Difference Between Freelancer, Contractor and Employee

Work life in the U.S. is changing. There has been a shift in organization and structure primarily driven by changes in the economy, technology and worker preferences. While most workers in today’s market still hold traditional jobs for which they commute to work five (or more) days a week and clock in/clock out on a set schedule, alternative work arrangements are becoming more common especially for high in demand skills such as IT and Business.

The Shifting Employment Landscape

According to a 2011 Knoll Workplace Research report, “Almost half of the surveyed organizations have started an alternative workplace program within the past two years and a large majority within the past five years.” This move coincides with the Great Recession, but the trends do not seem to be slowing down.

Jobs are more dispersed now than ever, as technology allows for greater connectivity between people located around the world. Real-time collaboration is possible as long as everyone has an internet connection, making remote work a viable option for many professional and even service sector jobs. The technology also makes it easier for independent contractors and freelancers to find work.

Recent research indicates that the number of independent contractors in the U.S. is somewhere between 10.5 million and 15 million, while the number of freelancers in 2020 hit 65 million. Combined, these two groups of workers make up approximately half of the 161 million people who held jobs or were looking for work in 2020. For those seeking work and for companies looking for workers, it’s essential to understand the difference between freelancer and contractor and employee.

Classifying Your Job According to the Internal Revenue Service

Generally speaking, if you have a job, you have to file taxes. The type of job you have determines how you file. The government doesn’t include all three categories of workers. Instead, there are two: employees and independent contractors. Though there are differences between an independent contractor and a freelancer, we’ll first drill down to the fundamental differences in employment classes.

The IRS has three things they look at in determining whether a person is an employee or an independent contractor:

Control of behavior: When a business can direct what an individual does while on the job, then the person is an employee. This includes detailed job descriptions, required tools or procedures, training and evaluative measures.
Control of finances: When the company determines an individual’s wages, salary structure and payment schedule, the person is usually considered an employee. On the other hand, independent contractors set their fees, invest in their tools and profit, or lose income based on the jobs they do.
Structure of the relationship: The language used to describe the relationship between the individual and the business matters, but it isn’t enough for a contract to state that an individual is an independent contractor if other criteria indicate otherwise. Benefits, length of relationship and role within the company are also important indicators.

These three measures provide a narrow view of the difference between freelancer and contractor and employee. The experiences of those who engage in each type of work go beyond what these measures describe. Independent contractors and freelancers have more in common with each other than they do with employees, so let’s move on to further distinguishing between how those who work for themselves are different than those who work for someone else.

Moving Beyond IRS Classifications

In July of 2020, the National Academies of Science, Engineering and Medicine released a report acknowledging “the changing nature of employment, independent contracting and freelance work, and jobs with unstable hours." With the rise in the number of people who classify themselves as self-employed, people need to understand what differentiates the two at a deeper level, especially since some of the lines between distinguishing characteristics can seem blurry.

Who Pays the Taxes?

So, we’ll come back to the IRS for this first differentiating characteristic because it’s a big one in terms of responsibilities. If you are an employee, you get a paycheck from your employer. This check is always less than what you would get if you received your entire salary, but your employer takes out your tax obligations and pays them to the IRS for you. Every spring, you file your income taxes to determine whether you paid in too much or too little.

If you are self-employed, the payment you receive for services is for the entire agreed-upon amount between you and the small business or individual for whom you contracted to work. It is then up to you to pay your own tax obligations, healthcare and self-employment taxes. If you earn above a specific amount, you are obligated to submit quarterly payments to the IRS to cover your obligations. You also file annual income taxes to determine if you paid in too much or too little.

Who Gets Benefits?

Those who work for themselves do not receive any employee benefits from the people or companies they work for. This means that any time off is time without income. It also means that they have to figure out their retirement plans and health insurance coverage. Employers are not obligated to offer benefits, but a vast majority do, at least for full-time positions.

What Happens When You Can’t Work?

If you get injured on the job, or if the work goes away, what happens next depends on whether you work for yourself or someone else. In the case of employees, employers are required to pay for workers' compensation insurance and unemployment insurance. When employees become sick or injured performing their job duties, then the employee is compensated (the precise degree to which they are compensated depends on state laws). Likewise, if the employer lays off the employee, the employee can file for unemployment.

Independent contractors and freelance workers receive neither of these benefits. Regardless of the reasons they are not working, they don't get paid if they don’t work.

How Long Do the Jobs Last?

A key difference between the self-employed and the employee is in job duration expectancies. An employee is hired to work for a business for an indefinite time. In contrast, freelancing (self-employment) and independent contractors work until the end of a specified period or the end of an agreed-upon job or set of tasks. As such, there is no guarantee of future work, so those who are self-employed must seek out their next source of income regularly.

How Flexible Is the Job?

In general, work, on the whole, is becoming more flexible, but only in specific aspects. More people, for instance, are working remotely at least part of the time than ever before. According to Global Workplace Analytics, between 2005 and 2018, the number of employees who worked from home at least 50% of the time increased by 173%. During the same period, the self-employed population grew by only 4%. An Owl Labs report also indicates that 80% of people would like to work remotely at least for a period of time.

Employees are beginning to take advantage of remote work opportunities, but the degree of flexibility for the self-employed is even greater. Employees generally, but not always, lack control over when they report to work and for how long, even if they clock in at home. The self-employed tend to have much more control over when they work and for how long.

What About Money?

Here’s another big difference: money. In most jobs, you do not have much control over how much you get paid. Professional positions tend to have more negotiating room, but, even so, there is generally a set of parameters you have to work with. When you’re self-employed, you set your hourly rates. There still tends to be market parameters that you have to abide by. If you’re charging twice as much as anyone else in your field, you aren’t likely to get much work.

Another significant money factor is what happens if you don’t get paid. If you are an employee, the company you work for is legally obligated to pay you. If you’re your own boss, you may have to contend with a lawsuit if you want to recoup money from someone who opted not to pay you.

Determining the Difference Between a Freelancer and Independent Contractor

Two primary characteristics delineate a freelancer from an independent contractor, but they are essential in people’s experiences. The two defining differences are job scope and duration. Freelancers tend to take on jobs that are smaller in scope and shorter in duration than independent contractors.

Think of the difference between a doctor or home renovator (independent contractors) and a web designer or SEO specialist (freelancers). The first tends to take on far fewer jobs at a time, and the jobs can last for weeks, months or years, whereas the second can take on multiple jobs at one time, and the jobs can last for hours, days or weeks.

Finding a Job That Fits You

If you are looking for a new job that suits your goals and lifestyle, a staffing agency geared toward your area of expertise and your preferences for work parameters can help you find the right match. At Best Staffing Agencies, we help you determine which staffing agencies are the most reliable, dependable and trustworthy for temporary, contract or full-time work in your industry. Get started on your new work path today!