Freelancer (Independent Contractor) or Employee: Which Status Are You and Which is Better?

Legally speaking, there are essentially 2 types of workers: employees, and independent contractors (aka “freelancers,” “gig workers,” etc). Companies, as well as many workers, often prefer an independent contractor situation rather than traditional employment for several reasons, discussed below. But companies do not necessarily get to decide whether a worker is an employee or an independent contractor; nor does the worker. The law decides.

That said, in certain professions and certain circumstances, it could go either way, and thus you could structure your work situation around the law. For example, journalists can be either on staff, which would generally be employee status, or they can work project by project, which would generally be as an independent contractor.

However, the law on this varies significantly by state, so it’s important to check state laws on this issue.

How does the law determine who is a freelancer and who is an employee?

The laws on worker classification vary by state, which can differ from the federal government, and even different agencies within the federal government!

State Law

Whether you are an independent contractor vs employee in terms of state law varies by state. States typically use either (1) an ABC test, or (2) control test.

ABC test

California and some other states have relatively higher standards to qualify as an independent contractor. The strict test is generally some version of the ABC test, which states that you are an independent contractor only if you:

(A) are free from control and direction by the hiring company;
(B) perform work outside the usual course of business of the hiring entity; AND
(C) workers customarily and traditionally perform this work as an independently established trade, occupation or business.

In addition to California, 3 states currently use an ABC test to determine employment classification for most employment law, including wage and hour laws: Massachusetts, New Jersey, and Vermont. Other states use the test only for some sectors (usually construction-related). More than half the states use the test for purposes of determining whether unemployment insurance applies.

Control test

Most states use a simple, less restrictive “control” type test, which asks whether or not the hiring entity has control over how the work is done, where the work is done, when the work is done, etc. If the hirer has or exerts this control, the worker is an employee. If not, the worker may be an independent contractor.

Federal Law

In terms of how federal laws would apply, the federal Department of Labor considers someone an independent contractor based on the “Economic Reality Test.” Under this test, the following factors related to the worker are considered: (revised Jan 2024):

  1. Opportunity for profit or loss depending on managerial skill
  2. Investments by the worker and the employer
  3. Permanence of the work relationship
  4. Nature and degree of control
  5. Whether the work performed is integral to the employer’s business
  6. Skill and initiative

No single factor determines a worker’s status, and no one factor or combination of factors are more important than the other factors. Instead, the totality of the circumstances of the working relationship should be considered.

See the U.S. Dept of Labor website for more.

As if it weren’t complicated enough, in addition to the above, the IRS classification may vary from other laws. In certain occupations, corporate officers and service providers are considered “employees” even if they qualify as independent contractors under other law.1IRC Sec. 3121(d)(1)

Which is a better status – independent contractor or employee?

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)

Advantages:

  • 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.

Disadvantages:

  • 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)

Advantages

  • 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.

Disadvantages

  • 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”).

Resources for Freelancers

See our full Guide to Law for Freelancers, and our Freelancer Resources page.

Find a good business lawyer or employment lawyer to help you.

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