Independent contractors bring several advantages to organizations. They can offer the same skills and expertise as in-house employees without the costs of additional payroll taxes and compensation packages. Thanks to their specialized expertise, most contractors can be productive immediately, reducing the time you’d ordinarily spend on onboarding activities. Contractors also allow for greater staffing flexibility, since you can only hire them for a short duration to assist with a specific task or project. However, your company’s needs change over time, meaning your staffing needs are likely to evolve as well. Here’s what you need to know about helping a contractor become an employee.
While keeping the benefits we listed in mind, there may come a time when it makes sense to convert an independent contractor to a full-time employee. So, when does an independent contractor become an employee? Here are some indicators that the transition should be considered:
In many cases, the advantages of turning a great contractor into an employee make the transition worthwhile. After all, these professionals already understand their role and have the skills needed to succeed in it. They may also have established professional relationships within the organization, as well as gained knowledge of your company’s culture, mission, and strategic vision. However, there are some steps you’ll need to take to ensure a smooth and seamless transition.
The independent contractor-to-employee conversion comes with several legal considerations. For one, employees should be on the payroll and receive a steady paycheck, whereas contractors typically submit invoices and are treated as vendors under accounts payable.
Moreover, employment and labor laws will now apply to the employee, although they did not apply to the individual when they were an independent contractor. This means that under US labor laws, the employee will now be:
It’s also important to consider that employees are protected against being misclassified as independent contractors (Tip: Try our contractor vs. full-time employee analyzer to assess and confidently classify your workers). The Internal Revenue Service (IRS) uses the right-to-control test to determine whether an individual is a contractor or employee. This test assesses financial and behavioral factors, as well as the type of relationship between the worker and the company. If your company is treating an individual as an independent contractor when they should really be considered an employee, you could face legal consequences.
In addition, employers become responsible for taxes when a contractor becomes an employee. While you don’t need to withhold taxes for contractors, the organization will need to withhold income tax, Social Security, and Medicare from the wages paid to an employee.
Finally, you’ll need to consider how compensation will change when switching an independent contractor to employee status. The employee may now receive an hourly rate or salary, as well as benefits such as paid time off, retirement planning options, and health insurance.
Transitioning an independent contractor to an in-house employee means taking the following steps:
Note that the contractor is not obligated to accept an in-house position. If they decline, they must continue to be treated as a contractor—not an employee—so that legal requirements are met.
In the US, there are several documents needed to convert an independent contractor to an employee. These may include federal and state forms, such as:
Once the contractor has accepted employment with your company, you’ll need to set them up through payroll. In the US, wage statements reflect paid time off (both for sick days and vacation) and health insurance, as well as other benefits.
You’ll also need to pay employment taxes if your employee is a US resident. This can include federal income tax, Social Security and Medicare, federal unemployment taxes, and any other state or local taxes. Additionally, you’ll need to have the employee complete a W2 form to report employee wages.
Be sure to adjust your payroll processes as soon as the contractor starts work as an employee. Otherwise, you may wind up owing back taxes on the payroll taxes you should have been paying.
Since your contractor will now be an in-house employee, it’s important to hold them to the same standards as other employees throughout the company. This means they should abide by any company policies and employee agreements. Onboarding activities may include steps such as training/orienting the employee, signing an employee handbook, meeting with the rest of their team (either virtually or in person), offering mentorship, and setting up a company email address for them.
To streamline your onboarding activities, turn to Oyster. We’re here to help you find and hire remote contractors and employees anywhere in the world.
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
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