Freelancer vs Independent Contractor: A Guide for Employers

Freelancer vs Independent contractor- whom to hire and when? Is this question plaguing your mind? Well, hold on! Being an employer in 2024, you simply can’t let go of the wondrous miracles that hiring a global contractor can bring with it. In the erstwhile times, engaging contractors in business to get things done was not a popular idea. Things have changed as hiring workers on a temporary business guarantees access to a premium skillset while cutting down overhead charges that may crop up while hiring employees.

In a startling revelation, findings by SAP Fieldglass suggest that only 58% of workforce expenditure is on employees. No wonder why freelancers and contractors are great options for employers! But, there is a catch. Freelancers and independent contractors are completely different worker profiles owing to the subtle difference making them distinct from one another.

Though the terms “freelancers” and “independent contractors” are used interchangeably,  the core differing factors are often brushed under the rug. Considering the legal and business landscape unique to each country, it is essential to gain clarity on the varied aspects between freelancers and independent contractors.

So, let’s delve deep into the nitty-gritty of details concerning freelancer vs independent contractor!

Table of Contents

• Who is a Freelance Worker?
• Who is an Independent Contractor?
• Freelancer vs Independent Contractor- Roles and Responsibilities 
• Freelancer vs Independent Contractors- Similarities
• Freelancer vs Independent Contractor- Key Differences
• Who is a Gig Worker?
• Things to Consider When Hiring Freelancers or Independent Contractors
• How Does the IRS Evaluate Employee Misclassification?
• Freelancer vs Independent Contractor- Which One is Right for Your Business?
• Final Words- Freelancer vs Independent Contractor 
• Frequently Asked Questions-  Freelancer vs Independent Contractor

Who is a Freelance Worker?

Studies reveal that around 51% of the working population will constitute freelancers by 2027.

A freelance worker, often referred to as a freelancer, is an individual who offers their services to clients on a project-by-project basis, typically without long-term commitments to a single employer. Freelancers are self-employed and may work with multiple clients simultaneously, providing services such as writing, graphic design, programming, consulting, and more. They have flexibility in choosing their projects, setting their rates, and managing their workload. Freelancers are responsible for their own taxes, insurance, and business expenses and often work remotely or from their own workspace.

Instead of following the traditional employment model, freelancers work independently and get to be their own boss. This is because the responsibility of managing and completing the project lies upon themselves. The nature of work that freelancers carry out is what sets them apart from independent contractors, among other things. Since they have the liberty to work with multiple clients simultaneously, their portfolio gets diversified- thereby giving them the opportunity to win more projects from prospective clients in future.

Some common roles for freelancers are as follows:

• Content Writers
• Copywriters
• Video Editors
• Graphic Designers

Who is an Independent Contractor?

An independent contractor is an individual or entity hired by another party to perform specific services or tasks under the terms of a contract or agreement. Independent contractors are self-employed and operate as separate entities from the hiring party, often providing services to multiple clients. They have control over how the work is performed, including the methods, tools, and resources used.

Contractors may choose to work alone or hire a team of workers, also known as subcontractors, under them to complete a project promptly. Their roles and responsibilities along with other details such as work duration, payment terms, etc., will be governed as per the terms laid out in the independent contractor agreement signed by both the parties (client and the contractor).

Independent contractors are typically responsible for their own taxes, insurance, and business expenses. They may offer specialized skills or expertise in various fields such as consulting, construction, IT services, and more. Unlike employees, independent contractors do not receive benefits such as health insurance, paid time off, or retirement contributions from the hiring party.

Let’s have a look at some of the most common roles that independent contractors take up:

• Lawyers
• Dentists
• Carpenters
• Accountants

Freelancer vs Independent Contractor- Roles and Responsibilities

Freelancers

The roles and responsibilities of freelancers can vary depending on the nature of their work and the specific services they offer. Let’s see what these are:

1. Service Provision

Freelancers provide specialized services or expertise to clients based on their skills and experience. This can include writing, graphic design, web development, consulting, photography, marketing, and more.

2. Project Management

Freelancers are often responsible for managing their own projects, including project planning, scheduling, and execution. They may coordinate with clients to define project objectives, deliverables, timelines, and budgets.

3. Client Communication

Freelancers maintain regular communication with clients to discuss project requirements, provide updates on progress, address any concerns or feedback, and ensure client satisfaction. Effective communication is essential for building and maintaining positive client relationships.

4. Quality Assurance

Freelancers are accountable for delivering high-quality work that meets or exceeds client expectations. This includes adhering to project specifications, following best practices, and delivering work on time and within budget.

6. Administrative Tasks

Freelancers handle various administrative tasks related to their freelance business, such as invoicing clients, tracking expenses, managing contracts and agreements, and maintaining accurate records for tax and accounting purposes.

8. Client Satisfaction

Freelancers prioritize client satisfaction by delivering exceptional work, providing excellent customer service, addressing client feedback constructively, and striving to exceed client expectations.

Independent Contractors

While certain roles and responsibilities of freelancers and independent contractors tend to overlap, there is no harm in getting a brief idea about the latter’s specific duties at work:

1. Contractual Agreements

Independent contractors typically work under formal contracts or agreements with clients. These contracts outline the scope of work, project timelines, deliverables, payment terms, and other key details of the engagement.

2. Autonomy and Control

Independent contractors have a high degree of autonomy and control over how they perform their work. Like freelancers, they have the flexibility to determine their own work hours, methods, tools, and resources required to complete projects.

3. Business Operations

Just like freelancers, contractors are responsible for managing their own business operations, including setting up their business entity, obtaining necessary licenses or permits, managing finances, and complying with tax and legal obligations.

4. Client Relationships

Independent contractors cultivate relationships with clients based on their expertise, professionalism, and ability to deliver quality work. Building and maintaining positive client relationships is essential for securing repeat business and referrals.

5. Risk Management

Independent contractors assume certain risks associated with their work, including financial risks, liability risks, and market risks. They may need to secure insurance coverage or take other measures to mitigate potential risks associated with their business activities.

Freelancer vs Independent Contractors- Similarities

The Internal Revenue Service (IRS) of the US has grouped freelancers and independent contractors together. While comparing both the worker categories might be tricky, certain subtle differences still loom large. Before we go into analyzing their differences, let’s have a look at what fronts do freelancers and independent contractors bear similarities:

Taxation

Both freelancers and independent contractors are categorized as self-employed professionals as per the IRS rules. Since you will be hiring them, ensure that you are recording all the payments you are disbursing in their accounts via the 1099-NEC (Non-employee compensation) form. On the other hand, an employee needs to submit W-2 form that automatically records the deduction of payroll taxes that include income tax, medicare, etc. On the basis of their annual earnings, independent contractors and freelancers will have to take care of their taxes by themselves. No withholding of taxes ought to be done on the end of the employer.

Expense Management

No matter what kind of work-related expense comes to the fore, freelancers and independent contractors need to take care of all these by themselves. Whether it is a software tool, office equipment, laptop or phone, contractors need to procure these by themselves. Employers are not supposed to provide them with expense reimbursements.

If the task requires that the freelancers will have to use any particular software that exists with a company license solely,  clients may approve this provision to them in such a case.

Benefits

The IRS does not have specific rules requiring businesses to offer benefits to freelancers and contractors in the same way they do for employees. Freelancers and independent contractors are  responsible for managing their own benefits such as health insurance, retirement savings, and other perks. However, businesses may choose to offer certain benefits or incentives to freelancers and contractors as part of their contract negotiations or to attract and retain talent. These benefits could include access to company resources, professional development opportunities, or bonuses for exceptional performance.

If you are planning to offer benefits to your third-party workforce, make sure to be clear about the specific perks you want to provide them with. Ensuring compliance with any applicable laws or regulations governing independent contractor relationships is essential. Keeping worker misclassification charges at bay is also vital. Even if you offer benefits to contractors and freelancers, using a smart contractor management software will aid you in staying clear of misclassification risks- all thanks to the team of legal experts who will aid you in doing it right.

Freelancer vs Independent Contractor- Differences

While the terms “freelancer” and “independent contractor” are often thought to be identical terms, there are underlying differences between the two:

Parameters	Freelancers	Independent Contractors
Nature of Work	Freelancers typically work independently on short-term projects for multiple clients. They often have specialized skills and may work on a variety of projects simultaneously.	Independent contractors also work on a contract basis, but they may work for a single client or company for an extended period. Their work may be more project-specific and integrated into the client’s operations.
Control Over Work	Freelancers generally have more autonomy and control over how and when they work. They have the freedom to choose which projects to take on and how to complete them.	While independent contractors also have some degree of autonomy, their work may be more directed by the client. The client may specify project requirements, deadlines, and methodologies.
Scope of Work	Freelancers often specialize in a particular skill set or industry and may offer a wide range of services to clients.	Independent contractors may provide specialized services or expertise tailored to the client’s needs. Their work may be more project-focused and tailored to specific client requirements.
Relationship with Clients	Freelancers typically maintain relationships with multiple clients simultaneously. They may work with different clients on different projects and have a more transient client base.	Independent contractors may have a more exclusive relationship with their clients, working with a single client for an extended period or on a series of related projects.
Legal Considerations	Freelancers may operate as sole proprietors or independent businesses. They are often responsible for managing their own taxes, invoicing, and client relationships.	Independent contractors also operate on a contract basis, but there may be legal distinctions depending on jurisdiction and industry regulations. They may be subject to specific contractual agreements and legal obligations set forth by the client.

Who is a Gig Worker?

A gig worker is an individual who performs short-term or freelance work, often referred to as “gigs,” typically through digital platforms or online marketplaces. Gig workers are often independent contractors who offer their services on a temporary or flexible basis, such as ridesharing, food delivery, freelance writing, graphic design, and more. They have the freedom to choose their own schedule and the gigs they want to accept, providing them with flexibility but also lacking the benefits and job security typically associated with traditional employment. Gig workers are paid for each task or project completed, and their income can vary based on the volume of work and demand for their services.

Things to Consider When Hiring Freelancers or Independent Contractors

When hiring freelancers or contractors, there are several important factors to consider to ensure a successful working relationship and project outcome. Let’s see what these crucial factors are:

1. Clarifying the Scope of Work

Clearly define the scope of the project or services you need from the freelancer or contractor. Provide detailed specifications, expectations, and deliverables to avoid misunderstandings later on. There is no point in going through multiple edits or revisions when things can work out perfectly the very first time. Letting your freelancers have a crystal clear idea about the scope of work will aid them in understanding how to go about the project accurately. This will ensure that the outcome matches your needs and expectations. In that way, significant amounts of time will be saved that would otherwise have been expended in bringing about modifications to the same work.

2. Skills and Expertise

Evaluate the freelancer or contractor’s skills, experience, and expertise relevant to the project. Review their portfolio, samples of past work, and client testimonials to assess their suitability for the job. As is obvious, you will want to spend solely on the right freelancer/contractor who has an impressive track record of delivering projects to their clients on time. Therefore, scrutinizing their background and work samples is crucial to ensure that you are hiring the right person.

3. Availability and Schedule

Determine the freelancer or contractor’s availability and work schedule to ensure they can meet your project timelines and deadlines. To avoid hiccups in the working relationship, it is crucial to stay abreast of all these details beforehand. Communication gap with respect to availability may attract uncomfortable situations, possibly disputes, with your chosen freelancer or contractor. So, make sure to inform your contractor about the hours for which they are expected to work. Discussing any potential conflicts or scheduling constraints upfront is much-needed.

4. Communication

Establish clear communication channels and expectations from the outset. Determine how often you will communicate, preferred methods of communication, and who will be the main point of contact for the project. To streamline communication with your team of freelancers or contractors, using a contractor management software may turn out to be helpful. Eliminating communication gaps is essential to foster collaboration and enable timely problem-solving, thereby leading to a smooth, on-budget, and satisfactory project completion.

5. Contract and Terms

Contract agreements are paramount when collaborating with freelancers or contractors as they establish clear expectations, protect both parties’ interests, and mitigate risks. These documents outline:

• project scope
• timelines
• deliverables
• payment terms
• intellectual property rights

Having an independent contractor agreement in place will ensure that both the parties have a shared understanding of specific responsibilities and obligations. Moreover, contracts serve as a legal recourse in case of disputes, providing a framework for resolution and potentially averting costly litigation. By delineating the terms of engagement comprehensively, contract agreements foster trust, professionalism, and accountability in freelance or contractor relationships, ultimately facilitating successful collaborations.

6. Payment and Budget

Ensuring prompt, on-time payments to freelancers and contractors ought to be your priority. To keep winning external talent and enhance your employer branding, it is crucial to send them their due remuneration as promised.

Unfortunately, 58% of freelancers reported having worked with clients that fail to pay them. This not only frustrates them but also casts a demotivating spell on their being. Needless to say, this will have an adverse impact on the work they are going to deliver. Using contractor payroll solutions like Asanify will help you save loads of time as the entire contractor payroll process will get automated, thereby enabling a single-click payroll run.

No wonder why it is crucial to discuss payment rates, methods, and schedules with the freelancer or contractor in advance. Negotiate a fair and competitive rate based on the complexity of the project, the freelancer’s experience, and industry standards. Further, make sure to set a budget for the project and be transparent about any additional costs or expenses.

7. References and Reviews

Requesting references or reviews from freelancers or contractors before commencing work is crucial as it provides valuable insights into their capabilities, reliability, and professionalism. By reviewing past clients’ experiences, you can gauge the freelancer’s or contractor’s quality of work, adherence to deadlines, communication skills, and ability to meet expectations.

To make informed decisions, extracting the chosen worker’s past work reviews is vital. Having access to past client testimonials of contractors will give you the assurance that you are hiring ideal individuals who have a proven track record of delivering satisfactory results. Additionally, soliciting references or reviews establishes a level of accountability and incentivizes freelancers or contractors to maintain high standards of performance, ultimately enhancing the likelihood of a successful collaboration.

8. Cultural Fit

Assessing the cultural fit of freelancers or contractors before getting started with work is of supreme importance. Wondering why? The answer lies in attaining the objectives of seamless collaboration and project success. Understanding how their values, communication styles, and work ethics align with your organisation is crucial to ensure smoother integration into the team dynamic, fostering stronger relationships and productivity. It not only mitigates potential conflicts but also enhances synergy, promoting a cohesive work environment where everyone feels valued and understood.

A study by Glassdoor has revealed that organizations prioritizing cultural fit during the recruiting process witness a 20% lower turnover rate. Therefore, examining cultural fit upfront can help preempt any potential misalignments that could arise during the project. This will, in turn, aid in saving time, resources, and ensuring the achievement of desired outcomes.

How Does the IRS Evaluate Employee Misclassification?

Employee misclassification is a significant issue for the IRS (Internal Revenue Service) because it can lead to underpayment or non-payment of taxes, violation of labor laws, and denial of benefits and protections to workers. The IRS has specific criteria and processes for evaluating whether a worker has been misclassified as an independent contractor rather than an employee.

The IRS primarily uses the common law rules to determine the category of a worker. These rules focus on the degree of control the employer has over an individual’s work.

The key factors assessed under the common law rules include:

• Behavioral Control: This refers to whether the employer has the right to direct or control how the worker performs the work. Factors such as instructions given to the worker, training provided, and evaluation methods are considered.
• Financial Control: This involves examining the extent to which the worker has control over the financial aspects of the work, such as investment in equipment, opportunity for profit or loss, and reimbursement of expenses.
• Type of Relationship: The nature of the relationship between the worker and the employer is also evaluated, including written contracts, employee benefits, permanency of the relationship, and the provision of employee-type benefits.

Freelancer vs Independent Contractor- Which One is Right for Your Business?

The precise answer to this question is that it depends. On what factor, you may ask? Well, depending upon your organizational goals and requirements, whether you need to hire a freelancer or an independent contractor will vary.

To make an informed decision about the kind of external workforce you wish to employ, let’s have a look at the following criteria.

Hiring a Freelancer

Engaging a freelancer in your business would be the right decision if you:

• need a professional who brings a combination of experience and value to the fore
• have varying urgent needs that may change from one week to another
• are not looking forward to sign a long-term contract with the worker
• are comfortable with the worker having multiple clients to cater to
• want to pay hourly or on the basis of milestones
• need someone who is an expert at content/copy/script writing, video editing, graphics designing, etc.
• are not sure the exact tenure for which you need to engage the person
• are fine with the person working remotely

Hiring an Independent Contractor

An independent contractor would be an apt fit for your organization if you:

• are looking for a professional to engage on a long-term basis
• want to pay a fixed amount once the project gets delivered
• need the person to work solely for your business and not for other clients or competitors
• looking for someone who can work in the office
• want to designate work to an external worker who can maintain confidentiality about the task at hand
• are looking for a person skilled in domains such as accounting, consulting, HR, operations, etc.

Analyse your needs carefully before kick-starting your hiring process. By taking into consideration the above factors, you will succeed at making the right decisions when hiring freelancers or independent contractors.

Final Words- Freelancer vs Independent Contractor

Understanding the distinctions between freelancers and independent contractors is essential to navigate the modern workforce landscape. By leveraging the insights provided in this guide, you will be able to make informed decisions when hiring external talent, ensuring compliance with labor laws and tax regulations while maximizing productivity and efficiency. However, managing a diverse team of contractors and freelancers can present its own set of challenges. That’s where Asanify comes in.

Asanify offers a comprehensive contractor and freelancer management software solution designed to streamline the hiring process, facilitate communication, track project progress, and ensure compliance with contractual agreements and legal obligations. With Asanify, you can effectively manage their external workforce, optimize collaboration, and drive business success in today’s dynamic marketplace. To streamline processes and automate workflow, using tools like Asanify is surely going to be a stellar decision.

Frequently Asked Questions- Freelancer vs Independent Contractor

1. Is a freelancer the same as an independent contractor?

No, a freelancer is not actually the same as an independent contractor. You may have found both the terms to be used synonymously but there is a subtle difference between the two worker types. While freelancers work with an organization for a relatively shorter period of time, independent contractors hop on to a working relationship that may span a longer period of time (say, a few months or even years).

2. Is freelancing an independent work?

Yes, freelancing is an independent form of work where individuals offer their services to clients on a contract basis without long-term commitment. Freelancers have autonomy over their schedules, projects, and client selection, allowing them to work flexibly and pursue projects aligned with their skills and interests. They manage their own businesses, handle client communication, project management, and invoicing autonomously.

3. What is another name for an independent contractor?

Independent contractors are also attributed varied names such as hustlers, solopreneurs, side-giggers, etc.

4. Is a subcontractor a freelancer?

While subcontractors share some similarities with freelancers, they are not necessarily the same. Subcontractors are individuals or businesses hired by a primary contractor to perform specific tasks or components of a larger project. While subcontractors may operate independently and work on a contract basis like freelancers, they often have a closer relationship with the primary contractor and may work exclusively for them on a project-by-project basis. Freelancers, on the other hand, typically maintain autonomy over their work and may have multiple clients simultaneously, whereas subcontractors may have a more integrated role within a single project or client’s operations.

5. Do freelancers need a contract?

Yes, freelancers typically need a contract when engaging with clients to outline the terms of the project, including scope of work, deliverables, deadlines, payment terms, and any other relevant details. A contract helps establish clear expectations for both parties, protects the freelancer’s rights and interests, and ensures payment for services rendered. It also helps mitigate potential disputes and provides a legal framework for resolving conflicts. Additionally, a well-drafted contract can help establish a professional relationship and build trust between you and the freelancer.

6. Can a freelancer terminate a contract?

Yes, a freelancer can terminate a contract under certain circumstances, depending on the terms outlined in the contract itself and applicable laws. Common reasons for terminating a contract include non-payment or late payment by the client, breaches of contract by either party, or unforeseen circumstances that make it impossible or impractical to fulfill the contract obligations.

7. How do I determine whether to hire a freelancer or an independent contractor for a project?

Consider factors such as the nature of the work, the duration of the project, the level of control required, and the skills and expertise needed. Freelancers are ideal for short-term, specialized projects, while independent contractors may be better suited for longer-term engagements requiring ongoing support.

8. What should I do if I need to terminate a contract with a freelancer or independent contractor?

Review the termination provisions outlined in the contract, including notice periods and any associated penalties or liabilities. Communicate openly and professionally with the freelancer or contractor, providing clear reasons for termination and discussing any outstanding issues or obligations. Be prepared to negotiate a mutually acceptable resolution if necessary.

9. What steps should I take to protect my intellectual property while working with freelancers or contractors?

It is essential to include intellectual property provisions in the contract to specify ownership rights and confidentiality obligations. Clearly define what constitutes intellectual property, establish ownership rights for work created during the engagement, and require contractors to sign non-disclosure agreements to protect sensitive information.

10. What are the advantages of hiring freelancer vs independent contractor for my business?

Hiring freelancers or independent contractors can offer several benefits, including flexibility, cost-effectiveness, access to specialized skills and expertise, scalability, and reduced administrative burden. It allows businesses to tap into a global talent pool and adapt quickly to changing project requirements.

Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.