Employers compensate workers by paying them for their time, talent and contributions. In an employer-employee relationship, the company accomplishes this by paying a salary or an hourly wage to workers. In addition to paying the company's employees, the payroll department calculates withholdings and remits those amounts and the company's portion of payroll taxes to the IRS and the appropriate state revenue department. Companies that have non-employees -- called independent contractors -- still compensate them, but it's not referred to as a salary and the payment process differs.

Federal Law

The Fair Labor Standards Act contains provisions for minimum salary, hourly rates, overtime pay and nonexempt and exempt classifications. Nonexempt refers to employees who are not exempt from the FLSA; they receive 1.5 times their hourly rate when they work more than 40 hours in a workweek. Exempt employees do not receive overtime pay. Most people use the terms "salaried employee" or "salary" to denote someone who doesn't receive overtime pay; however, there are some salaried employees who are considered nonexempt, based on their job duties. The FLSA rules apply to employees only, not non-employees.

Salary Basis

Under the FLSA, employers must pay salaried employees at least $455 a week -- $23,660 a year -- to meet the salary basis test. The FLSA doesn't have a salary basis test for non-employees, therefore, companies that engage the services of non-employees aren't bound by federal minimum salary laws. Non-employees typically provide services for an amount to which the non-employee and the company mutually agree. Some non-employees charge companies by the hour, and others bill their services based on a flat-fee arrangement.

Employee vs. Non-Employee

The IRS has a rather simple test to determine what constitutes the employer-employee relationship. Non-employees are called "independent contractors," and they do not have the same type of working relationship with the company that the company has with its employees. For example, in an employer-employee relationship, the employer can determine how the employee must perform the job and has the authority to dictate when and where the work must be completed. An independent contractor is in business for herself, and she determines how to perform the work assigned to her, preferably without oversight from the company, which is her client, not her employer.

IRS Forms

At the beginning of the independent contractor's relationship with the company, she submits the IRS Form W-9, which requires the contractor's name, address, Social Security or Tax Identification Number and organization status. The contractor might be a sole proprietor, a corporation, partnership or under another tax classification. Independent contractors are required to submit this form. And when the company pays the contractor more than $600 in a calendar year, the company must report the amount to the IRS and send the independent contractor an IRS Form 1099 that contains the amount paid during the year.

Taxes

A primary distinction between an employee and a non-employee, or independent contractor, is tax withholding. Employers withhold designated amounts from their employees' paychecks based on the IRS Form W-4 that employees submit when they begin working. The W-4 contains the employee's withholding status, Social Security number and other pertinent information for determining withholding rates. Non-employees, or independent contractors, who submit an IRS Form W-9 do not have taxes deducted from their pay because they assume responsibility for self-employment taxes. Companies do compensate their independent contractors. But the two parties don't have an employer-employee relationship, and the payment to a non-employee isn't called a salary.