Contractor vs. Freelancer: What’s the Difference?
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Have you ever seen the terms contractor or freelancer on a job listing? Although contractors and freelancers are similar and represent types of self-employment, some key differences exist between the two.
Before accepting a new position as a contractor or freelancer, it’s important to understand what each term means and how the designation might impact your schedule, working location, remuneration, and so on.
Read on to find out more about the key similarities and differences between contractors and freelancers.
What Is a Contractor?
A contractor provides services to a company for a set period of time. They usually work with a company continuously for a fixed number of hours per week or for the duration of a particular project. Depending on the role, they work on-site in a client’s office or in their own workspace.
A contractor may work independently as a sole trader or run their own limited company. In either instance, they will source their own clients and deal with all aspects of the business (e.g., setting rates and paying taxes). However, agencies that employ contractors also exist. A contractor will usually work with clients sourced by the agency, and the agency will take care of things such as setting rates and paying taxes.
Although contractors can take on any number of projects, they will often focus on one or two lengthier projects at a time.
What Is a Freelancer?
When the word freelance first appeared in the early 1800s, it referred to medieval mercenaries who fought for whichever nation or person paid them the most. Nowadays, a freelancer is a self-employed individual who decides when they work and whom they work with; they also set their own rates. (Perhaps this current definition is not too far from the original one!).
A freelancer provides services to a number of clients, typically for shorter terms than a contractor does. They tend to work from home, though they have the flexibility to work from wherever they choose – for example, in coworking spaces, at cafes, or “on the go” while traveling.
Much like contractors, freelancers can work independently as sole traders or run their own limited company.
Contractor vs. Freelancer
Now that we’ve covered the basic differences between contractors and freelancers, we’ll look at four related topics in more detail: paying taxes, setting rates, covering expenses, and receiving benefits.
- Paying Taxes
Generally, freelancers and contractors come under the same taxation umbrella – they have to pay self-employment tax. As a freelancer or contractor in the United States, you’re expected to pay your taxes quarterly and file a tax return annually. In the United Kingdom, you need to fill out a Self Assessment form and pay your tax bill once per year (to cover the previous year). As the rules vary depending on location, it’s important to check the requirements in your country!
- Setting Rates
When it comes to setting the rates for their services, freelancers are free to decide how much their clients should pay and on what terms (hour-based or project-based). They will create the initial contract, manage invoicing, and follow up on any late payments.
Contractors who work independently are also free to decide on their rates, which may vary from client to client or project to project. Much like freelancers, they will manage their contracts and invoicing and follow up on any late payments. Contractors who work for an agency, however, will usually rely on the agency to deal with these tasks.
- Covering Expenses
Freelancers and contractors do not normally receive reimbursement for equipment (e.g., office supplies) purchased for their work. As a freelancer or contractor, you should consider these types of expenses when setting your rates and make sure to set aside some of your budget to cover them. Before signing a contract with a client, you should consider any potential expenses. You may also need to consider things such as travel-related costs (if these are not covered by the client).
- Receiving Benefits
Freelancers and contractors are in the same boat in this regard – they both have to supply their own benefits. Being self-employed means no employer will provide you with work benefits, such as paid vacation, sick leave, health insurance, and pension contributions. It’s a good idea to assess the costs (e.g., of taking time off) and incorporate them into your rates.
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