self employed small business owner and tax obligations

An employer and an employee cannot just wave a magic wand and change the employee into an indepedent contractor. The IRS and likely your state already have guidelines on who is an employee and who is an independent contractor. The employer and employee generally do not have the power to agree between themselves that the employee is an independent contractor.

The IRS has some information on independent contractor versus employee. You can search for the phrase "independent contractor employee" at www.irs.gov and read the articles to see what the position of the IRS is.

A wrong classification may result in penalties. Either the employer or the employee may ask the IRS to determine the worker's status by using Form SS-8.

I agree with the previous answer. You need to understand the whole concept of "contract labor" well to keep from running afoul of IRS and TWC trip-wires.

But the direct answer to your question is that you can certainly switch the status of someone you are using, if that is supported by reality. Just be careful.