Contractor vs Freelancer - What Are the Key Differences?
Modern workplace arrangements have created new ways to work. In fact, most self-employed professionals are either freelancers or contractors. Although the law doesn’t distinguish these roles when it comes to registration or taxation, these two roles approach their work in distinct ways and associate with different industries.
Knowing the difference is incredibly important, especially if you’re a small business looking to hire a consultant that is most advantageous to your situation. Here’s what you need to know about contractors and freelancers:
Defining Contractors
A contractor is an individual that provides services to a client, which can range from individuals to entire organisations. They usually render these services for a predetermined time. As implied in the name, contractors are generally in a contract with their client, which outlines the payment, duration, and nature of their services.
Contractors usually work at the offices or premises of their clients like a short-term employee. However, unlike actual employees, contractors are not on the company’s payroll. That means that they’re responsible for paying their own taxes and handling their National Insurance contributions.
Contractors usually work through recruitment and contracting agencies and are classified as “agency workers”. This gives them minimal employment rights, like the National Minimum Wage. However, if they have a “pay between assignments” contract, that changes their classification to an employee, which gives them additional rights and functions.
However, some contractors are self-employed, even while working with an agency. While this allows them more freedom and flexibility, this also means they don’t have any employment rights.
The industry with the most number of contractors is the IT sector, as specialists are usually needed for multiple weeks to complete a specific project. Getting contractors to do the job is typically a more cost-efficient strategy for these companies as opposed to hiring a permanent in-house specialist. However, contractors are also prominent in engineering, finance, and consulting industries.
Defining Freelancers
Meanwhile, freelancers usually have multiple projects from different clients. They often work from their own home or at a café or coworking space and enjoy flexible working hours. Freelancers charge according to different rates, depending on their personal preferences: these can be an hourly or daily rate, or a fixed rate per project.
People usually hire freelancers to produce a customised product or service, which makes them top choices in creative industries. Writers, graphic designers, and videographers are one of the most prominent examples of freelancers, as they’re usually commissioned to produce unique pieces for a project. They’re also paid once the work is completed within an assigned deadline.
The creative and media industries are ones that are usually made up of freelancers. From architects to copywriters, freelancing offers talented individuals to supplement their income while working on various projects.
How they Operate
Although contractors and freelancers share many similarities, they operate differently. Both are generally self-employed, but the similarities sometimes end there. For example, freelancers are directly paid by their clients. Contractors with an agency, on the other hand, get their pay from the agency as an employee or agency worker.
With contractors working in a limited company, their income is given directly to the company instead of to themselves. That means that contractors must pay themselves first to spend this money legally. To maximise this, they can fulfil different positions in the company structure, like a director, employee, or shareholder.
Meanwhile, freelancers are rarely on any company or agency’s payroll. They receive their payment directly through invoicing but have the same options of creating a limited company or working as a sole trader. However, they probably cannot qualify for IR35 status.
A viable option for both types of professionals is by becoming a nominal employee of an umbrella company. These companies serve as the intermediary between the freelancer or contractor and their agencies or clients. Although umbrella companies are technically the employer of these two types of professionals, they do not provide work opportunities for them. Instead, they convert their invoices to salaries, offering tax benefits.
Conclusion
Contractors and freelancers have provided essential services to all types of industries. These are often strategically-minded individuals who are savvy at identifying work opportunities that propel them forward while working in more flexible environments. Whether you’re a small business or a freelancer, knowing the difference between these two is essential to know your options.
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