Freelancer vs Employee
Independent Contractor (Freelancer) or Employee – Which is the Better Status?
Whether you are hiring or being hired, in some circumstances you may have a “choice” of worker status (see our guide to the 2 types of worker status – independent contractor and employee). This can happen if the worker and the company agree to structure the working relationship in a certain way that legitimately meets the legal standards, as described here.
Also, the laws on worker status are in flux, and you may want to advocate to make it easier or harder to be an independent contractor in your professional or field.
There are advantages and disadvantages to both the company and the worker as to independent contractor status over employment status.
Here’s what you need to know.
Workers: Advantages/disadvantages to working as an independent contractor (rather than employee)
- More flexibility: The hiring company cannot control how or when the freelancer does their work, only the end result and when it is due.
- Intellectual property rights: If you are creating any intellectual property (writing, art, design, etc.) for a business and you have not signed a contract stating that the copyright belongs to the business (“work for hire”), then the copyright by default belongs to you. You generally have room to negotiate the rights you would or would not release for the work, and accordingly, the compensation
- Taxes: because you can take business expense deductions, you may pay less in taxes than as an employee. But because freelancers must pay self-employment taxes, you may end up paying more. Talk to your tax professional! Also, your taxes are generally not withheld when you get paid, so you can hold onto the tax money a bit longer (employees have taxes taken out automatically each paycheck)
- Paperwork: Usually there is less upfront paperwork for freelancers to deal with. You may be asked to fill out a W9 form for each client, and you may (but not always) receive a 1099 form from each client showing how much they paid you in the prior year. Compare that to an employee, who will generally have to fill out a W-4, I-9, provide government identification, and possibly review and sign employee “onboarding” documents for each employer. Then you would get a W-2 form from each, showing how much they paid you in the prior year. If you do projects for several employers, often securing gigs with new employers, the employee paperwork can get quite cumbersome.
- Almost no labor law protection: Many laws that apply to employees don’t apply to you, such as wage and hour laws, family and sick leave, unemployment benefits, workers compensation and disability benefits, and even most anti-discrimination laws.
- Paperwork: You will need to keep track of your income and expenses, and taxes are a bit more complicated
- Taxes: because of self-employment taxes, you may end up paying more in taxes than as an employee. Talk to your tax professional!
- Less job security (maybe): Freelancers are hired for a specific project or certain amount of time. However, you may have an ongoing relationship with one or more businesses such that your contract is generally renewed periodically. As for employees, employers may be less inclined to fire them due to the amount of paperwork required, as well as an intangible sense of more permanency. Still, most employees are at-will, which means they can be fired at any time for any reason (other than discrimination or retaliation).
Company: Advantages/disadvantages to hiring a worker as independent contractor (rather than employee)
- More flexibility: Companies can engage or not engage freelancers much more easily than hiring/firing employees; not as much paperwork or processing. You generally just need to have each freelancer fill out a W9 form, and send them a 1099 form showing how much you paid them in the prior year. Compare that to an employee: they will need to fill out a W-4, I-9, provide government identification, and sign employee “onboarding” documents. Then you would send a W-2 form showing how much you paid them in the prior year.
- Lower costs: By some estimates, companies may save 20-30% by hiring independent contractors rather than employees. This is, in part, because the company does not need to pay the payroll taxes, unemployment benefits, or workers compensation for freelancers.
- Fewer labor regulations: Employee rights generally do not apply. These include wage and hour laws, including overtime and minimum wage, unemployment and disability benefits.
- Less control: In general, companies cannot control how and when freelancers perform their duties.
- Intellectual property rights: If you are hiring a freelancer to create any intellectual property (writing, art, design, etc.), by default the copyright to the work belongs to the freelancer, not the company. However, you may require that the freelancer sign a contract stating that the copyright belongs to the business (“work for hire”).
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