Big, multi-national corporations like Google, Facebook, and Twitter regularly hire interns, but your small business can develop an internship program too. Internships are beneficial for both parties. The intern gets real-world experience, and the company gets a fresh perspective and an additional set of hands.
The number of employers offering internships increased 7.3 % from 2016 to 2017, and with a strong labor market, that growth can be expected to continue in 2018 and beyond. But along with hiring interns comes several legal and financial considerations. The US Department of Labor (DOL) and Internal Revenue Service (IRS) have strict laws around worker classification and payroll taxes.
Although the laws are complicated to understand, what they boil down to is that interns can be classified as employees, volunteers, or independent contractors. The distinctions between who is an employee, who is an independent contractor, and who is a volunteer can get fuzzy. And miscategorizing any worker—including an intern—can result in fines and lawsuits, definitely things you want to avoid for your company.
At the end of the day, the best option is to consult an employment lawyer if you have specific questions about your business’s internship program. But, here’s some general information about the different ways you can classify interns and the legal tests involved. You’ll also hear about how other small business owners have utilized internship programs to help students while improving their own bottom line.
The Basics of Classifying Interns
When you hire someone to work for your small business, the task isn’t over the moment they sign the offer letter or even when they show up for their first day of work. There are tax, legal, and financial consequences that your company has to follow when an individual works for your company in any capacity. The extent of these responsibilities changes based on how you classify a worker.
There are three ways that you can classify an intern for legal and tax purposes:
- Independent Contractor
You can think of these classifications as falling along a sliding scale, in terms of the business’s legal and financial responsibilities. Volunteers get the fewest legal protections and no monetary pay—though interns can, and often do, earn academic credit for their work. Employees receive a wage and the greatest legal protections, but employers have to pay various payroll taxes and benefits. Independent contractors fall somewhere in the middle. They don’t have the same legal rights as employees, but companies still have some tax obligations.
→Too Long; Didn’t Read (TL; DR): Businesses can classify interns in one of three ways: employees, independent contractors, or volunteers. Employees have the greatest legal protections and require the most financial responsibilities from businesses. Volunteers have the least protections, not requiring much from companies. Independent contractors are in between.
Most Interns Are Classified as Employees
Although interns usually are new to the industry and learning the ropes, many businesses give interns the same tasks and responsibilities as ordinary employees. This is especially true in hands-on industries, such as technology, design, and media production. In fact, the majority of interns are classified as employees and receive compensation during their internships.
What Is an Employee?
An employee is someone that a business hires to do a specific job in exchange for paying the employee a wage. The employee receives a W-2 tax form from the employer, and the employer has to pay federal and state payroll taxes for the employee, such as social security, medicare, and unemployment taxes. Most employees are at-will, which means that the employee can quit without notice, and the employer can terminate without notice (without violating discrimination laws or other employment laws, of course).
The main factor that distinguishes an employee from an independent contractor is that the employer has a significant amount of control over the work that an employee does on a day-to-day basis. For instance, the employer selects the office setting, the work hours, and the tasks.
Employees must receive at least the minimum wage. Full-time employees are eligible for health insurance and other benefits that you choose to provide, such as retirement accounts and paid time off.
Legal Test: Is Your Intern an Employee?
The government generally prefers that companies classify their workers as employees rather than independent contractors, to ensure that your company is paying its fair share of taxes. But companies usually prefer the exact opposite in order to avoid burdensome regulations.
The DOL has a series of seven factors that can help businesses—and courts—assess whether your intern is an employee, as opposed to an independent contractor or volunteer. If most of these statements are true about your internship program, then you should pay your intern a wage and classify them as an employee:
- The business has implied or explicitly agreed that the intern will receive compensation for their work.
- The projects the intern is working on are part of the regular course of business, similar to what other employees work on (as opposed to more educational or experimental activities).
- The intern isn’t receiving academic credit for the internship, and isn’t taking integrated coursework.
- The internship continues during the school year.
- The internship continues even after the intern has received training or learned essential skills.
- The intern’s work substitutes for work done by regular employees.
- There’s an understanding between the business and the intern that the internship will culminate in a paid job offer.
These factors are meant to create a flexible test, as specific circumstances vary considerably from one company to another. Ultimately, if your company is the “primary beneficiary” of the internship—as opposed to the intern—then the intern is a paid employee. And the employment is at-will, unless your company has a contract with the intern or with the school that details specific termination provisions. You must pay the intern at least minimum wage, and they are entitled to other employee benefits too, such as overtime for working over 40 hours per week.
Employee is typically the correct classification for an intern, and the “safest” from a legal standpoint, when the intern is doing work that regular employees ordinarily do. Consumer Research Firm BestCompany, based in Pleasant Grove, Utah, is a small business of 30 employees with an internship program. Sarah Hancock, BestCompany’s Content Marketing Manager, says, “We have an internship program for a few reasons, but one is to vet employees before offering them a permanent position. Interns perform many of the same tasks as our full-time employees. For our department, that means creating, managing, and optimizing content for our website, email outreach, and link building.”
Keep in mind that some states, such as New Jersey, Maryland, and New York, have their own tests for determining whether interns are employees. These laws are very intern-friendly, so most interns working in those states are classified as employees under state law.
→TL;DR (Too Long; Didn’t Read): Under federal law, interns should be classified as employees if the “primary beneficiary” of the internship is your company. One of the main things to consider is whether the intern is doing work that ordinary employees typically do and whether that work is helping the business’s bottom line.
Unpaid Interns Are Classified as Volunteers
In an ideal world, all interns would receive a pay check, but many small businesses don’t have the budget to pay their interns. An unpaid intern is legally classified as a volunteer. It’s perfectly legal to hire an unpaid intern, but if you plan to do so, the best practice is to with with the intern’s school so they can earn academic credit for the internship.
What is a Volunteer?
A volunteer is someone who performs services for your company without compensation or benefits. Normally, we associate volunteers with a philanthropic or non-profit purpose. However, an individual who performs services for a for-profit company without financial compensation is also a volunteer under the law.
Legal Test: Is Your Intern a Volunteer?
Courts use the same seven factors noted above to assess whether an intern is a volunteer. If most of the following are true about your internship program, then you can likely classify your intern as an unpaid volunteer:
- The business has made it clear that the intern won’t receive compensation for their work.
- The intern works on educational or experimental activities, as opposed to projects that other employees would normally do.
- The intern is receiving academic credit for the internship or is taking integrated coursework.
- The internship reflects the academic calendar of the intern’s educational institution.
- The internship stops once the intern has received training or learned a relevant skill.
- The intern’s responsibilities complement, but don’t serve as a substitute, for work done by regular employees.
- The business has made it clear that the intern isn’t entitled to a paid job at the end of the internship.
When you consider the seven factors together, the intern should be the “primary beneficiary” of the internship. In other words, the internship should primarily be a teaching tool or closely integrated with the intern’s coursework. For example, say you have a law office, and your intern reviews and discusses old cases with the senior partners in conjunction with their textbook. That’s evidence that the internship serves an educational purpose primarily for the intern’s benefit. In contrast, if the intern wrote briefs or motions for new cases, then that is more suggestive of an employee-employer relationship.
Even if you don’t pay your intern a wage, you should at least work with their school to see that they can earn academic credit. For many interns, course credit is more valuable than a pay check because they can graduate early and save on tuition.
→TL;DR: Your interns can be classified as unpaid volunteers if the primary beneficiary of the internship program is the intern. For unpaid volunteers, the internship should serve primarily an educational purpose.
Interns Typically Aren’t Independent Contractors
Independent contractors are common—they make up 20% of the American workforce, and are growing in number each year. Independent contractors typically receive payment for their work. However, they have much greater control over their work compared to employees.
What is an Independent Contractor?
Independent contractors are self-employed individuals, such as freelancers. Many independent contractors set up their own corporations or LLCs. They provide their own tools, set their own work schedule, and often have multiple clients or work on a per-project basis. Independent contractors determine how, when, and where to complete a project and generally do not receive training from the hiring company. Before tax time, the company sends independent contractors Form 1099s to self-report their income to the IRS.
Could Your Intern be an Independent Contractor? Probably Not.
Internships usually don’t fit an independent contractor model, according to Thomas Simeone, an attorney and CPA at Simeone & Miller, LLP. “Many interns are unpaid or seeking experience,” Simeone explains. “While those are not determinative factors, they make it more likely that an intern will be considered an employee. Rarely does an independent contractor work for free or to obtain experience. Usually, they already know what to do—as evidenced by the lack of control of the company—and are engaged in a business for profit.”
Most interns work on site at your company, have set hours, and work under your company’s training and supervision. This makes them much more like an employee than an independent contractor. That said, there are always exceptions. If your interns work on a per-project basis, or if your internship program is very unstructured, then you could make a case that they are independent contractors.
For example, photographer Liam Smith hires interns to assist him during photo shoots. He considers his interns paid independent contractors. Here’s Liam’s description of his internship program:
“Interns help me with updating the business website, blog, and social media, as well as image editing. The intention is to highlight how the business works, so they may learn from it and implement structures and systems in their own workflow to improve productivity.
Interns are paid for assisting at weddings when required, but there is no formal agreement or necessary hours required per week. I consider interns to be independent contractors. The intention is to develop their professional practice so they may create their own business and improve their photography.”
As with other worker classifications, be aware that states might have their own rules on what distinguishes an employee from an independent contractor. California, for example, has a particularly strict law that makes it much harder for companies to classify workers as contractors.
→TL;DR: Independent contractors are freelancers and other self-employed individuals. Most interns aren’t independent contractors because they work on-site at your business, and your company has a significant level of control over the intern’s tasks and day-to-day schedule.
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What’s the Big Deal About Classifying Interns?
Mistakenly categorizing an intern as an independent contractor or volunteer, rather than a a paid employee, can cost your small business money and time. A current or former intern who believes they were misclassified can file a complaint with the federal Department of Labor, the state labor department, or even in court. Or the intern might try to file a claim for unemployment benefits or worker’s compensation, which are available only to employees.
Large corporations like Fox, Hearst Corporation, and CBS have faced complaints and lawsuits from unpaid interns, and small businesses are even more vulnerable without the deep pockets to defend against a lawsuit.
When an employee files a complaint, the DOL will investigate. If they find reason to believe that you misclassified an intern, they can audit your business, covering all workers over the last three years. The DOL and IRS also do random audits to make sure companies are following the rules.
If you did misclassify workers, then the government will charge you back taxes and penalties. Criminal penalties exist in especially egregious cases.
If you’re unsure about how to classify a worker, you can submit Form SS-8 to the IRS and provide details about your internship program. The IRS will review the situation and determine if the person is an employee under the law. While the form is pending, you should treat the intern as an employee, with wage withholding and access to benefits.
→TL;DR: You need to properly classify interns, as well as all workers, to avoid paying back taxes and penalties to the government. Improper classification can also land you in a lawsuit.
Consider Hiring Part-Time Paid Interns
Small business owners who want to hire interns often face challenges on multiple fronts. You want the intern to have a great learning experience while helping out your business, but you also want to minimize your own financial and legal risks. A compromise solution that works well for many small businesses is to classify interns as part-time employees.
Although definitions vary, part-time employees are typically individuals who work fewer than 30 hours per week. Part-time employees receive a wage, just like full-time employees, and they are subject to payroll tax withholding. However, part-time employees are not eligible for many benefits that add costs for employers, such as health insurance and retirement plans. And some businesses opt not to provide paid time off for part-time employees.
By classifying interns as part-time employees, you might be able to have the best of both worlds: a happy intern who gets paid for their services, and few responsibilities for your business. Be The Machine, an NYC-based experiential marketing company, went this route. Founder Patrick West says, “While we think interns can be very helpful for our business, we have limits on space, funds, and also useful assignments. We pay interns the minimum wage and feel it is very important to pay interns as they are providing valuable services that should be compensated. And technically, most interns are part-time employees as defined by law.”
→TL;DR: Hiring part-time paid interns is often a good solution for small businesses. Such interns receive a wage, but aren’t entitled to benefits that are costly for businesses to provide, such as health insurance and retirement plans.
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Tips for Hiring and Managing Interns
However you end up classifying your interns, the best thing to do is set expectations from the start about what the internship will be like and the types of responsibilities interns will receive during the course of the internship. This will ensure a good experience for the company and the intern.
Here are some tips to keep in mind for hiring and managing interns:
Work Closely with the Intern’s School
Working closely with the intern’s educational institution helps you develop tasks that fit the intern’s skill level and areas of interest. Many schools have career counseling offices or internship liaisons who can clue you into what the intern is learning at school, so that the internship appropriately reflects the curriculum. It’s especially important to work with the school if you’re offering course credit for the internship.
In addition, working with the school helps ensure that you’re abiding by worker classification laws. Some schools might specify working conditions and hours for their students, and set expectations for the business. For example, the University of Rochester’s internship page states, “Students do not give up their rights as employees due to their academic status.”
Give Interns a Valuable Learning Experience
In a busy office, people often rely on interns for a variety of tasks, including some mundane ones like getting coffee and filing documents. However, you can add a lot more value to your bottom line and to the intern’s experience by assigning meaningful projects.
Vienne Cheung, founder of luxury retailer VienneMilano, tries to provide interns with meaningful tasks:
In college, I started my career as an intern at a graphic design studio. At my internship, I learned graphic design skills and how to deal with customers. At the time, I worked directly with clients to design posters, business cards, and flyers. While this was an unpaid internship, I gained a significant amount of experience, earned enough credits which allowed me to graduate a year early, and was able to develop a solid design portfolio.
The reason why VienneMilano now has an internship program is that my personal internship experience was instrumental in my career. My goal is to pay-it-forward to those who want to learn.”
You don’t always have to assign the most exciting tasks. But as Cheung points out, even if your internship program is unpaid, providing real-world experience and allowing the intern to earn academic credit goes a long way to ensuring a good experience for all parties.
Give Regular Feedback to Interns
The last thing to remember is to give regular feedback to your interns. Be open to new perspectives. As a young college student or recent grad, your intern might do things differently from you, but that can be a good thing. There is an opportunity to learn from that. However, if the intern isn’t doing a good job, explain why and give them an opportunity to correct their mistakes. This will allow them to emerge from the internship as a more well-prepared professional in the industry.
→TL;DR: However you classify interns, make sure that expectations are clear to you and the intern from the start. Focus on giving the intern a valuable work experience, and work closely with the intern’s educational institution.
Take Time to Figure Out Intern Classification Before Hiring
Having an internship program can be very beneficial for both your company and the intern. But before you hire an intern, figure out how you will classify them for legal and financial purposes.
Here are the things to think through when developing your internship program:
- Many interns carry out the tasks and responsibilities of an ordinary employee. In this case, the safest option is to classify the intern as an employee and pay them at least minimum wage.
- In lieu of financial compensation, you can work with the intern’s school to grant the intern academic credit. In this case, they are an unpaid volunteer.
- Interns that work on a per-project basis or control own work and schedule can be classified as independent contractors.
Ultimately, an internship program can benefit your company and interns alike. Being well-informed about how interns should be classified and compensated from the start of your program will ensure success—and protect your business.