In Terms of Taxes, They’re the SameAs far as taxes are concerned, workers in most countries are generally categorized either as 1) an employee or 2) an independent contractor. Therefore, legally speaking, freelancers fall under the independent contractor umbrella, and are essentially seen as the same thing. According to the Internal Revenue Service (IRS) of the United States, independent contractors (including freelancers) are individuals such as lawyers, doctors, accountants, programmers, artists, subcontractors, or any other independent business, profession, or trade that offers their services to the public. Even though this is according to U.S. tax law, it’s not uncommon for other countries to have adopted similar regulations when classifying workers.
Employees vs. Independent Contractors (and Freelancers)For legal reasons, it’s important that both workers and employers know the distinction between independent contractors and employees. For employers, misclassifying someone can lead to expensive and unnecessary legal issues; and for workers, not knowing your classification or being misclassified could mean losing out on entitled benefits, which could lead to problems come tax time. Within the United States and elsewhere, independent contractors and freelancers are considered sole proprietors unless they’ve set themselves up as a single member limited liability company (LLC), which is sometimes done for tax purposes. This means that they must keep track of earnings and business expenditures, as well as file and pay their own taxes (unlike employees whose taxes are automatically withheld through payroll). Freelancers and contractors are essentially their own small business, requiring them to market themselves, land clients, provide necessary materials, and complete projects all on their own terms. It’s also important to note that they’re often not entitled to many of the benefits and protections afforded to employees, such as unemployment or workers’ compensation. If you’re unsure how you or someone you’ve hired should be classified, the following questions could be of some help:
- Does the worker provide the equipment necessary to complete their projects on their own, or is it provided by the employer? Independent workers typically use their own resources and supplies to complete projects
- Are the services they provide integral to the running of the business? Many independent workers are contracted for short-term work, and are not considered necessary for the daily functioning of a business
- Do they simultaneously work with multiple independently established clients? Independent contractors and freelancers often have the ability to work with multiple clients at the same time, and may not be required to dedicate all their time or effort toward a single one (unless otherwise agreed upon)
- Does the employer regulate when, where, or how the project is completed? Under most tax laws, if an employer controls when, where, or how a project must be done, the worker qualifies as an employee; conversely, independent workers often have full autonomy in how they complete their work
- Do they have their own employees? While it’s possible for independent contractors and freelancers to subcontract work out, it’s less common for them to have established employees
- Who sets their rates? Independent workers and freelancers typically set their own rates, or negotiate with the client for a price that both parties deem fair; they’re usually paid either by project or on an hourly basis, as opposed to being on salary
Where Do Independent Contractors and Freelancers Differ?As there’s not really a difference in classifying the two worker types from a legal standpoint, many people don’t bother to learn what qualifies them as a contractor, freelancer, or both. In fact, it’s not entirely uncommon for some individuals to consider themselves to be a contractor when they’ve been hired to work on a project, and a freelancer when they’re looking for one. While this may not be 100% accurate by most definitions, it’s still possible to fulfill both roles simultaneously. Despite the matching guidelines in regards to taxes, contractors are generally understood to operate somewhat differently than freelancers. Understanding these generally accepted differences may not be as important as those between an independent contractor and an employee—as it doesn’t really matter legally speaking—but it’s still good to know the industry vernacular.
- Contractors tend to work for the same client for an extended period of time, often on a full or part-time basis, whereas freelancers are perceived to be more gig-based, typically juggling multiple, smaller projects at once
- Contractors are more likely to be location-dependent during the course of a project, often spending its duration working within the client’s home or office; on the other hand, freelancers are rarely location-dependent and are more free to set their own schedules
- Freelancing is most common in fields that are creative or technologically-based, such as computer programming, writing, and editing, graphic design, etc. On the other hand, many contracting positions are considered to be more physically demanding, such as repairmen, builders, plumbers, electricians, and HVAC installers
- Some contractors have employees on payroll or sub-projects out to other contractors/freelancers, whereas freelancers are generally thought to work alone
Why Any of this MattersWhile it’s certainly true that in most places independent workers—regardless of whether they are freelance writers, designers, doctors, or lawyers—fall in the same tax category, understanding the qualifications for this job category is important. Making a mistake when it comes to classifying yourself or another as an independent contractor versus an employee can be expensive, time-consuming, and potentially even land you in legal trouble. So even if mislabeling a freelancer for a contractor has no legal ramifications, not knowing a worker’s status most certainly could. Therefore, it would be a mistake to think that this topic is unimportant, especially for the growing number of individuals working in the gig economy.
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