Temporary workers such as independent contractors and freelancers were once only hired as extra help during busy periods or to cover for full-time employees on leave.
However, times have changed. Most organizations now employ external workers in various capacities. In 2020, temporary or contract staffing employment was around 13.6 million, and it was only the beginning of a transformation in the workforce.
Though independent “contractor” and “freelancer” are often used interchangeably in casual conversations, they aren’t actually the same thing. They may be hired to perform similar tasks, but the difference is crucial for legal and taxation reasons.
Read on to understand the difference between freelance vs independent contractor, and why this distinction is important.
Freelance vs Independent Contractor: Understanding The Terminology
Since the mainstream inclusion of external workers is still relatively new in many companies and organizations, managers may not be well-versed in the correct terminology. This can cause problems down the line as the company may incur misclassification penalties.
Therefore, it is important to know how a worker is classified.
Who Is Classified as a Freelance Worker?
Freelancers are individuals that are not contractually affiliated with any company or agency. They work on short-term projects for multiple clients at once, and typically work alone to accomplish their tasks.
Freelancers represent over 36% of the workforce today, with over 59 million Americans doing freelance work. This class of workers has contributed around $1.3 trillion to the US economy, according to the Freelance Forward study conducted by Upwork.
Freelancers work with their clients for a limited period to accomplish a certain task. Some clients may offer repeat projects, but often a freelancer is hired for a single project.
Freelancers are responsible for developing and marketing themselves and offering their skills and services to various clients in their niche. They must also file their own taxes and manage their own administrative work.
All freelancers are classified as self-employed. They may also be considered contractors if they work on a large project for extended periods. However, not every self-employed, independent contractor can be classified as a freelancer.
Freelancers enjoy a high level of autonomy, with free reign to perform their tasks and make decisions as they see fit, as long as they meet the client’s expectations. They also work remotely, use their own equipment, and set their work schedule according to their convenience.
Who Is Classified as an Independent Contractor?
Independent contractors often get confused with freelancers because they operate similarly. Independent contractors are also self-employed individuals who pay their own taxes and may work with multiple clients simultaneously.
Contractors work solo or are employed through an agency and can be hired as temporary replacements for full-time workers. They may be asked to work on-site or on the company’s premises and use equipment provided for them.
Contractors are often expected to work on longer projects for many more hours than freelancers. They are the middle ground between freelancers and employees, who enjoy the best of both worlds: the freedom of independent work and the reliability of predictable income.
Freelance vs Independent Contractor: What Are the Major Differences?
IRS worker classification or status is based on three categories:
- Behavior – how much control the company has over how the worker performs their job
- Financial – how the business elements are controlled by the company and how the worker is paid
- Type of relationship – whether there is a written contract or agreement, benefits offered to the worker, and whether the relationship will continue after the worker has performed their key duties
These categories and distinctions help determine whether a worker should be classified as an employee of the company or a self-employed worker on a contractual basis.
However, the distinction between a freelancer and an independent contractor requires more nuance due to the many similarities between the two.
Here are the seven major differences that will help you delineate between an independent contractor and a freelancer:
Work Period
Freelancers often have much shorter work periods compared to contractors. A freelancer may only work on a client’s project for a few hours or days before moving on to their next project. In fact, they often work on multiple projects at once and divide their time between multiple clients.
For example, a graphic designer may spend a couple of days or weeks working on a company’s brand kit before moving on.
In contrast, contractors have longer work periods that may exceed a few months or even last up to a year. These contracts are usually much longer than a freelancer’s standard agreement.
For example, a product designer may spend more than six months designing a line of products for a certain company under a single contract. Or an independent construction contractor may spend up to a year working on a renovation for a single client.
Industries or Fields Of Work
Freelancers vs independent contractors usually don’t overlap as they tend to work in different industries or fields.
Freelancing is more common in creative industries, tech, software, and finance. This is because the work in these fields requires specialized skills on a temporary or short-term basis.
The jobs in these industries are also easily portable, and workers are free to complete their tasks on a flexible schedule while working remotely without affecting the quality of their work.
Conversely, independent contractors work in fields usually dominated by larger organizations and require more structure. This can include construction, government, healthcare, architecture, and other similar fields.
Legal Agreements and Invoices
Legal agreements are necessary to protect all workers. They should contain these fundamentals:
- A simple contract outlining the scope of work and compensation to be paid by the employer
- Agreements detailing intellectual property, trademarks, and licensing
- Non-disclosure clauses to protect the employer and employee
Beyond these details, the specific paperwork surrounding freelance vs independent contractors differs as the latter often require more documents and detailed agreements. These additional clauses or sections detail the crucial elements of the job they will perform for the employer.
Independent contractors may also have more detailed invoices outlining all expenses incurred throughout their work period. Overall, employing independent contractors requires more complex legal agreements.
Rates and Taxes
Freelancers and independent contractors can set their own rates, but they may charge clients differently depending on the expected output.
Freelancers often charge on an hourly basis, while independent contractors charge per project, depending on the scope of work.
Independent contractors may be limited by industry standards and budgets—or even the agency they work under—while freelancers are relatively free to set higher rates depending on their skill level and demand.
And while freelancers and independent contractors must file their own taxes, they may be taxed differently.
Scope of Work
Freelancers have a broad scope of work that may include one element of a project or an entire short-term undertaking.
Here are some examples of the tasks they may be given:
- A writer will write a single article for a client’s newsletter
- An artist will design a company’s logo or illustrate their product packages
- A developer will create a website for a client
- A photographer will be hired for one event, such as a wedding or a company conference
- A consultant will provide advice throughout an ongoing project
A freelancer in a certain field can single-handedly work on many different projects simultaneously. For example, a single artist may create illustrations for a children’s book, design a company’s logo, and create murals for a restaurant or boutique.
In contrast, an independent contractor has a relatively limited scope of work within their field. Though they may undertake various projects, they often remain within their specialization and depend on other contractors to collaborate with them.
For example, a plumbing contractor can work on the plumbing of a kitchen in an apartment and work on a bathroom in a hotel. They may have to collaborate with an interior designer and architect throughout the project.
Benefits and Perks
In general, freelancers are not offered any employee perks, such as health insurance, paid time off, retirement benefits, etc. This is because they are self-employed with no ties to their employer and a limited period of employment.
Some companies provide independent contractors with some benefits depending on their agreements and the length of their contracts. Independent contractors that work within an agency also receive benefits and perks.
Business Registration
The business registration of a freelance vs independent contractor can be done in two ways:
- Sole Proprietorship – often used by freelancers to define their self-employed status
- Limited Liability Company (LLC) – used by independent contractors who wish to legally separate their personal assets from business liabilities
Conclusion
Understanding the difference between the classification of a freelance vs independent contractor is one thing. Managing and organizing the different people working on your project is another.
To ensure that you don’t face problems, it is important to shield yourself by ensuring that your agreements with workers are foolproof. All clauses, remuneration, and scope of work must be clearly communicated and explicitly stated prior to the implementation of your project.
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