How to Convert a Contractor to Full-Time Employee

If you hire a contractor to complete a short-term project and you’re impressed by their performance, you may have the option to hire them as a full-time employee. There are certain steps you must take to successfully convert a contractor to a full-time staff member. Learn more about the differences between contractors and full-time employees, why businesses often choose to convert contractors to full-time and how to calculate contract to salary wages. 

 

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Differences between contractors and full-time employees

Employers often hire contractors, also known as independent workers, to complete temporary work or to finish certain projects. They may also bring on contractors if the company doesn’t currently have the budget to make them a full-time employee. Common differences between contractors and full-time employees include: 

  • Contractors create their own work hours: Since contractors are usually working on specific projects and may have outside tasks they’re completing for other companies as well, employers may let them pick their own work hours. Full-time employees are often required to work during the business’ hours of operation. 
  • Employees receive training and onboarding: When hiring full-time employees, the human resources team often puts them through the training and onboarding process, while contractors are usually only trained on their specific project.  
  • Contractors work temporarily: Employees usually sign contracts stating their long-term commitment to the company, and contractors typically agree to stay with the company until they finish their project. 
  • Employers pay for the employee’s equipment: Since contractors are often self-employed and complete similar projects for different companies, they typically provide their own equipment needed to finish their work. Employers usually supply employee’s with the resources and equipment for their role.

Related: How to Convert Contractors to Full-Time Employees

 

Why a business might want to convert contractors into full-time employees

When a quality contractor submits valuable work and brings in successful results to your company, it’s best to consider converting them to a full-time team member. Here are some common reasons why businesses convert their contractors to full-time employees:  

  • Keep an impressive employee long-term: If you’re impressed with the employee’s skills and have enough work available to turn it into a full-time role, hiring them as a full-time employee allows them to submit more quality work and complete multiple, larger projects that may bring in impressive results for the company. 
  • Motivate them to stay committed to the company: A contractor may feel more committed to submitting valuable work if they’re hired on as a full-time employee who receives great compensation, benefits and perks that other full-time team members regularly receive. 
  • Work with someone who is familiar with your company: It’s often easier to convert someone from a contractor to a full-time employee rather than bring on an outside hire because a contractor is more familiar with how your company and the role operates, so you may spend less time training them. 

 

Steps businesses should follow to convert contractors to full-time employees

To convert a contractor to full-time, here are steps to take: 

 

1. Review the rules for employee classifications

The Internal Revenue Service has specific guidelines for determining if a staff member is a full-time employee or contractor. According to the IRS, the main rules that classify a worker as an employee or contractor lie in the following categories: 

  • Behavioral control: If a worker is considered a full-time employee, you can direct and control how and when they must work on their tasks. Contract employees often control their own schedules and techniques for completing assignments. 
  • Financial control: Employees are entitled to consistent pay, while contractors usually receive payment after successfully completing projects. Contractors can work for other companies, even competitors. Employers can keep their employees from contributing work to other businesses in the same industry. 
  • Relationship: When employees agree to work with a company, they’re usually committing to a long-term relationship, while contractors stay with the company temporarily. Because full-time employees are agreeing to a long-term commitment, they’re often entitled to benefits like insurance, pension plans or vacation pay, while contractors aren’t.

 

2. Offer the role to the employee 

Meet with the contractor to offer them the full-time role, communicate their new or adjusted responsibilities and address any questions or concerns they may have. Make sure to note their position’s information in a written document for your records. 

 

3. Collect your employee’s information 

Gather the employee’s personal and employment information for tax purposes. Provide them with Form W-4, Employee’s Withholding Certificate and you should both complete Form 1-9 to verify that they’re eligible to work in the United States. Add any new payment information to their employee file as well, like rate of pay, hourly or salary status and exempt or non-exempt status.

 

4. Convert their hourly wage to annual salary and add the employee to your payroll 

Officially place the employee on your regular payroll to ensure you’re paying the correct amount and are correctly following your regular payment schedule. Add them to your time and attendance software for them to easily access and clock-in to work, if necessary. If they’re moving from an hourly wage to an annual salary, follow these tips to calculate contract to salary pay: 

  • Estimate how long it should take the employee to complete their basic work items. 
  • Research common pay rates for similar roles. 
  • Convert salaries for workers who perform similar job duties and use a 40-hour workweek to accurately calculate this. 
  • Divide this salary by 52.
  • Divide your total by 40 to receive your hourly rate. 
  • Determine the approximate worth of the benefits you’re offering the employee and convert this amount to an hourly rate by using the method in the above steps. 
  • Add the hourly salary amount and hourly benefit rates number. 
  • Multiply the hourly rate by your estimated hours that you expect the full-time employee to work. 
  • Use this final number to receive your salary offer for the employee.
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