What’s the difference between a contractor and a freelancer?
Most self-employed professionals work either a contractor or a freelancer. While these are not legally distinct roles in terms of taxation or registration, each one operates differently with clients, and tends to be associated with specific industries. So, what’s the difference between a contractor and a freelancer?
What is a contractor?
A contractor provides services to a client, either an organisation or an individual, for a specific, predetermined period of time. As the name implies, contractors will often enter into a contractual arrangement with a client, which defines the nature, duration, and payment of the work in question.
Contractors are generally required to work at the offices or premises of their clients, essentially functioning as a short-term employee. The key difference is, unlike employees, contractors are not enrolled on the company’s payroll. As a result, they are responsible for their own taxation and National Insurance contributions.
There is a grey area between the lines of employed and self-employed when it comes to contractors, with HMRC holding little distinction between temporary employment and self-employed contractual arrangements.
Contractors often work through recruitment and contracting agencies, who work to secure a steady stream of potential clients. Legally, many of these contractors are classed as ‘agency workers’, affording them minimal employment rights, such as National Minimum Wage. If a contractor has a ‘pay between assignments’ contract they are classified as an employee, granting them additional rights and responsibilities.
Contractors working with an agency can also be self-employed, affording them the most flexibility and freedoms, but granting them no employment rights. This approach allows contractors to source work from multiple agencies at the same time, so long as this is not prohibited by an agency’s contractual terms and conditions.
The biggest sector for contractors is the IT sector, where specialists are typically required for several weeks to complete or manage a specific project. Outsourcing such roles to a contractor is typically a more efficient strategy as opposed to hiring a permanent employee.
Contractors also work extensively within the engineering, education, health, finance, and consulting industries, either by completing one-off projects, or filling in for absent personnel as a ‘temp’.
What is a freelancer?
Freelancers often service multiple clients at the same time. They will usually work from their own home and will not be designated a set number of working hours. Freelancers may charge an hourly or daily rate, or agree to a fixed per project rate.
Freelancers are often commissioned to produce a bespoke product or service, generally within the creative industries. For example, an artist may be commissioned to produce concept pieces for a project and is paid on the completion of the agreed work within an assigned deadline. It is the freelancer’s responsibility to manage their time and ensure work is completed in a timely fashion. They will often be working on several other commissions at the same time.
Graphic designers, architects, copywriters, and many roles within the media industry are often fulfilled by freelancers. The short-term commitments of freelance work also make it a popular form of supplemental income, both for people in full or part-time employment, as well as students.
How do contractors and freelancer operate?
When you consider what’s the difference between a contractor and a freelancer, you may think there is little to choose between the two ways of work. Both contractors and freelancers are generally self-employed, operating as either a sole trader or as a limited company. However, each one operates in a different way.
Contractors signed up with an agency will not be paid directly by clients. Instead, clients pay your recruitment agency for the work you have done, as well as a fee for the agency’s service. These contractors are then paid by the agency as either an agency worker or an employee.
An increasingly popular option, however, is becoming a nominal employee of an umbrella company.
Umbrella companies act as a middleman between the contractor and their agencies or direct clients. Although technically an employer of freelancers and contractors, umbrella companies will not provide work or recruitment opportunities to their employees - they merely convert invoices into salaries, which can afford a variety of tax benefits.
If a contractor is operating as a limited company, their income is paid to the company instead of directly to them. In order to spend it legally, these contractors must first pay themselves. There are a number of options available to maximise take-home pay, created by fulfilling different positions within the company structure. As a shareholder, director, or even as an employee, contractors can take a combination of salary and dividends to slip out of income brackets and avoid hefty income tax rates.
Freelancers will rarely be on the payroll of an agency or umbrella company. Instead, they are paid directly by clients via invoicing. Freelancers have the same options between creating a limited company or operating as a sole trader and are unlikely to be considered for IR35 status.
What’s the difference between a contractor and a freelancer? It very much depends on your personal circumstances, the industry you work in and how you choose to operate. However, stepping into the world of contracting can be a lucrative decision for many experienced IT professionals.
Take a look at our other first timer guides for a complete view of exactly what it takes to make that vital first step.
Further information on freelancing can also be found here on FreelanceUK.