I'm Andy Temte and welcome to Money Lessons! Join me every Saturday morning for bite-sized lessons that are designed to improve financial literacy around the world. Today is November 7, 2026.
Last Saturday I promised that today we'd take up how the law classifies your work: who the law counts as an employee rather than a contractor, and who it says is owed overtime. Before your first pay stub is printed, the law has already answered two questions about your job, and the answers decide what you're paid and who pays for what. Today we'll put a dollar figure on each answer, look at who gets to decide, and cover what you can do if you believe your employer got the answer wrong.
Employee or Contractor: Who Pays for What
Back on October 3rd we defined the 1099 as the form a business sends you when it paid you for work without hiring you as an employee — the IRS calls you an independent contractor. When a business classifies you as an independent contractor, it pays none of three things it would pay for an employee.
The first thing an employer pays for an employee and not for a contractor is the spending we added up on September 26th. We followed one employee earning a salary of $50,000, and the employer's spending beyond the salary — its share of the health premium, its half of Social Security and Medicare taxes, and the retirement plan match — came to $13,100 for the year. A business pays none of that for a contractor. And the employer's half of Social Security and Medicare taxes doesn't disappear: on October 3rd we said that a self-employed person pays both halves of Social Security and Medicare taxes, so the employer's half becomes a tax the contractor pays instead.
The second thing an employer pays for an employee and not for a contractor is the unemployment insurance tax. Unemployment insurance is a state program, paid for mostly by a tax employers pay on their employees' wages, that replaces part of your pay for a limited time when you lose a job through no fault of your own. Employers pay that tax on their employees' wages and not on what they pay contractors, so a contractor whose work ends collects nothing.
The third thing an employer pays for an employee and not for a contractor is overtime. The federal overtime rule applies to employees only. An employee who works more than forty hours in a week is owed overtime pay for the hours past forty; a contractor who works the same hours is not.
Who Decides: The Tests
Whether you're an employee or a contractor is decided by tests written into the law. The tests look at how the work gets done day to day: who sets the hours, who supplies the tools, and who decides how the job is done.
The IRS has a test, and it comes down to one question: how much control does the business have over the work? If you believe a business has classified you as a contractor when you work as an employee, two IRS forms let you act on it. Form SS-8 asks the IRS to decide your status, and either you or the business can file it. Form 8919 is for a worker who was paid as a contractor but was really an employee. It goes with your tax return, and it lets you pay only the employee's half of Social Security and Medicare tax — the 7.65 percent — instead of both halves. In most cases you file Form SS-8 first.
The Department of Labor uses a different test for the federal minimum wage and overtime law, and as of this recording that test is being rewritten, so the two federal agencies don't share one answer. In my experience, in businesses that operate in many states, the strictest test is the one that ends up governing, and the strictest is a state test called the ABC test.
Under the ABC test you're presumed to be an employee, and the business can treat you as a contractor only if it proves all three of these conditions: A, that you're free from its control and direction, both on paper and in practice; B, that the work you do is outside the usual course of its business; and C, that you're customarily engaged in an independently established trade or business of the same kind. California wrote that version into its labor law. Illinois uses a version of the ABC test for unemployment insurance, and so do more than a dozen other states. Take condition B. A bakery that hires a plumber to fix a sink can call the plumber a contractor, because plumbing is outside the usual course of a bakery's business. A bakery that calls its bakers contractors is unlikely to pass condition B.
Wisconsin, where I live, doesn't use the ABC test, but its test has the same shape. For unemployment insurance, and for most employers, a worker who performs services for pay is presumed to be an employee, and the employer has to show two things: that the work is performed free from its control or direction, and that the worker meets at least six of nine conditions that describe someone in business for themselves — among them, advertising as a business, working under contracts with more than one customer, paying the main expenses of the work, being able to earn a profit or suffer a loss, and not depending on one customer for a living.
Note that in Wisconsin, as in the ABC states, the presumption runs toward employee, and the burden of proof is on the employer, not on you.
Exempt or Non-Exempt: Who Is Owed Overtime
The second question the law answers about your job is whether you're owed overtime, and the answer comes from the Fair Labor Standards Act, the federal law that sets the minimum wage and the overtime rule. The overtime rule is this: an employee covered by the law who works more than forty hours in a workweek is owed at least one and a half times their regular rate of pay for every hour past forty. At $20 an hour, every hour past forty pays $30. The law covers most workers, though not every small business.
An employee the overtime rule applies to is called non-exempt. An employee the rule doesn't apply to is called exempt — exempt from overtime. Note that being paid a salary does not, by itself, make you exempt. Under the most common exemptions, a salaried employee is exempt only if two tests are both met.
The first is a salary test: as of this recording, you have to be paid a salary of at least $684 a week, which is $35,568 a year.
The second is a duties test: your main duty has to fit one of three definitions written into the regulations, and the three are called executive, administrative, and professional. An executive employee manages the business or a department of it, regularly directs the work of at least two other full-time employees, and has a say in hiring and firing. An administrative employee does office or non-manual work directly related to running the business and exercises discretion and independent judgment on matters of significance. A professional employee does work that requires advanced knowledge in a field of science or learning, the kind acquired through a prolonged course of specialized study.
Fail either test and you're non-exempt, salary or not. There are other exemptions — outside sales; certain computer employees, meaning programmers, software engineers, and systems analysts, not everyone who works at a computer; and a separate test for highly paid employees — so the two tests I've described cover the common cases, not every case. And some states have overtime rules of their own that are stricter than the federal rule.
Fun fact, the tax law signed on July 4, 2025 made the "half" in time-and-a-half deductible from your federal income tax. For tax years 2025 through 2028, the part of your overtime pay above your regular rate can be deducted, up to $12,500 a year, or $25,000 if you're married filing jointly, and the deduction shrinks for incomes above $150,000, or $300,000 if you're married filing jointly. You don't have to itemize to take it. Only overtime the federal law requires counts, so overtime owed only under a state law or a union contract doesn't qualify. And Social Security and Medicare tax still come out of every overtime dollar, because the deduction is from income tax only.
Now, suppose you're non-exempt and your employer hasn't paid the overtime you're owed. The agency that enforces the law is the Wage and Hour Division of the Department of Labor. You can call its helpline, and complaints are confidential. In fiscal year 2025 the Wage and Hour Division recovered more than $259 million in back wages — pay that was owed and never paid — for nearly 177,000 workers, an average of $1,465 each. And when the Wage and Hour Division collects back wages and can't find the worker the wages belong to, it holds the money for three years. The Wage and Hour Division keeps a search tool called Workers Owed Wages: type in an employer's name, and the tool tells you whether money is being held in your name.
What This Means for You
If you're paid as a contractor and the way you work looks like an employee's — the business sets your hours, directs how the work is done, and you work for no one else — you don't have to accept the label. Form SS-8 asks the IRS to decide, and if you file for unemployment insurance, your state's agency applies your state's test.
If you're salaried and you regularly work past forty hours, check two things: whether your salary is at least $684 a week, and whether your main duty fits the executive, administrative, or professional definition. If either answer is no, you're owed overtime, and the Wage and Hour Division is the agency that collects it.
Links to both IRS forms, the Wage and Hour Division's helpline, and the Workers Owed Wages tool are at the bottom of today's post.
Next Saturday we take up pay that isn't salary — bonuses, commissions, and tips — and why the withholding on a bonus looks like a higher tax and isn't.
Until next week... Grace. Dignity. Compassion.
Form SS-8, Determination of Worker Status: https://www.irs.gov/forms-pubs/about-form-ss-8 Form 8919, Uncollected Social Security and Medicare Tax on Wages: https://www.irs.gov/forms-pubs/about-form-8919 Wage and Hour Division helpline: 1-866-487-9243 — https://www.dol.gov/agencies/whd/contact/complaints Workers Owed Wages search tool: https://www.dol.gov/agencies/whd/wow
