Can I Convert My Employees Into Independent Contractors?

Can I Convert My Employees Into Independent Contractors?

Thanks to the Covid-19 pandemic and the stay home orders many states issued in its wake, you may be one of the many employers who discovered that your work continues to get done even when your employees work from home or other remote locations. You may therefore be toying with the idea of converting your employees to independent contractors. But can you legally do this? If so, how to go about it?

Independent Contractor Advantages

There’s no question but that having independent contractors rather than employees do your company’s work can save you a lot of money. For instance, consider the following:

  • You do not provide fringe benefits to independent contractors.
  • You do not pay the employer’s portion of FICA taxes to independent contractors since you’re not their employer.
  • You do not pay overtime, vacation time and other such extras to independent contractors.
  • You do not pay for independent contractors’ health insurance.
  • You do not need to have and maintain an expensive payroll system for your independent contractors since you pay them a gross amount for their services and don’t have to withhold anything from these payments.
  • You do not cover independent contractors under your workers’ compensation insurance.

Legal Tests

A variety of tests exist for determining whether someone is your employee or an independent contractor. In general, the person is your employee under the following circumstances:

  • You control how many hours he or she works each week or month.
  • You control not only the work he or she does, but also when and how he or she does it.
  • You provide the equipment on which he or she performs the work.
  • You can require him or her to attend company meetings and other functions.
  • You can establish a reasonable dress code to which he or she must adhere.
  • You send him or her a W-2 tax form each year.

Making the Conversion

While you can legally switch your workers from employee to independent contractor status, doing so can prove very tricky and complicated. Your best strategy consists of hiring an experienced business litigation lawyer in Washington, DC, like from Eric Siegel Law, to help you make the transition and make sure you adhere to all federal and state laws.

For instance, you must fire an employee and pay him or her all of his or her accrued sick or vacation pay before you can “rehire” him or her as an independent contractor. You must then send him or her a 1099-MISC form each January instead of a W-2 if you pay him or her $600 or more in a calendar year. Be advised, however, that providing a given person with both a W-2 and a 1099-MISC for the same tax year will undoubtedly result in an IRS audit.