Converting Contractors to Full-Time Employees: How to Calculate Salary
Whether a company hires an independent contractor or a permanent employee, both types of working relationships have their pros and cons. However, in some situations, companies currently working with independent contractors may find it more advantageous to transition these workers into a full-time, permanent employee position.
This guide can help both employers and workers know what to consider before making the contractor to employee transition, including the tax and legal implications involved. This guide also describes the steps associated with the hiring and onboarding process, as well as how to calculate a fair salary for new employees leaving their contractor position.
What's In This Content?
- 1 Benefits of converting independent contractors to employees
- 2 Independent contractor vs. employee considerations
- 3 Legal considerations of contractor to employee conversion
- 4 Contractor to permanent employee hiring and onboarding process
- 5 Contractor to full-time employee salary negotiation
- 6 Choose Globalization Partners for remote hiring solutions
Benefits of converting independent contractors to employees
Converting an independent contractor to a full-time employee is beneficial for both the worker and the company. If your company is debating whether to make this switch, consider the following reasons to make the transition:
- Strengthens HR policies and company culture: Companies can boost their recruiting efforts and strengthen their corporate culture by creating HR policies that provide the opportunity for independent contractors to become employees. These open policies can amplify a company’s positive reputation, strengthening talent recruitment and retention strategies.
- Creates a competitive advantage: Companies known for allowing independent contractors to convert to employees have an advantage by mitigating attrition to the competition. In a competitive job market, companies can benefit from building strong working relationships with contractors and then offering them full-time salaried positions to expand the talent on their current team.
- Reduces risk of compliance violations: Converting independent contractors to employees can also be a pragmatic decision for companies. In some situations, the lines between contractor and employee become blurred, opening the company up to potential labor and tax code violations. To prevent misclassifying an employee as an independent contractor, companies can transition workers into the appropriate category by converting them to a full-time position.
- Supports the worker’s career goals: For many independent contractors, converting to a full-time position can help them achieve their career goals. Some independent contractors may prefer to work as full-time employees because it allows them to play a more significant role within the company while having access to benefits, vacation pay, bonuses, and other compensation they don’t have when self-employed.
Converting contractors to full-time employees has advantages for your company and your workers. Discussing the pros and cons can help employers and workers determine whether the transition is appropriate and advantageous for both parties.
Independent contractor vs. employee considerations
When considering converting a contractor to full-time employment, both company and worker need to assess many factors to ensure it’s the right decision. Consider these aspects of contractor to employee conversion:
- Amount of work: Companies that continuously hire the same independent contractors for increasing workloads may choose to hire these workers as employees to streamline workflow. When the work amounts to a full-time position, then transitioning to employment may be the sensible move.
- Compensation: When companies convert an independent contractor to an employee, one of the main considerations is how to equate a contractor’s fee to a full-time salary. Because contractors are responsible for their own taxes and expenses, they typically charge more for their services than an employee would earn in salary.
- Benefits and vacation: In addition to salary, another important consideration for the company and the worker is the types of benefits and vacation remuneration the company will offer. Contractors aren’t typically eligible for these types of benefits, so having access to a broader remuneration package can help in the negotiation process.
- Training and supervision:Companies have limited ability to provide training and supervision to independent contractors — this is one of the important distinguishing factors between contractors and employees. When companies have specific training materials or programs they want workers to participate in, transitioning to employment may be critical in ensuring a successful long-term relationship between the company and the worker.
- Tax status: While independent contractors are responsible for remitting their own taxes, employers in most countries are responsible for remitting income taxes for their employees. When negotiating contractor to employee conversion, be sure to discuss how tax responsibilities will change for the worker and shift to the employer.
Workers and companies should carefully consider and discuss the above factors that differentiate the contractor vs. employee status so that both parties can make informed decisions.
Legal considerations of contractor to employee conversion
Of the many factors to consider when converting a worker on contract to a permanent employee, the legal implications are the most critical aspect of the process. There is a practical difference between an employee and a contractor, but there is also a legal difference. While each jurisdiction is different in how they define a contractor vs. an employee, most follow similar guidelines.
When converting independent contractors to employees, companies must consider the following legal aspects that differentiate the two worker types:
- Income tax forms:Depending on the countries involved, the governing tax agency may have specific paperwork for employees vs. contractors. For example, in the U.S., companies that hire independent contractors use W-9 and W-8 forms for domestic and international workers, respectively. After converting a contractor to an employee, companies need to use W-2 forms for employee income. Each country has its unique sets of forms, and companies should make sure to use the correct forms after the transition.
- Payroll taxes: In addition to being responsible for remitting employee income tax, employers often have additional taxes for employees that they didn’t have for contractors. Depending on the jurisdiction, a company may now be responsible for remitting the employer portion of healthcare, unemployment insurance, social security, workers’ compensation, and other programs that vary from country to country.
- Labor standards: Employers also need to meet certain labor standards. Again, different jurisdictions have different labor codes your company must follow. Some examples of labor standards that companies need to meet include working time and overtime pay, paid time off and holiday pay, parental leave, and various requirements for working conditions. Companies that hire international employees must take steps to ensure they meet the labor standards of the worker’s country, even when they differ from their own country.
Your company should be clear on the above legal factors before transitioning to a full-time position. This ensures the conversion is done correctly, fairly, and compliantly with each country involved.
Contractor to permanent employee hiring and onboarding process
The hiring and onboarding process involved in converting a contractor to an employee will differ from the conventional talent acquisition process. The first major difference is that the worker is already familiar with the company, and management is already familiar with the worker’s skills and abilities. Therefore, the hiring process won’t require the same interviewing process as it would with a traditional new hire. However, converting a contractor to an employee has some other steps that aren’t involved in the normal hiring process.
Here is an overview of the hiring and onboarding process when converting a contractor to a full-time employee:
- Determine the employee status: The first step in initiating the contractor to employee conversion process is determining whether the contractor can legally become an employee. The governing tax agencies involved may have their own tests to determine whether the new role constitutes employment or not. For example, in the U.S., the Internal Revenue Service (IRS) follows common law rules for making this distinction. Resources like this can help you determine the legal classification of the workers and whether or not they can convert to employee status.
- Inform the contractor about the conversion process: After confirming that the transition is legally possible, the next step is to inform contractorsof the company’s desire to hire them as full-time and permanent employees. This step will involve essential items, such as salary negotiation, setting work hours and location, and providing the equipment they need to perform the role as an employee. This includes ensuring they have suitable computers, software, servers, or other necessary technology.
- Develop an employment contract: Once the worker has agreed to transition to a full-time permanent position with the company, the next step is to create an employment contract. An employment contract lists the required job duties and responsibilities involved in the role, while a contractor agreement revolves around a specific scope of work. Be sure to seek legal counsel when developing an employment contract to ensure it meets local labor laws. Once both parties have signed the employment contract, the company can add the new employee to its payroll.
- Onboard the new employee: Once the company has officially hired itsnew employees, it’s time to onboard them. However, the onboarding process may differ when converting an independent contractor to a full-time employment position compared to a traditional hire. That’s because the independent contractor likely already understands the company, its products and services, and its systems and processes. The worker may also be familiar with the staff and management, along with the company’s facilities or infrastructure.
Companies that plan to hire contractors for a set period before converting them to an employment position can develop hiring and onboarding processes specifically for this situation that will help streamline all future transitions.
Contractor to full-time employee salary negotiation
As part of converting independent contractors to employees, companies and workers need to agree on a new compensation structure. As self-employed individuals, independent contractors decide how to charge their clients, typically through an hourly rate or a flat fee per project. This hourly rate or fee fluctuates depending on the nature of the project and the amount of time involved in delivering the product or service.
While independent contractors have flexibility in setting and adjusting their rates, employees often receive a fixed salary with the potential for a raise after a set period. Because of the significant difference in how independent contractors and employees are paid, workers and companies must negotiate a fair salary for this new working relationship.
These are the steps involved in the contractor to full-time salary negotiation process.
1. Convert contractor rate to salary
Converting a contractor rate to a full-time salary is not a straightforward process. Independent contractors charge their clients significantly more than what they would earn as employees. This allows them to cover their self-employed expenses and personal income taxes. Therefore, a straight conversion of the contractor wage to salary is unlikely to be financially feasible for the company. Additionally, workers generally earn a lower salary on paper because they are responsible for significantly fewer overhead expenses as employees.
When developing a fair compensation structure, workers and employers have a few different approaches to take. The easiest way to convert a contractor’s wage to a salary is to determine the contractor’s hourly rate and multiply it by 2,080 hours, which is the total number of hours a full-time employee generally works annually.
2. Calculate total employer tax burden and other costs
With this salary figure calculated, companies can now determine the real salary cost, which is achieved by subtracting the total tax burden and other expenses they will cover as the employer. For companies, this is one of the most significant differences in the cost of employees vs. contractors because they aren’t required to pay these expenses for independent workers.
Here are some of the taxes and other direct overhead expenses associated with the total cost of employees:
- Employer-paid portion of payroll taxes
- Travel expenses and reimbursements
- Training costs
- Equipment and technology investments
Similarly, contractors will also need to calculate the total portion of their earned wage that goes toward their overhead costs and taxes and then subtract that total from their gross income.
3. Factor in benefits, bonuses, and perks
After subtracting the total tax and expenses burden from the converted salary, employers will need to calculate the additional costs associated with retaining employees, including benefits, cash bonuses, and other perks the company offers its team.
Some of the additional costs associated with the total cost of employment include:
- Health, vision, and dental benefits
- Paid vacation and holiday pay
- Retirement savings matching programs
- Performance bonuses or sales commission
- Perks such as team-building outings, coffee and lunches, and holiday parties or bonuses
By calculating the total amount of additional expenses associated with hiring employees, companies now have a more realistic idea of the total cost of converting their contractors to employees. Likewise, with these additional benefits and bonuses calculated, the workers can also make a more informed judgment about the total salary they are willing to take given the amount of additional compensation they will receive as an employee vs. a contractor.
Choose Globalization Partners for remote hiring solutions
Converting independent contractors to employees is a long-term strategy that helps companies expand their teams, retain top talent, and maintain a competitive advantage in their industry. When transitioning contractors to employees, companies must meet certain standards to ensure compliance with relevant laws and regulations.
To grow your company’s international team of remote workers, choose Globalization Partners. Our global employment platform helps companies hire and onboard new international employees while remaining compliant and ensuring a successful transition. To learn more about our international hiring solutions, request a proposal today.