The steps to convert a contractor properly, what converting does and does not fix, and your options in any state.
Not sure yet? Take the contractor or employee test
Converting a contractor to an employee is straightforward going forward: end the contract, make a W-2 offer, complete the hire paperwork, and run payroll in the state where they work. The harder question is the past. Converting does not erase exposure from the time they were treated as a contractor. For federal taxes, the IRS Voluntary Classification Settlement Program can settle it for eligible employers. State taxes and wage claims are separate.
No single factor decides it. The IRS looks at the whole relationship, and some states are stricter.
Set hours, required methods, your tools, and regular check-ins point toward an employee. The IRS calls this behavioral control.
An open-ended role doing your main business, rather than a defined project, looks like employment.
No other clients, no business expenses, no way to profit or lose money on the work. The IRS calls this financial control.
Some states, such as California and Massachusetts, use an "ABC test" that treats most workers as employees unless all three conditions are met.
Want a quick first read? Take the contractor or employee test, or read about the ABC test and worker misclassification.
From the day of the conversion, they are an employee like any other.
Run the worker through the IRS factors and your state's test. Our contractor test gives a quick first read. If it is still unclear, either side can ask the IRS for a ruling on Form SS-8, which usually takes at least six months.
Settle open invoices and close the contract with a clear end date, so there is no overlap between being paid as a contractor and as an employee.
Set the pay as a salary or hourly wage, not the old contractor rate, which usually included the taxes and benefits the worker paid themselves. Decide whether the role is exempt or non-exempt from overtime.
Form I-9 (the employer's part within three business days of the start date), Form W-4 and any state withholding form, and the state new-hire report.
Withholding and unemployment insurance accounts in the state where the person works, which may not be your home state.
Make sure your policy covers the state they work in. Contractors are often missing from it entirely.
Working in another state? See hiring in another state and workers' comp for remote employees.
Converting fixes the classification from the conversion date. The earlier period has three separate parts, and each has its own answer.
The IRS Voluntary Classification Settlement Program (VCSP) lets eligible employers reclassify workers going forward and pay 10% of one year's employment tax liability, calculated at reduced rates, with no interest or penalties and no employment tax audit of prior years for those workers.
You qualify only if you consistently treated the workers as contractors, filed all required 1099s for them for the previous three years, and are not under an employment tax audit. File Form 8952 at least 120 days before you want to start treating them as employees.
The VCSP covers federal taxes only. State agencies can still assess unpaid state unemployment insurance and withholding for the period the worker was treated as a contractor.
A former contractor filing for unemployment is one of the most common ways a state starts asking questions.
Neither the VCSP nor a conversion settles claims the worker could have as an employee, such as unpaid overtime or benefits they were excluded from.
How much exposure there is depends on the role, the pay, the state, and how long the arrangement lasted.
Talk to an advisor first. Whether to apply for the VCSP, and how to handle state and wage exposure, depends on your facts. Speak with your tax advisor or employment counsel before you file anything.
Most conversions do not start with a plan. They start with one of these.
The state sends you a notice with a short deadline to respond. If the state decides the person was an employee, it can assess unpaid unemployment tax and look at your other contractors too. Respond on time, and fix the classification of anyone still working for you.
Doing the same job they did as an employee, now on a 1099, is a classic red flag, especially when one person gets a W-2 and a 1099 from you in the same year. Usually the safer route is a part-time employee.
A contractor who wants health insurance, paid leave, or a permanent seat is often already working like an employee. That is a good moment to review the arrangement.
WorkGenius employs your contractors as W-2 employees in their own states, one or many, with the same work and the same manager. We are the employer from the conversion date.
Which one fits depends on where the person works and how many people you are converting.
Hire them directly as your employee. If they work in a state where you are not set up, you register there first.
Makes sense when
A Professional Employer Organization co-employs your team and runs payroll and benefits. Your company stays an employer, so some state registrations may still be yours.
Makes sense when
WorkGenius becomes the Employer of Record and employs them as W-2 employees in their state, with the same work and manager. One contractor or many, in any of the 50 states.
Makes sense when
As the Employer of Record, WorkGenius is the employer from the conversion date.
The past stays with you: using an EOR removes misclassification risk going forward. It does not settle anything from the period before the conversion.
Pricing is one all-in markup on the employee's pay, billed on one weekly invoice. Benefits are billed separately.
Tell us who you want to convertThis guide is general information, not legal or tax advice. Rules change and vary by state.
We'll look at where your contractors work and how WorkGenius can employ them as W-2 employees, one or many, from the conversion date.
No commitment required. Free consultation included.