A common freelancer vs. independent contractor debate often arises when professionals want to start their own business or when companies want to hire outside experts for specific tasks. While both are similar, and the terms are frequently used interchangeably, there are some differences to be aware of.

For instance, freelancers typically take on smaller projects compared to independent contractors but often work with more clients simultaneously. In this article, we’ll explore the rest of the differences, as well as similarities between the two, to help you figure out which option is best for you. Without further ado, let’s dive right in!

Key Takeaways

• Freelancers and independent contractors are both self-employed individuals who set their own hours, rates, and schedules and are responsible for their own taxes.
• Freelancers are often recognized as more autonomous, catering to diverse clientele on small-scale projects, while independent contractors are typically more involved in fewer larger projects.
• Critical documentation to ensure legal and tax compliance for both types of professionals includes contracts, Forms W-9, Forms 1099-NEC and 1099-MISC, invoices, and other business records.

What Is a Freelancer?

A freelancer is a self-employed professional who provides specific services to multiple clients on a per-project basis. Freelancing doesn’t count as employment from a legal standpoint. These individuals set their own hours, rates, and schedules, buy their own equipment and materials, and are in charge of their operations and marketing.

Freelancers are common in many different industries, with a lot of them gravitating toward professions that can be done remotely. This includes writing, web development, graphic design, social media marketing, video editing, photography, consulting, and so on.

Typical work arrangements for freelancers include short-term projects and hourly contracts. Businesses usually hire freelancers when they need high-quality, specialized work that they don’t need to micromanage all the time. The contract usually includes a set deadline and a pay rate.

Here are some of the biggest benefits of being a freelancer:

• Flexibility in creating a work schedule that suits you while choosing projects and clients.
• Potential for high earnings that can exceed the average salaries of employees in your field.
• Complete control over your business and absolute decision-making power.

Naturally, freelancing also comes with some drawbacks, including the following:

• Unpredictable clients and income, which results in job instability.
• No employer-provided benefits, like health insurance, retirement contributions, equipment, materials, offices, etc.
• No tax withholding from clients since freelancers are in charge of freelance taxes.

What Is an Independent Contractor?

An independent contractor is a self-employed professional—similar to a freelancer—who provides services to multiple companies or individuals on a contractual basis. Compared to freelancers, independent contractors typically work on fewer projects at the same time, with the projects being larger in scope and longer in duration.

Like freelancers, independent contractors work in many industries, including more traditional ones, like construction, healthcare, law, and real estate.

They are often employed under fixed contracts with terms that are more strict compared to freelancing. These contracts can outline everything from deliverables and deadlines to the exclusivity with the client.

While still having a lot of freedom in approaching the project and organizing themselves, independent contractors can be asked to dedicate more time and commitment to a single project. This can result in them being able to only focus on one or two projects at a time.

Here are the main benefits of being an independent contractor:

• More stable income than with freelancing
• Moderate control over work terms
• Legal protection when operating as a business entity

Here are the drawbacks:

• Less flexibility than freelancers due to typically stricter contract terms
• Responsibility for their own taxes, expenses, tools, and resources
• Potentially restrictive contract clauses that forbid working with other clients

5 Critical Differences Between Freelancers and Independent Contractors

The best way to make a freelancer vs. independent contractor comparison is to explore the differences between them, so let’s see what they are.

#1. Legal Classification and Tax Implications

The IRS looks at freelancers and independent contractors in the same way, legally and for tax purposes. The main distinction it makes is between 1099 contractors and W-2 employees, where it assesses how much control the employer has over the worker, both behavioral and financial.

Freelancers and independent contractors are both self-employed individuals who file their own taxes, report income and expenses, and submit Form 1040 for individual tax returns. If they receive more than $600 from a single client within one year, they need to receive Form 1099 from them.

Clients and businesses who hire freelancers and independent contractors typically don’t withhold their taxes.

#2. Control Over Work Process

One of the main characteristics that qualify you as a freelancer and independent contractor is your autonomy and control over your work style and schedule. Compared to W-2 employees, freelancers and contractors usually choose when, where, and how to do their jobs. Clients usually have very little control over this process and only wait for the outcome.

However, freelancers typically enjoy a higher degree of freedom compared to independent contractors. Depending on the project and contract terms, some contractors might have to be available during certain hours or work at specific locations.

Both types of professionals still have a much higher decision-making authority than traditional employees, including choosing which tools and methods to use in their work.

#3. Client Relationships and Exclusivity

Freelancers and independent contractors can both work with multiple clients simultaneously within their area of expertise. However, freelancers are often associated with a larger number of small projects.

While independent contractors can operate in the same manner, they are often hired for large-scale projects. It’s not uncommon for independent contractors to work exclusively for one client for extended periods of time.

In that sense, freelancers are more associated with the freedom to work with as many clients as possible. Independent contractors can do the same, though their contracts can sometimes include an exclusivity clause forbidding them from working with another client. Freelancers get contracts as well, but they often have more lenient terms.

#4. Payment Structures and Stability

Independent contractors and freelancers choose how to accept payments and set their own rates. Some of the most common invoice payment terms and structures for self-employed professionals include hourly rates, per-project fees, retainer fees, and commissions.

Increased flexibility and the ability to negotiate payment methods and amounts are offset by reduced financial stability compared to traditional employees. Independent contractors and freelancers can be paid more than employees in their field but also much less. Their earnings can vary significantly from month to month, resulting in unpredictability.

Freelancers and independent contractors typically send self-employed invoices to clients, describing the work provided and the amount due, often with flexible payment options, like net terms.

#5. Legal Protections and Liability

Freelancers and independent contractors are in charge of their own insurance. Clients don’t pay for health insurance, liability insurance, and other coverage and benefits, though they can require self-employed entities to have them.

Some of the most common types of insurance for independent contractors include workers’ compensation insurance (WC policy), general liability insurance, and professional liability insurance.

This is critical as self-employed professionals are accountable for their work and can be sued for their mistakes or contract breaches, whether accidental errors or due to negligence. In these instances, insurance provides protection and mitigates the risk for their businesses.

Here’s a brief rundown of the freelancer vs. independent contractor comparison:

Which Option Is Right for You?

Choosing between being a freelancer vs. an independent contractor mostly comes down to selecting the style of self-employment. Since there are many legal similarities between these two types of self-employment, deciding on one option revolves mainly around positioning yourself in the market.

If you prefer more autonomy and the ability to work with as many clients as possible on short-term projects, you’ll likely be better off as a freelancer. However, if your goal is increased financial stability through more commitment and work on large-scale projects, you should become an independent contractor.

There are also industry norms to consider, as freelancers are often sought-after in creative fields and digital spaces, working as writers, graphic designers, and virtual assistants. On the flip side, independent contractors are standard in specialized trades, consulting, and traditional fields, like law or healthcare.

Lastly, another important factor to consider is personal preference. Freelancing is typically more dynamic and focused on active networking, while independent contractors are more engaged in single projects and take a more structured approach to their work.

How to Correctly Document Your Status

Correctly documenting your status as a freelancer or independent contractor involves properly issuing, receiving, and keeping the necessary records.

Here’s the essential documentation that every self-employed professional needs to know about:

• Contracts and agreements. These are created between freelancers or independent contractors and their clients. They clearly define the scope of work and payment terms, as well as other clauses, like timelines, restrictive clauses, termination, dispute resolution, etc.

• Form W-9. This standard tax form is used by independent contractors, freelancers, and other gig workers. The form is sent to clients (not to the IRS) to provide them with a contractor’s Tax Identification Number (TIN) for filing purposes.

• Form 1099-NEC (or Form 1099-MISC). Forms 1099-NEC are sent by clients to the IRS and self-employed professionals to report their nonemployee earnings if they are $600 or more in one year. Form 1099-MISC is used for miscellaneous earnings, like rent, prizes, and royalties.

• Invoices. Freelancers and independent contractors send detailed invoices to clients to document their services and ensure they receive appropriate compensation.

• Business records. These documents describe your earnings and expenses kept for federal tax purposes. They include gross receipts, purchases, expenses, travel, transportation, entertainment, gift expenses, assets, and employment taxes.

To ensure optimal record-keeping and tax compliance, you should always use written contracts and adequately store digital and physical copies of all documentation.

Simplify Your Documentation With Paystub.org

Paystub.org can help you simplify record-keeping and streamline your business operations by allowing you to quickly and effortlessly create accurate documentation.

Our invoice generator can help you make these documents in minutes with a simple three-step process, as follows:

1. Choose a template
2. Fill out the form
3. Review your invoice and go to checkout to download it

If you hire subcontractors to help you on some of the projects, you can use our Form 1099 generator, which offers the same user-intuitive interface for simple usage.

Finally, if you have employees on a payroll, you can leverage our Form W-2 and paystub generator for comprehensive record-keeping and issuance.

Final Thoughts

Ultimately, a freelancer vs. independent contractor consideration boils down to personal preference and work style. Both types of professionals have the same legal classification and tax implications, and the differences are primarily in how they are marketed and perceived by clients.

A much more important distinction to make is between employees and independent contractors or freelancers. Under the FLSA, worker misclassification can result in severe legal and financial consequences for both the employer and the employee.

Regardless of the option you choose, you should ensure tax and legal compliance with proper record-keeping. To make this process easier, you can use our generators to create invoices, independent contractor paystubs, and other documentation more conveniently.

Freelancer vs Independent Contractor FAQ

#1. Do freelancers and independent contractors pay the same taxes?

Yes, freelancers and independent contractors pay the same taxes. They are both classified as self-employed individuals by the IRS and are responsible for their own taxes and expenses, unlike W-2 employees.

#2. Can I be both a freelancer and an independent contractor?

Yes, you can be both a freelancer and an independent contractor. These terms mainly describe a style of work and the way clients perceive you rather than representing a legal category.

#3. How do clients typically prefer to work with freelancers vs. independent contractors?

Clients typically prefer to work with freelancers on short-term projects with a smaller scope, while they more frequently opt for independent contractors when there are large-scale projects that require greater commitment.

#4. Do I need different insurance as a freelancer compared to an independent contractor?

The insurance you need as a freelancer compared to an independent contractor depends on the type of work that you do, not on the label of your self-employment. When choosing insurance, you should consider aspects like the risk of injury, property damage, errors, omissions, etc.

#5. How does classification affect my ability to get loans or mortgages?

Getting loans and mortgages as a freelancer or independent contractor is often more challenging than for W-2 employees. As a self-employed individual, you’ll have to prove your income history and demonstrate stability through relevant documentation, like profit and loss statements and bank statements.