rights, benefits, and tax liabilities. While the FLSA doesn’t distinguish between part-time and full-time employees, other regulations and requirements might, so you should check for this, as well.

What is the difference between exempt and nonexempt employees?

While the main difference between exempt and nonexempt employees may, at first glance, appear to be based on how each is compensated for work, receiving hourly pay or a salary, the major distinction is based on the duties each type of employee performs.

Exempt Job Duties

Administrative and managerial duties are some of those considered to be exempt. However, whether an employee is called an administrator or manager isn’t as important as their actual duties. For that matter, an employee performing exempt job duties may still be paid at an hourly rate.

The FLSA has three basic requirements, or tests, to categorize an employee as exempt:

• Salary level: Being paid the federal minimum weekly requirement
• Salary basis: Being paid a salary rather than hourly
• Primary duty test: Exempt job duties include office work (sometimes called “nonmanual work”) related to business operations, supervising at least two employees regularly, management duties such as interviewing, training, and scheduling, and using independent judgment and decision-making related to daily business operations

These positions typically include administrative employees, some sales employees, computer employees, and others. It’s important to note that there may be fine distinctions between types of jobs — such as indoor sales versus outdoor sales — that the FLSA makes when determining which jobs are and aren’t exempt. When in doubt, consult the U.S. Department of Labor’s FLSA page for clarification.

Overtime

Overtime is paid only to nonexempt employees working more than the established hours of a normal workweek. These nonexempt employees are covered by the Fair Labor Standards Act, which regulates overtime eligibility and sets the minimum wage and establishes standards related to child labor laws. FLSA regulations pertain to both part-time and full-time employees.

The FLSA does not cover exempt-status employees, so you’re not responsible for tracking overtime hours or offering overtime compensation. Their salaried pay is assumed to cover a general number of extra hours worked as part of their job throughout the year.

Rights and Benefits

Nonexempt employees can expect to be paid at least the federal minimum wage during a regular workweek, receive the benefit of overtime hours at a rate of one and a half times their normal pay, and have their hours properly tracked and recorded.

Employers have a little more leeway with exempt employees regarding how many hours they can legally ask them to work, but they still face compensation requirements. Exempt employees must receive a minimum of $684 per week. They also receive the benefit of being paid this set amount of money regardless of how many hours they do or don’t work.

Tax Liabilities

When it comes to filing a tax return, exempt and nonexempt employees are taxed the same by the IRS. Earned income is calculated the same, and their returns only differ in terms of the income tax bracket each employee fits into, something that doesn’t involve their status as exempt or nonexempt.

As an employer, you’ll still be responsible for local, state, and federal tax withholdings for all of your employees.

Unemployment Implications

Both exempt and nonexempt employees can collect unemployment benefits, although these benefits are likely to vary by area or state. To ensure you comply with local, state, and federal regulations, check the U.S. Department of Labor requirements for your area.

Supporting and Understanding Your Small Business’s Employment Needs

For small business owners, juggling exempt and nonexempt employees might seem complicated. Understanding what job duties qualify an employee as exempt and what payroll requirements govern compensating different types of employees takes the headache out of doing your payroll. 

ZenBusiness is here to make your business’s day-to-day operations even easier, from payroll to staffing and beyond. Our business experts can help you tackle any questions you might have as a small business owner and provide resources to take your business even further.