If you’re planning to recruit global talent to your expanding business, you must know the different employee types. It can help you make an informed decision and balance your expense sheet. Freelancers and contractors are two standard options for employers, and hence, they must know the nuances of the independent contractor vs freelancer debate.
According to a study, almost 36% of the US workforce has moved to freelance, especially after the pandemic. However, your choice of external employees isn’t limited to freelancers only – you can also hire independent contractors. But what are their differences?
Keep reading as we’ve covered this topic in detail here.
Who is a Freelance Worker?
Freelancers are self-employed, non-permanent workers offering specialized skills to their clients. They usually provide services to multiple organizations simultaneously and take up as many projects as they can fit into their schedules. Freelancers are most common in media industries and creative fields.
Who is a Contractor?
Independent contractors function much like freelancers, but they generally work for a single client or a continuing long-term project. Independent contractors can either work alone or for an agency. They manage their insurance and taxation themselves. They are highly skilled professionals, often possessing their organization. Independent contractors are more prevalent in IT, finance, health, construction, etc.
Independent contractor VS freelancer – key differences
Both freelancers and contractors are external employees having significant professional and financial independence. However, they share certain differences that employers should know to avoid employee misclassification. The freelance vs contract employee debate can be clearly understood by considering hiring, payment, work schedules, etc.
One can differentiate between contracting and freelancing by judging the working period. Freelancers typically undertake short-term projects with/without a defined timeline. But contractors usually work for clients on more extended projects with a defined timeline.
Typically, an agency hires independent contractors. If you don’t have the time to browse through the list of freelancers, this is an ideal option. To hire an independent contractor, you can contact a hiring agency and directly negotiate the agency’s timelines, deliverables, and rates. On the other hand, while hiring freelancers, you have the freedom to negotiate the rates, deliverables, and timelines directly with the candidate.
Freelancers have set work schedules and work at their convenience. This schedule is often unpredictable, making it difficult for an employer to get regular project updates. Some independent contractors prefer to work on their schedule, much like freelancers. However, most contractors work within a stipulated time each day, making it possible to get timely updates. Thus, negotiating a preferred work schedule for both parties is always an option for freelancers and contractors.
Freelancers and contractors are either paid on a project basis or hourly basis. The main difference lies in their mode of payment. Freelancers are paid directly on a pre-sanctioned amount. The payment process is simple. Once freelancers complete a project, they raise an invoice and collect their payment. Contrarily, an independent contractor working for an agency receives compensation from the agency (not the client). However, contractors who don’t work with agencies usually receive payment directly from clients. This becomes a major difference in the independent contractor vs freelancer debate as employers need not worry about payments if they hire contractors through an agency.
Freelancers usually don’t work under legally binding contracts, which allows them to be available for multiple clients simultaneously. However, independent contractors sign a formal agreement with the company they choose to work with. These contracts outline the project costs, timelines, deliverables, payment, etc. Sometimes independent contractors also sign contracts with legal clauses clearly stating who will own the final work, the responsible parties, etc.
This is one of the most common points in the independent contractor vs freelancer debate. Freelancers can choose their preferred work location. It may be their home office or a specific site per the project demands. Sometimes freelancers may also rent an office space, but employers are not bound to provide them a workspace or reimburse the costs for it. On the other hand, employers might have to offer a specific work location to independent contractors, especially in the IT or construction sectors.
Who is a Gig Worker?
The gig economy has boomed in the last few years, and if any worker has ever worked as an independent contractor or as a freelancer, they’ve been a part of the mighty gig economy. “Gig” is simply short-term work or project-wise work. Think of Uber drivers or Zomato delivery executives to get a clearer picture of gig workers.
Essentially, gig workers work on a short-term basis and can include both freelancers and independent contractors. They can offer their services via freelance marketplaces or applications.
Things to Consider When Hiring Freelancers or Contractors
If you are wondering which option – contract vs freelance employees – is your best bet, these questions will help you decide:
- What type of project creates the need to outsource candidates?
- Do I want to work with the candidate directly or indirectly?
- What is my budget for the project?
- How long will I need the candidate?
- Will I need the candidates for specific hours of the day?
- Will the candidates need to collaborate with the office staff?
- Will I eventually hire the candidate as a full-timer?
How Does the IRS Evaluate Employee Classification?
Categorizing workers correctly is crucial because employee misclassification is a punishable offense. It may cause severe tax issues, landing you in trouble with the IRS.
The IRS presents three determining categories for employee classification, namely:
- Behavioral control
- Financial control, and
- Relationship type
When an employer has direct control of the employee or can control their work performance, it is behavioral control. In other words, if an employer exerts significant control over the worker’s behavior, they are considered employees. Control here means the number of instructions the professional gives (when to work, from where to work, which tools they should use, etc.). If these directions prevail, a professional must be classified as an employee.
When an employer can control and direct the organization’s business and financial aspects, it is termed financial control. Higher financial control indicates a higher likeliness for the worker to be an employee. For example, greater financial control can be observed when the investments in tools to be used by the workers remain in the hands of the owner. Similarly, decisions to reimburse any worker or if the worker is allowed to engage in other business ventures are also considered.
The type of relationship indicates how both parties – professionals and employers – interact. Businesses usually offer benefits like vacation leaves, insurance, etc., to employees and not contractors or freelancers. Similarly, employees sign a detailed employee agreement with the employer organization for an indefinite term, unlike the short-term project-based contracts of contractors or freelancers.
Employee misclassification occurs when a company falsely classifies its employees as freelancers/contractors to evade taxes and avoid offering benefits to their employees. The government takes misclassification seriously as it leads to serious public revenue loss. It is an incident of wage law violation that can lead to hefty fines or penalties.
We hope you now have a much better understanding of freelancers and contractors. Knowing their unique benefits and differences can simplify the hiring process and help you reap their distinctive advantages.
However, if you are looking to outsource the burden of hiring freelancers and contractors, you should choose an established global EOR firm like Multiplier. Our SaaS platform will help streamline your hiring process, manage employee onboarding, generate compliant contracts, manage payroll, etc. We can also inform you about the locally compliant perks and benefits to offer your employees.
Q. What is the difference between independent contractors and freelancers?
No, an independent contractor is not the same as a freelancer. Although the terms are sometimes used synonymously, there are many differences. Freelancers work with a company for a short duration, while independent contractors work for a longer duration (a few months, or a year, or more). Freelancers generally work alone, while independent contractors can work single-handedly or via any agency.
Q. Contractor vs freelancer: which is the best one?
Both freelancers and independent contractors come with unique pros and cons. Thus, there is a correct answer to this question. It depends on an organization’s needs. freelancers can be ideal if your organization wants to hire a specialized skill set for a short duration. But if you want to hire someone for long-term projects, you can opt for contractors.
Q. Can I convert my independent contractor to full-time staff?
You can convert your independent contractor to a full-time staff for your firm, which is a win-win scenario for both entities. This way, you will be able to retain the top talents for your organization and ensure employee compliance.