These are the signs that the independent contractor you work with is a true keeper:
- They deliver on time, every time
- What they deliver continues to amaze you
- Their growth is visible and contributed to your company’s growth
- You’re worried that someone else will make an offer before you do — and losing such a stellar worker isn’t an option
- It’s just not the same when they’re on the break
There’s no better way to award them for their work than to offer them a full-time position and some job safety to come with it! In return, you’ll get a more stable, in-house worker, motivated to dedicate all the time and skills to the company.
Converting an independent contractor to a company employee isn’t difficult at all.
However, you’ll need to make a couple of changes to the way you pay them, fill out the tax forms, and assign them with work in general.
This article will serve you as a guide to a painless transition, so your independent contractors work within all the legal rules, from day one of their employment. It covers:
- Independent contractor definition
- Employee definition
- Differences between independent contractors and employees and step-by-step transformation guide
- What to do in case you work with multiple independent contractors from a certain country, and you want them working as employers
Disclaimer: This article is informational and should not be used instead of legal advice.
What is an independent contractor?
An independent contractor is a type of worker who provides services or products for other companies and legal entities — as a non-employee.
This type of arrangement became increasingly popular with the gig economy growth. Almost every professional who owns the basic working equipment such as laptop/ computer, microphone, and camera, can work as an independent contractor.
The list goes beyond designers, marketing specialists, writers, developers, and artists; the International Revenue Service (IRS) also classifies lawyers, doctors, dentists, vets, and many other “traditional” professions as eligible.
Independent contractors are self-reliant: they fill their own tax forms and pay for health insurance, apply for a tax return, buy and maintain their own equipment, hone and perfect their skills and knowledge as they find fitting. They also determine their vacation time, but employers aren’t required to provide them with a paid sick leave or vacation pay.
While this brings many challenges and some difficulties, independent contractors, as well as freelancers, do enjoy a lot of freedom unavailable to regular employees:
- Independent contractors can freely pick the tasks and clients, no strings attached (apart from the contracts they sign with them), and they can terminate the collaboration at any point
- They organize their working days and hours as it fits them, and pick where they’ll work
- They have complete control over the working process and how they do their job
- They have a final say over their career development
To conclude: they are independent and flexible but need to do everything on their own.
From the employers’ perspective, hiring independent contractors has some considerable benefits.
In addition to the aforementioned self-reliance, they are in most cases cheaper to hire and require minimal training. A global talent pool is open for the employers to choose the independent contractors from, and they can terminate (or choose not to renew) the contract when they wish.
Not sure if your worker is an independent contractor or a sole proprietor? This blog will show you all the differences!
Defining a full-time employee
Employees are your traditional company workers bound by employment contracts they sign upon arrival.
They work within the company premises, in a way regulated by their employers. To complete the work, they use tools and equipment provided, maintained, and financed by their company.
Full-time employees, consequently, depend on their employers for many things and are obliged to work in a way determined by their superiors and company owners. Having strict business hours, dress code, and company culture to go by leaves employees with significantly lower levels of freedom compared to independent contractors.
However, employers are required to do a lot more for their full-time crew.
In return for their professional loyalty, employees receive employee benefits package as required by Federal Insurance Contributions Act (FICA), paid time off, and are protected by the Fair Labor Standards Act (FLSA).
In addition to the legal requirements mentioned above, employers need to provide their workers with adequate training and make sure they’re happy and thriving. Otherwise, employees might leave them for a better deal — and it’s costly to find and hire new people (not to mention the time and effort it takes to do so).
Sometimes, people mix things up and cannot make a clear difference between employers and independent contractors. To avoid this (and penalties that may follow), read our article about the misclassification of employees as independent contractors.
The distinction between independent contractors and employees for legal and tax purposes
Above are the most basic differences between employees and independent contractors.
When you’re paying the independent contractor, you only have these requirements to meet:
- Have them complete the IRS Form W-9 (Request for Taxpayer Identification Number and Certification) if they’re US-based, and keep a record of it
- If you’re hiring an independent contractor from a foreign country, they need to use the Form W-8BEN for individuals or the W-8BEN-E Form for entities (small business, for example)
- Complete the Form 1099-NEC (Nonemployee Compensation, for each person you paid $600 or more for services they provided during the year) and provide your independent contractors and the IRS with this document by January 31st, for the tax year that has passed
And that’s it! Every other legal task is up to them to complete, including the self-employment tax and abiding by the Self-Employed Contributions Act (SECA).
For the employers who are looking to offer their independent contractors a full-time position, these are the requirements for the new employee:
- Withholding taxes — employers are required to withhold a part of the employees’ income for tax purposes (FICA taxes)
- Employment taxes — the specific taxes employers need to file include:
1) Federal Income Tax
2) Social Security Tax
3) Medicare and Additional Medicare Tax
4) Federal Unemployment Tax
Employers need to report wages and income to the IRS by filing the W-2 Form, Wage and Tax Statement; to transmit these to the Social Security Administration, employers use the Form W-3, Transmittal of Wage and Tax Statements
- Employment law and protections — employees are protected with two acts:
1) Fair Labor Standards Act (FLSA) — sets the minimum wage, forbids child labor, and handles working overtime
2) Federal Insurance Contributions Act (FICA) — covers the payroll tax to fund social security (retirement, disability benefits, etc) and health care; both employers and employees pay FICA taxes — employees with the amount withheld from their wages, and employers need to pay an equal amount
It’s worth mentioning that, unlike employees, independent contractors aren’t protected by FLSA. This means that, instead of the minimum wage standard mandated by the state law, they can charge an hourly rate, per word, or in another way they consider appropriate.
Important reminder: when you switch from independent contractor to employee, you also need to switch from Form 1099 to Form W-2!
Differences between independent contractors and full-time employees can go even deeper than described above. Here we’ve covered the most important things from the employers’ perspective — for the full picture, take a look at our dedicated article about these differences.
Transitioning an independent contractor to an employee
Once you know what needs to be done when it comes to taxes, everything else becomes much easier!
Here’s what else you need to do to make this process complete.
Determine the employee status
First of all, you need to determine whether your independent contractor *can* switch to being an employee at all. To help employers, the IRS has created a three-question test that reveals whether the worker should be an independent contractor or an employee:
- What level of control does the employer have over the worker’s behavior — as mentioned, independent contractors have the freedom to choose working hours, days off, tools and working space, as well as the manner of work, while employees have to follow the company rules
- Does the employer have financial control over the worker — ICs and employers have a mutual agreement regarding the pay, while employees are guaranteed minimum wage, income, and the U.S. Department of Labor regulates the relationship
- Relationship type and duration — IRS considers workers as employees if the relationship is long-term and doesn’t change often; independent contractors are hired temporarily, without guarantees, often for certain projects only
The other way is to complete the IRS 20 Factor Test.
In case these guidelines don’t provide you with the clarification needed, you can also file the Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS and let them determine how you should classify the worker.
Make the arrangements with the independent contractor transitioning to an employee
Once you’ve determined your contractor is eligible to make this shift, let them know!
Here’s where you’ll need to discuss what this could mean for their career. Some independent contractors love their freedom of choice and the way their workdays look at the moment, and won’t be willing to make the change. Negotiating is the name of the game: let them know you value their skills and wish to provide them with something more, so they stay longer. This may include education, increased salary, 401k payments, or anything else you’re willing to offer.
If they agree, you may contact the HR department and start making the necessary shift. Let them know how this reflects their legal obligations and tax requirements.
Make the necessary adjustments for the new employee
Here are some tips to make your new employee feel welcome and have all they need:
- Introduce them to the rest of their team
- Pick a dedicated mentor who will help them adjust and learn how things work for full-time employees
- Provide them with tools, equipment, and designated workspace
- Adjust their payroll
- Make sure they go through the onboarding
Working with multiple foreign independent contractors? These are your options
If the people you want to hire live in other countries, you have two options:
- Opening a subsidiary — subsidiary is a local branch of your company that enables you to hire them as local employees; this requires you to find someone who will complete the legal and financial work, so you stay compliant with the local labor laws
- Using Professional employer organization (PEO) and Employer of record (EOR) services — this one is far easier to manage than a subsidiary; you can outsource complete HR services, and make the EOR the hiring party on your behalf.
This is where Deel can help!
As an Employer of record, we can take care of complete payroll and compliance in more than 150 countries worldwide. This includes local support, customized full-time contracts, international payments, and more benefits for employers who’d love to take a dip in the global hiring pool.
Get a full look and schedule a demo — we would love to show you how easy it can be!