5 HR Considerations When Converting a Contractor to Full-Time Employee

Filip Dimkovski - TBR writer
By Filip Dimkovski
Nevena Radulović - Trusted Brand Reviews Editor
Edited by Nevena Radulović

Published December 22, 2022.

Business man shaking another employee's hand and smiling cordially

The decision to convert a contractor to an employee can be daunting for a business, as the process of onboarding and managing a new employee shouldn't be taken lightly. Having someone as a contractor often means fewer responsibilities for the business, yet there are some risks associated with employee misclassification that can land an employer in hot water.

Still, for businesses that have worked with a contractor over an extended period of time and are satisfied with their work, the decision to convert them to a full-time employee may be beneficial. To avoid possible misclassification issues, businesses should ideally make the conversion within a year of working with the contractor. We'll look into the 5 most important considerations to take if you want to convert a freelancer or contractor to an employee.

1. Amount Of Work

Probably the most important consideration to take when considering a contractor-to-employee conversion is the amount of work the contractor has been doing for the business. If their work is consistent and similar to that of a full-time employee, it may make sense to convert them into an employee role. This can streamline the workflow and make all processes easier for the business, in addition to potentially reducing costs, even though they'll be entitled to overtime compensation.

2. Compensation

If you're considering converting a contractor to an employee, it's important to calculate the cost-effectiveness of the decision and consider the potential expenses. While an independent contractor's hourly rate is typically higher than an employee's, one should also calculate the taxes and employee benefits that come with bringing in a full-time employee.

Namely, contractors pay taxes themselves, but employees' taxes are paid by the employer. Moreover, bringing a full-time employee to the team means more than just a fixed salary—it also requires paying for employee benefits like health insurance, paid time off, or retirement plan benefits.

» Which taxes should employers pay? Learn about income tax vs. payroll tax

3. Benefits and Vacation

As we briefly mentioned above, an important consideration when converting a contractor to an employee is the benefits package they'll receive. Not only should you consider the cost of providing health insurance and vacation time to the employee but also how these benefits can help attract and retain top talent. As a business owner, you should see these benefits less as an upfront cost and more as a smart investment in reaching your recruitment goals. In fact, having a solid package of benefits and paid time off might have a bigger impact on a contractor's motivation to become an employee than the salary they'll receive.

So, let's take a look at all the benefits a full-time employee can receive:

  • Health insurance, including dental, life, and vision benefits
  • A yearly paid vacation & paid time off
  • A dedicated retirement plan & savings
  • Performance bonuses
  • Professional development benefits
  • Social benefits like team-building outings and holiday parties

» Managing employee benefits: set up an effective absence & leave program

4. Training and Supervision

When hiring an employee, you'll need to provide more training and supervision than you would with a freelancer. Usually, companies have a limited ability to train independent contractors, as they're often expected to “hit the ground running” in terms of their knowledge and experience. But for full-time employees, you should be able to provide more intensive training and guidance. Of course, this might be a bit tedious in the short term, but making this part of the business' talent acquisition strategy will greatly benefit the business in terms of increased productivity and efficiency. This will ensure a good long-term relationship between the employer and the worker and ensure a pleasant work environment.

» Is workplace culture important? See why it matters and how to improve it

5. Tax Status

As you probably already know, independent contractors are alone responsible for their taxes. This is important to consider when deciding whether to convert a contractor to an employee. In most countries, becoming a full-time employee means becoming liable for taxes, as the employer will be responsible for paying them instead of the worker. Thus, the tax status should be discussed with a tax expert to ensure tax and payroll compliance and avoid any issues in the future.

When calculating costs, the employer should consider taxes and other overhead expenses, including:

  • The employer-paid portion of payroll taxes
  • Travel-related expenses and similar reimbursements
  • Training costs
  • Costs related to equipment and technology investments

Regarding the legal aspect of differentiating independent contractors from employees, business owners should remember there are multiple legal papers and forms that should be filled out, including:

  • Income tax forms
  • Payroll taxes
  • Labor standards documents

Bottom Line

When converting a contractor to an employee, there are several considerations to take, including the costs of providing benefits, training and supervision requirements, and compliance with relevant local laws in your jurisdiction. While the entire process might seem tedious, there are many ways to streamline it.

That being said, many modern businesses recognize the value of using a payroll software solution to avoid all the stressful paperwork that comes with ensuring compliance with local tax laws. Adopting an automated payroll solution can simplify the process of transitioning a contractor to an employee, saving you money and time in the long run.

» Want to simplify turning contractors into employees? Read TBR's payroll software reviews to find a solution that will help you along the way.

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