The gig economy has been on a steady rise for the last decade, with 57 million people in the U.S. now doing some type of freelancing. That’s an increase of 10 million from just five years ago! Freelance income tops $1 trillion, which is 5% of the U.S. economy.
Freelance and independent contract work are alluring to employees because of the associated freedom and flexibility. Freelancers can set their own hours, be their own boss, and even tack it onto an existing full-time job to make a side income.
For employers, the gig economy offers a budget-friendly way to serve niche business needs from accounting to marketing and beyond, without the investments and responsibilities that come with full-time employees.
With so many people following this alternative career path (and so many employers warming up to working with them), it’s highly likely that you’ve collaborated or hired at least one person who doesn’t fit the mold of the standard 9-to-5 full-time employee. But what is a freelancer? What is an independent contractor? What’s the difference between them and which one is the best fit for your needs?
To learn more about freelancers vs. independent contractors and how to determine which one to leverage for your next project, read on.
What is a Freelancer?
A freelancer is a worker who is self-employed rather than being employed by a company. They set their own hours and rates, send their own invoices, and typically work with multiple clients simultaneously. Freelancers are responsible for a number of expenses that typical full-time employees are not responsible for, like employment taxes, business taxes, and the full cost of healthcare.
‘Freelance’ is a vast umbrella term that covers many different types of work arrangements. A freelancer may work on an hourly, monthly, project, or contract basis. They may consult for a set period of time or for a predetermined scope of work, or they may work with clients on an ongoing basis.
The IRS classifies freelance workers as 1099 employees. In contrast to full-time or part-time employees of a company, who receive a W-2, freelance workers receive a 1099 form from each client. The 1099 reports their earnings and indicates that the employer is not responsible for paying FICA taxes or withholding income tax on that worker’s behalf.
While we typically think of freelancers as working from home on their computers—and many do—there are all sorts of professionals that can be 1099 workers, including doctors, lawyers, dentists and real estate agents.
What is an Independent Contractor?
In the eyes of the IRS, a freelancer and an independent contractor—also called a 1099 contractor—are the same thing. As the IRS defines it, “an individual is an independent contractor 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.”
So, while an employer can direct every aspect of how a W2 employee does their job, from the hours they work to where the work is done, with an independent contractor they can only direct what the final deliverable must be in exchange for payment. This critical requirement is what typically limits the use of independent contractors in most scenarios. As such, while the term “contractor” is commonly used in staffing scenarios, the vast majority of the time the individual is a W2 employee of the staffing firm (at 4 Corner our client requirements rarely call for an independent contractor, vs a W2 employee who is on our payroll during the contract period).
Like a freelancer, an independent contractor is responsible for covering their own federal income taxes and self-employment taxes. Self-employment taxes include the requisite contributions to Social Security and Medicare that are typically withheld by the employer on a standard full-time paycheck.
Freelancer vs. Independent Contractor: What’s the Difference?
So you want to hire a 1099 worker to fill gaps in your business. Should you hire a freelancer or an independent contractor? The difference between a freelancer and an independent contractor is less about the technicalities and more about the terminology.
In other words, ‘freelancer’ and ‘independent contractor’ mean the same thing from an employment and tax perspective. In practical use, though, people often use one term over the other depending on the type of worker they’re describing. It’s kind of like saying ‘raining’ vs. ‘drizzling.’ Though both convey precipitation, most people use the terms to describe slightly different types of showers.
Here are some of the key differences between freelancers and independent contractors.
1. Number of clients
Freelancers are more likely to work on many different projects at once, often for multiple clients. They balance their workload as they see fit and bill according to the work that’s done. It’s not uncommon for independent contractors, on the other hand, to work with just one client at a time, getting paid for a fixed period of time (i.e. six months) or a specified scope of work (i.e. the launch of a product).
2. Scope of work
Independent contractors typically work on a very closely defined scope of work for a set time frame. They’re often brought in to tackle one specific business challenge or serve a particular need within a project. A freelancer’s work is more fluid. It’s common for a freelancer to tackle projects on an ad-hoc basis, with work assigned as needed.
3. Legal agreements
As the term ‘contractor’ suggests, a contract is signed by both parties before an independent contractor’s work gets underway. While the employer has fewer rights to control how the work is done, they can make lots of other stipulations in the contract. For example, an employer might dictate that certain information must be kept confidential or that the 1099 contractor can’t work with one of their major competitors at the same time. While a freelancer might also sign a contract, it usually doesn’t come with such rigid conditions and instead merely dictates the scope of work and the agreed-upon fee.
4. Location of work
As we mentioned earlier, the term ‘freelancer’ can apply to doctors who work in hospitals, lawyers that work in law offices, and more. Broadly speaking, though, most freelancers work from home or from some other neutral location like a coffee shop or coworking space. For independent contractors, it’s not atypical to work from the company’s location. Some may even have an office or dedicated workspace there.
5. Type of role
You’re more likely to hear the term ‘freelancer’ used when talking about creative roles, like photography, design, writing and marketing. The term ‘independent contractor’ is more often used in business and strategic roles, like finance, operations, and HR.
6. Employment prospects
While it’s common for freelancers to have been previously employed at a company in their field (or be currently employed by one if it’s a side hustle), most operate with the assumption that they’ll be a free agent for the foreseeable future. With contracting, you’ll sometimes see what’s known as a contract-to-hire agreement. This type of arrangement is a means to an end. Under it, a worker contracts with a company for a set amount of time with the understanding that at the end of the contract, the employer will either decide to hire them as a permanent employee or terminate the relationship.
Which One is Right for My Business?
The short answer is, it depends.
A freelancer may be the better choice if you:
- Want a mix of niche expertise and value
- Have a less consistent workload and needs that fluctuate from week to week
- Want to pay on an hourly basis
- Don’t want to sign a long-term contract
- Aren’t sure how long you’ll need help
- Are comfortable being one of many clients
- Are comfortable working with someone who’s fully remote
- Have needs in creative areas like advertising, copywriting, design or development
An independent contractor may be the better choice if you:
- Need strategic direction or help defining the work to be done
- Want to secure someone for a specific amount of time
- Want to pay a fixed price for a fixed scope of work
- Want exclusivity from other clients or competitors
- Need someone who can work in the office some or all of the time
- Have work that requires a level of confidentiality
- Have needs in business/operations areas like accounting, HR, or operations.
It can also be helpful to look at the types of workers other companies in your field are using. Browse their career pages to see if they’re advertising for freelance, contract, or contract-to-hire openings. When in doubt, consider consulting with a staffing professional in your field who can walk you through your various options and help you determine whether a freelancer vs. independent contractor is the best choice to meet your needs.
Get Help from the Experts at 4 Corner Resources
Have a project that requires a niche skill? Need help with accounting, IT, customer service, or some other aspect of business? 4 Corner Resources can help you find the perfect staffing solution.
From temporary hiring to contract staffing, we’ll identify professionals with the skills and expertise you need while meeting your budget requirements and helping you control overhead. We can advise on the legal and financial requirements of each type of labor and even help you manage your payroll so you keep the IRS happy.