Upwork’s Freelance Forward Report found that 59 million Americans freelanced in 2020. That’s a lot of people who can potentially help your business grow in areas that are beyond your expertise. For example, you’ve probably decided that hiring a web developer is a lot cheaper than spending the extra time and money to do it yourself.
Finding the right person is its own job. There are also many types of workers to choose from, like freelancers and contractors. You’re probably wondering—what’s the difference between freelance vs. contract work?
For starters, both work temporarily for your company and can help you complete a variety of projects. For tax and employment purposes, they’re also considered one and the same. However, there’s a handful of differences between these two workers that you’ll need to understand before hiring them.
We’ll go over the differences of freelance vs. contract work, along with other types of workers, so you can understand key distinctions that impact your business.
What is a freelance worker?
A freelance worker is a self-employed person who works on many projects from a variety of companies. This worker has complete control over their rates, their work space, how they work, and the clients they work with.
Freelancers typically take on short-term projects and work alone. You’ll pay these workers with a 1099 and they’re responsible for reporting taxes on that payment. Freelance workers are great if you have small one-off tasks and projects you need covered.
What is an independent contractor?
An independent contractor is a worker who typically works with one company at a time and is traditionally placed with a company by another agency. Contractors normally take on long-term projects and can work on site with your other staff. An agency can also assign multiple contractors to a project.
However, independent contractors can work for themselves and take on multiple projects at one time. This is why the terms “freelancer,” “independent contractor,” and “contractor” are often used interchangeably.
An independent contractor’s employment status makes a big difference when it comes to pay, taxes, and benefits. We break down major differences below.
- Employed through a third-party agency: If the contractor works with you through an agency, ask the agency if the contractor is their W-2 employee. If so, then you don’t need to provide any benefits or report on their taxes.
- Employed directly as a contractor: If you work directly with the contractor and agree that they are independent from your company, then this person is paid with a 1099. You are not obligated to provide benefits and you do not need to report their taxes.
- Employed as a temporary employee: If you agree on taking an agency’s worker or direct contractor as a temporary employee, then you will probably pay them with a W-2. This area gets a little gray since laws differ by state. To stay on the safe side, look up your local laws and solidify employment terms in writing with the contractor or agency.
You can also set up a contract to hire position. This is a position that starts employees out as contractors with the opportunity for them to come on as full-fledged employees. This is a great route if you want to test the waters for a role before hiring someone full time.
Working with a contractor may be your best option if you’re looking for someone long-term who can give your project more time and attention.
What are the main differences between freelancers and contractors?
The main differences between freelancers and contractors are found in how they are hired, paid, how long they work with your business, and how they work with your staff. We’ll go over each of those factors below.
Contractors are traditionally hired through an external agency. This can save you some time if you aren’t interested in individually vetting freelancers. You’ll work with the agency when negotiating rates, timelines, and deliverables.
Contractors working with agencies don’t have as much freedom picking clients as freelancers. However, some contractors work independently and work similarly to freelancers.
You’ll work directly with a freelancer to negotiate rates, timelines, and deliverables. Freelancers can work with multiple clients at once and have complete control over the clients they accept.
You can expect to pay independent contractors and freelancers hourly or by the project. Unless you’re taking on either of these workers as a temporary employee, you don’t need to worry about paying benefits. However, they may negotiate coverage for necessary expenses like travel or specific tools.
Contractor pay varies based on the terms of your contract and how you define employment. Most of the time, you will pay a contractor through their contracting agency. You’ll pay that bill periodically and the agency takes care of the contractor’s pay, taxes, and benefits.
You’ll pay freelancers directly on the amount agreed upon. They will send you their invoice when the project is complete. Like we’ve mentioned, they handle their own taxes and you are not required to provide any benefits.
Freelancers and contractors work for companies temporarily. Contractors typically work on longer-term projects with defined timelines. On the other hand, freelancers work on short-term projects, but also have defined timelines.
Since contractors work on long-term projects, they’ll typically work specific times of the day. This makes them more available for your team. Some contractors work on their own time like freelancers.
All freelancers set their own day-to-day schedule and work on their own time. An unpredictable schedule makes it difficult to get updates, but shouldn’t be a big issue if they’re working on small deliverables. You can get around this by agreeing on periodic project updates in your contract.
You can negotiate work schedules with both workers if needed. For example, you may hire a contractor to deep clean your store. You’ll probably need them to work after hours when the store is empty.
What about gig workers and those who are self-employed?
Gig workers are independent contractors who typically work on short-term tasks. App-based gig workers like Uber drivers and Postmates delivery are commonly associated with the gig economy. However, gig workers can include any freelancer or independent contractor.
When employing a gig worker through an app or a marketplace, you’ll work with them similarly to how you’d work with a contractor. Instead of going through an agency, you’ll probably use sites like Upwork or TaskRabbit to search for workers to help with your project.
Freelancers and contractors fall under the self-employed umbrella. Self-employed workers also include small business owners and others who work with a team. When working with self-employed workers with teams, the process will be similar to how you’d work with a contractor.
You’ll negotiate the terms of your contract with someone who may or may not be the person working on the project. Then, you can expect to pay an invoice upon completion of work.
What are the main differences between employees, freelancers, contractors, and gig workers?
Full-time, part-time, and temporary workers receive benefits, get paid regularly, and have their work and schedule dedicated by their employer.
Freelancers, contractors, gig workers, and others who are self-employed don’t normally receive benefits from the companies they work for since they are their own company. Pay is irregular and dependent on how many clients and projects they take on.
Differentiating employees from these various self-employment titles is important for tax and legal purposes. Wrongly classifying workers gets you into legal trouble. You may be denying benefits that employees are entitled to get.
The IRS defines independent contractors as follows: “…if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” To avoid confusion, agree on their classification before work begins and get it in writing. That way, everyone is treated and paid fairly.
What employees should know
Employees must also understand the differences between all these terms. You should go with the title that best fits the way you want to structure your day and the way you best work. Ask yourself these questions to see what role you may like the best.
- Do you want to manage many clients or work with one at a time?
- Do you want to work directly with clients or through an agency?
- Do you want to have your own employees?
- Do you want to eventually work for a company?
- Do you want to find work mainly through gig apps and marketplaces?
- Do you want to work with an agency to get clients?
- Do you want to have benefits provided by your client or an agency?
- Do you want to work directly with clients or through an agency?
You’re not stuck with whatever title you choose. You can start as a freelancer and work your way over to more long-term contract work. These titles also start to get a little loose when you start looking for clients and job postings.
Companies may not understand the differences between these terms. Many companies use “freelancer,” and “contractor” interchangeably. Read the fine print to see what category the job most likely falls under.
If this is a long-term project that requires you to work certain hours, it’s probably a contract job. If it’s a short-term assignment that only has a few milestones or deadlines to follow, it’s likely a freelance job. You can also ask the employer for more information if the job description isn’t clear.
It’s most important to understand how your client or employer is classifying you. This impacts things like taxes and benefits. Get on the same page with them before you begin work to avoid legal headaches later.
Final thoughts on working with freelancers and contractors
Although they’re similar, there are several important differentiators when considering freelance vs. contract work as a small business owner. Pick a worker that fits the projects and the budgets you have lined up. If you have a mix of freelance and regular work, it can get tough to keep track of everyone’s pay on top of other needs for your business.
Consider getting a small business solution to automate different parts of your business. That way, you can save yourself time and money. You can also automate tedious tasks and give your attention to more important ones.