You have probably seen the terms ‘contractor’ and ‘freelancer’ thrown about online quite often, especially if you’re searching for an accountancy service. If you take on some form of temporary or project-based work, either wholly as a career or on the side of your permanent job, you will likely fall into one of these two categories.
So what’s the difference between a contractor and a freelancer? It can often be confusing, especially if you are just starting out with this way of working. We will help clear up some of this confusion by showing you some key differences between what makes you a ‘contractor’ versus a ‘freelancer’.
What is a contractor?
A contractor is a person who provides services to a person or organisation (a client) for a specified and finite period of time. A contractor usually meets the following characteristics:
- Works on one contract at a time for one client
- Does not operate under standard employment, but rather a contract that defines their arrangement with their client for a defined period of time
- Are not on their client’s payroll
- Is set up as a sole trader, a limited company contractor or an umbrella company contractor
- Commonly found in the IT, engineering, public sector, health, education, social work, finance and consulting industries
A contractor’s contract will stipulate their working arrangements, which will determine whether they are genuinely self-employed or temporarily employed under the guise of self-employment. This is referred to as being outside or inside ‘IR35 legislation’.
Read more about IR35 legislation here.
What is a freelancer?
A freelancer also provides services to a client for a finite period of time. However, this period of time is not always specified. Here are the characteristics of a typical freelancer:
- Might be working on several freelance projects at once for different clients
- May not necessarily operate under a contract the same way as a contractor
- More often works from home or from their own office than the client’s office, because as they are less likely to have stipulated working hours. They are more likely to have to dedicate a certain amount of hours per day or week, but not at specific times
- Similarly to contractors, freelancers aren’t on their client’s payroll
- Will also be set up as either a sole trader, as a limited company director or will be getting paid via an umbrella company
- Commonly found in creative industries such as digital marketing, graphic design, media, publishing, and architecture
Like contractors, freelancers aren’t subject to the same employment rights as permanent employees. The term ‘freelancer’ is simply a way to describe the nature of your work; it is not a legal term – therefore a freelancer will still fall under the term of ‘self-employed person’. As such, freelancers will also have to consider their working circumstances to determine if they work inside or outside IR35.
Please note, only private sector freelancers can decide their own IR35 status; public sector contractors and freelancers must have their status determined for them by their end-client. See more on this here.
How do contractors find work?
Contractors tend to find work through recruitment agencies. This is by far the easiest way for a professional to secure a contract role with a client.
Contracts can be obtained directly from an end-client, but this is less common.
How do freelancers find work?
Freelancers can also find work through recruitment agencies, but due to the fast, project-based nature of freelancing it is quite common for freelancers to advertise their services on websites such as Upwork and Peopleperhour.
Here, freelancers can create a profile, list the services they offer, state their going rate and add their portfolios. People looking for freelancers can log on to these sites and browse freelancers that may meet their needs or post their own ‘wanted’ ad.
For example, if an entrepreneur is looking for a web designer in London to design his new website, he might go on Upwork and look for London freelancers who meet his criteria.
Another way freelancers commonly find work is through word of mouth – friends, former colleagues and former clients recommend freelancers to others in need.
How do contractors get paid?
Contractors can be paid in one of the following ways:
- On their recruitment agency’s payroll
- As a director of their own limited company
- As an employee of an umbrella company
- As a sole trader
Many clients do not feel comfortable working with sole traders due to the liabilities that fall back on them, therefore the first three options are the most common. When a contractor is on an agency’s payroll or is working through an umbrella company, their tax and National Insurance contributions are deducted from their pay before they receive it. They do not have to be responsible for handling their own tax obligations.
When a contractor operates as a director of their own limited company, they are responsible for paying their own tax and NI deductions through the self-assessment and PAYE systems, in addition to paying certain taxes for their limited company.
How do freelancers get paid?
Freelancers can be paid in the same way as contractors, however they’ll almost never jump on an agency’s payroll or work through an umbrella company. It’s much more beneficial to a freelancer to work through their own limited company or as a sole trader.
It is common for freelancers to operate as sole traders rather than operate through their own company; nevertheless there are still many clients who prefer freelancers to have their own limited companies.
Because freelancers are free to set their own rates per-project and based on how much experience they have under their belt, it is more financially beneficial to contract through a limited company as they can open themselves up to more opportunities with clients whilst maximising their take home pay.
That’s not to say that contractors can’t chase the rates they desire, but more often than not the rates for a contract are already pre-set by the client or the agency. If the contractor is not satisfied with the rate, they can try to negotiate for higher pay.
We hope this has cleared up the similarities and differences between contractors and freelancers. If you need advice on how to get paid, contact us as we have options to suit both contractors and freelancers from a wide variety of industries. Please also download our Ultimate Guide to Contracting which can offer you advice on finding contract roles, searching for payroll options, and more.