Freelancer vs Contractor: does it matter?

Arenโ€™t sure about the difference between โ€œfreelancerโ€ vs โ€œcontractor?โ€ Itโ€™s both simpler and more complex than you think. Click here for more.

freelancer vs contractor 2

When discussing the terms โ€œfreelancerโ€ vs โ€œcontractor,โ€ the two are commonly used interchangeably. There are certain instances, however, where the terms differ in terms of practical use and implication. The table below covers a few of the major differences:

Freelancer vs Contractor: An Overview

FreelancerContractor
Work StyleCommonly work independently for several clients on a project-based work scheduleTypically more integrated with a smaller number of clients over longer-term projects
Contracts?Mostly, but sometimes informallyAlways
Industry UseCreative, tech, professional servicesWide range of industries
IntegrationOperates independently with minimal contactOperates under similar conditions to other workers, but paid differently
PaymentTypically granted upon milestone completionTypically paid regularly due to longer-term work

The manner by which freelancers and contractors are classified for employment purposes is still incredibly important, as misclassifying a contractor can result in fines and penalties. The following article details the semantic differences between a freelancer vs contractor in further detail, as well as important details to watch out for when hiring both.

How are they practically different? 

The relationship between freelancer vs contractor is overall one of semantics, best summed up in the Venn diagram below:

The relationship between freelancer vs contractor

In essence, all freelancers are contractors, but not all contractors are considered freelancers. Freelancers are a subset of contractors, operating on specific conditions that prioritize freedom, flexibility, and adaptability. Contractors, on the other hand, create a business model that prioritizes long-term, structured relationships with fewer clients that are less agile. 

Think about the two like different business models; a food truck can zip across town and deliver food wherever business is while a restaurant stays in one place and garners a clientele of โ€œregulars,โ€ but both would be considered food services.

This means that the two are practically different, even if they are seen as similar/the same by the law. The main areas of distinction are covered in the subsections below.

Do both use contracts? 

Independent contractors typically operate according to a written contract that stipulates the scope of work, method of payment, and other relevant client expectations. Freelancers will sometimes opt to work without one of these contracts due to: 

  • Reliance on informal arrangements (e.g., verbal agreements, trust) 
  • Working on the promise of an impending contract
  • Rolling assignments with minimal risk 

That being said, we should note that contractors of any type should work through a formal contract wherever possible to keep both parties safe. We recommend using a sample contract in the event that you are unfamiliar with the content creation process.

How integrated are freelancers vs independent contractors?

One of the other minor areas of distinction between freelancer vs contractor is the level to which they interact and operate alongside your staff: 

  • Contractors are typically more involved with existing staff, working alongside them for longer periods of time. 
  • Freelancers typically operate more independently, completing work on their own time and in their own place of work, meaning that employee communication with freelancers is typically more sparse, sporadic, and impersonal. 

An important note here is that the more personal nature of contractors makes them more prone to being treated as an employee, which can result in significant misclassification fines and penalties.

How is a freelancer vs contractor paid?

Freelancers and contractors typically get paid through invoicing clients, however the schedule by which they receive payments may vary. There are no hard rules here, but the table below provides common averages for freelancers vs contractors when it comes to payments.

Freelancer vs Contractor: Method of Payment

FreelancerContractor
FrequencyUpon project/milestone completionMonthly, weekly, bi-weekly
Retainer?Sometimes, but rarelyUsually
AdvanceFor larger projects (25-50%)For longer-term projects (10-30%)

Are these terms industry-specific? 

While the terms โ€œfreelancerโ€ vs โ€œcontractorโ€ essentially mean the same thing, one is used more commonly than the other, depending on what industry you are working in. The table below provides an overview of common term usage by industry:

Freelancer vs Contractor: Common Industry Usage

IndustryFreelancer?Contractor?
Administrationโœ…โœ…
ConstructionโŒโœ…
Consultingยฝโœ…
Educationโœ…ยฝ
Film/Mediaโœ…ยฝ
HealthcareโŒโœ…
IT/Software Engineeringยฝโœ…
Legal Servicesยฝโœ…
Marketingโœ…โœ…
Writing/Editingโœ…โœ…
Web Developmentโœ…โœ…

The sheer number of green checks here should convey a strong message; it mostly doesnโ€™t matter which you use. There are a few instances, however, where using the term โ€œfreelancerโ€ (e.g., construction, healthcare, certain legal instances) will raise some eyebrows.

So does it matter how I classify them? 

Yes, but not how you think. 

The distinction between a freelancer vs contractor is purely one of colloquial usage; there is no legal distinction between the two. Employers do, however, get legal trouble when they classify a worker that should be an employee as a contractor. 

Employee vs Freelancer/Contractor

Employee vs contractor employment is significantly more detailed; so much so that the IRS has had to create several tools to correctly identify them, including a 20-point checklist delineating the differences between the two.

To give you an idea of the major differences between the two, the table below uses the same categories weโ€™ve used to differentiate a freelancer vs contractor to evaluate the differences between both and an employee:

Freelancer/Contractor vs Employee: An Overview

Freelancer/ContractorEmployee
Work StyleContractors manage their own work, provide their own equipment, and typically work on a deadline-oriented basisEmployees have the nature of their work determined for them by the employer
Contracts?YesNo
TaxContractors handle their own taxesEmployers manage an employeeโ€™s taxes
IntegrationSometimesAlways
PaymentBy invoiceBy paycheck

Ensuring that your worker is correctly classified as either a freelancer/contractor vs employee is essential when hiring. If you are still unsure about the correct classification even after using the tools provided above, some alternative options are: 

  • Hire an Expert: Many businesses keep legal retainers on hand for this exact reason, but companies wanting a more comprehensive solution can also use an employer of record (EOR) platform to automatically manage employee classification. 
  • Request IRS Assistance: It takes a bit longer, but IRS Form SS-8 allows companies to formally request IRS assistance when determining worker status. 

What to do next

At the end of the day, thereโ€™s very little difference between these terms – whether you use freelancer vs contractor, you are likely referring to the same, if not a similar, position. That being said, the concerns around worker misclassification are essential to understand and typically require a good bit of expertise and experience to successfully navigate. 

For companies looking to outsource these responsibilities to a more experienced partner, Payoneer Workforce Management provides comprehensive tools to manage freelancers, contractors and employees with ease, even when hiring internationally.

Reach out to us at the link below to discuss a future partnership.

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Disclaimer 

Nothing herein should be construed as if Payoneer Inc. or its affiliates are soliciting or inviting any person outside the jurisdiction where it operates/is licensed to engage in payment services provided by Payoneer Inc. or its affiliates, unless permitted by applicable laws. Any products/services availability are subject to customerโ€™s eligibility. The availability of this product is not guaranteed and may vary. Not all products/services are available in all jurisdictions in the same manner.

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