What you need to consider when switching from contractors to employees

Like many entrepreneurs, you started your business with as few people as possible. Companies often form relationships with independent contractors, either directly or through agencies. This helps to keep costs down and allows for growth. You may eventually want them to become employees - or - more importantly, they may automatically need to become employees depending on the relationship and work requirements. Follow federal and state guidelines on when some must be an employee.

Here are some points to remember when transitioning a contractor to an employee.

Payroll taxes

Your contractors will automatically be transferred to your payroll once hired as employees. It should seem simple enough. You are used to writing a check for the contracted rate. Now you will do the same for the hourly or new salary. There's more to it than that. You will need a payroll processor. This is often an add-on to essential accounting software. Being familiar with and adhering to tax laws in your area, state, and country are crucial. Contractors in the United States pay their self-employment taxes. Half of the contractors' taxes are theirs once they become your employees. You will also be responsible for federal unemployment and local or state taxes.

Employee Handbook

To protect yourself against legal recourses and keep track of the procedures and standards of your company, you will need an employee handbook once you have hired your employees. An attorney or HR specialist will be required to help you ensure that the manual is legal and contains all relevant information about your business. Handbooks must comply with each state’s labor law requirements so don’t just create a basic template to assume it will apply across all 50 states.

Benefits

When you make the switch, employee benefits should be a significant consideration. Most employees expect primary benefits such as vacation and health insurance. Incentives are necessary if you ask employees to move from an independent contractor job (which comes with benefits like flexible hours). You can seek the assistance of a professional employer group (PEO) if you need more confidence in managing and setting up benefits.

Last Thoughts

While there are many other things to consider when switching contractors to employees, small business owners often need to remember these are the most critical tasks. It is essential to compare the costs of contractors and employees before you make a move. Contractors may save you time and money, but employees may be a better option for your business. Additionally, you might not have a choice if your state’s requirements tell you they must be an employee.

Professionals can help you if you feel overwhelmed or confused, regardless of your choice.