While many people use these two terms interchangeably, they aren’t synonymous. Let’s take a quick look at their definitions to make sure we’re all on the same page.
What does it mean to be a freelancer?
A freelancer is an individual who isn’t on a full-time contract, but earns their living by engaging in long-term or short-term projects or tasks. They can work for various clients simultaneously, and most of the time, they aren’t subject to Non Competition Agreements.
What does it mean to be a contractor?
A contractor, as opposed to the freelancer, can be either an individual or a company that performs work for other people or businesses. They usually engage in long-term projects, rather than one-off tasks.
Differences between contract vs freelance
With the key definitions covered, it’s time to take a deep dive into the main differences between freelance vs contract. These include: rate, time dedication, place of work, working hours, contract and formalities.
1. Rate
There are minor differences between contractors and freelancers when it comes to rate setting.
Contractor: Since contractors usually take on longer-term projects, they often work based on monthly salaries or fixed price agreements. They set their own rates, which usually differ based on their location, project complexity, and its length.
Freelancer: Freelancers have various pricing models. They can charge per hour, per gig, or per task. Just like contractors, they can determine their own rates.
2. Time dedication
Do both freelancers and contractors get involved in multiple projects at a time? The short answer is – it depends.
Contractor: It depends on the project's length and complexity. The more time-consuming it is, the harder it gets to juggle multiple gigs. In such a scenario, the contractor will work for one client only. Especially, if the project requires full-time dedication. The “time” aspect is usually addressed in the agreement/contract between the contractor and the company.
Freelancer: Freelancers can either work on multiple projects simultaneously, if time allows, or decide to focus on one project only. It’s entirely up to them, however, as a lot of freelancers are open to taking on smaller projects, they often support a few businesses at a time. There is also a scenario where an individual holds a full-time position, and only takes on extra projects after hours. Naturally, this would impact their time availability.
3. Contract & formalities
When working with your contractor or freelancer, it’s important that you do things by the book. So, how do formalities differ when it comes to contract vs freelance work?
Contractor: Before you start working together, both parties sign a contractual agreement that specifies all the terms & conditions. In most cases, it indicates who retains the copyright to the contractor’s work, specifies any non-competitive clauses, and what either party can disclose about their work together. Some companies choose to apply the same regulations as for their full-time hires – with the exception of payroll & benefits, as these are the responsibility of the contractor.
Freelancer: At its very essence, collaborating with freelancers is less regulated than contract-based work. Some freelancer platforms offer an all-in-one NDA (i.e., when you order a service through the platform, you’re automatically protected with a non-disclosure agreement). Regardless of whether you decide to order through a freelancer service or independently, make sure that you retain the copyright to any work authored by the freelancer.
4. Place of work
Another contract vs freelance difference is where the individual will be working from.
Contractor: When you decide to work with a contractor, in most cases, you’ll have to decide whether they’ll operate fully remote, in a hybrid model, or in a full-on, in-house setting. And it’s about much more than whether you’re going to see your contractor in real life. Especially, when they are based in a foreign country. How so?In some countries, what you choose as the place of work will have legal implications, as it will implicate where the contractor needs to pay their taxes (and, possibly, benefits). In most cases, the company and contractor agree to specify the contractor’s country of residence as the place of work to avoid any formal implications and payroll in a foreign country.
Freelancer: Things are much simpler when it comes to freelancers. At its core, freelance work is performed remotely, so there’s no dilemma when it comes to where they should pay their taxes and social contributions. However, this doesn’t mean that seeing your freelancer is completely out of the question! If technically possible, they can still pay a visit to your office, when necessary.
5. Working hours
There are two things worth mentioning here. The first applies to both freelancers and contractors. Namely, what is the weekly/monthly time engagement you’ve agreed on? Will the individual work on a full-time or part-time basis? Once you’ve got that covered, you’ll need to decide on the exact hours. Here’s where your freelance vs contract options differ.
Contractor: In most cases, contractors work in the same operating hours as your full-time employees (or, at least, find a sufficient overlap if they’re in a different timezone). This is usually specified in the contract signed by both parties. Such an approach makes it easier for the contractor to stay in touch with your full-time team members throughout their work day.
Freelancer: While, from a legal point of view, you can’t impose strict hours on the freelancer, it doesn’t mean they won’t be willing to work alongside the rest of your team! I recommend speaking to the freelancer you’re considering for your project and asking them about the possibility of an (at least partial) working hours’ overlap.
Working with product specialists in the US & EU – key legal aspects
As I’m not a lawyer, let me start off with a disclaimer: the information you find in this section should not be treated as legal advice. Rather, we present a few common scenarios to help you wrap your head around the main legal obligations.
Also, for the sake of this section, I’ll assume that the ‘contractor’ is an individual and not a company.
All clear? Let’s move to the first scenario.
Scenario #1: A US-based company working with an EU-based individual
Neither the contractor nor freelancer will be subject to US law. This means that they will issue an invoice for their work to a US-based company, but they will not be:
subject to US Federal payroll tax, also known as FICA. Both the freelancer and contractors will be paying self-employment taxes in their country of residence
eligible for pension, maternity leave, or social security in the US.
When it comes to working with a contractor, there is a potential exception – namely, the country of jurisdiction for any legal disputes (i.e., where any conflicts can be taken to court).
With all of the above in mind, if you’re considering working with an EU-based contractor or freelancer, I recommend checking agreements between the US and the contractor’s/freelancer’s country of residence. This will help you make sure there aren’t any exceptions to what I’ve mentioned above. Poland, for instance, has a Business and Economic Relations Treaty which outlines the exact legal and financial obligations between parties from the two countries. These sorts of agreements might make it slightly different for companies to work with contractors and freelancers from various EU countries.
Scenario #2: An EU-based company working with a US-based individual
As in the case of US companies working with European contractors/freelancers, if the contractor will be working from the US, no EU job permits will be required. Similarly, as they will be paying taxes and contributions in the US, they will not be eligible for social benefits such as healthcare and pension in the EU. If you’re signing a contract, make sure that the “place of work” is clearly stated as the individual’s country of residence to avoid any ambiguity.
I once again recommend checking treaties between the company’s country of residence and the US, as these might specify further technical exemptions and simplifications.
Scenario #3: An EU-based company working with an individual from another EU country
EU-based contractors and freelancers providing services for EU-based companies pay taxes and all other obligations themselves. However, once again, the ‘place of work’ specified in the contract will be crucial.
In most cases, the contractor will be covered by the legislation of the country of residence. Nevertheless, given how many workers cross the border multiple times a day to perform work in a different country than that of their residence, the European Union has drawn up very specific rules as far as contractors are concerned.
If they spend at least 25% of their work activity in their country of residence, that’s where they’re obliged to pay tax and social contributions. However, if they work from another country (for instance, offering services to your business as a self-employed contractor) for more than 24 months, they will become so-called “posted workers”, to whom specific conditions apply. If you’d like to dive deep in the intricacies, here’s a great resource from the EU Commission.
Scenario #4: A US-based company working with a US-based individual
Another contract vs freelance scenario I’d like to address is when a company based in the USA cooperates with a US-based individual. Correctly classifying your employees is one of the most important issues you have to be aware of. You can select from: contractor, freelancer and contingent worker. This is especially important if you work with someone from California or New York. Here is why.
In California, Assembly Bill 5 came into effect on the 1st of January, 2020. It requires all independent contractors including freelancers and contingent workers to be reclassified as full-time employees if the number of their annual assignments exceeds 35. As you can imagine, this has significant financial implications. Full-time employees are not only eligible for benefits, but they are also subject to the guaranteed $12–$13 state minimum wage.
When it comes to New York, freelancers and businesses have to follow the Freelance Isn’t Free Act, introduced on the 15th of May, 2017. All work performed by freelancers valued at $800 or more must come in a contract form. Businesses are obliged to pay the invoice on the date listed in the contract. If there isn’t one, then they have 30 days from receiving the finished work to settle the payment. If they fail to do so, they can face financial liabilities.
The purpose of this Act is to protect freelancers from exploitation, and to make sure that they’re able to pay their taxes on schedule.
Here are a few additional things you should know if you hire US freelancers or contractors:
Employers are not responsible for collecting and paying payroll taxes such as income tax, social security and medicare tax for independent contractors
Contractors and freelancers aren’t subject to sick leave (unless it’s stated otherwise in their contract), maternity leave and pension.
The company is not held liable for contractors' and freelancers’ mistakes, they take full responsibility for their work.
Both the freelancer and the contractor issue an invoice, and are responsible for paying their own taxes.
As we’re approaching the end of this resource, here comes the big question:
Contract vs freelance – which solution to choose for your business?
Simply said, whether you choose to work with a freelance vs contract worker will entirely depend on your needs.
If you’re looking for someone who will support you long-term, then hiring a contractor might be a better choice. However, it’s not to say that you shouldn’t consider a freelancer as it all comes down to individual agreements. Both contractors and freelancers can engage in longer, more complex projects.
Nevertheless, if you need someone who will quickly perform a single, ad-hoc task, then freelancers are probably a better call as they are more used to short-term tasks. Irrespective of your choice, I recommend signing an NDA and copyrights agreement or use a platform like Match that guarantees it for each gig.
At MVP Match you get access to hundreds of highly-skilled freelancers. All of them are fully vetted and verified for their skills as it’s a marketplace for the top domain experts only! And if you’re worried about formalities and other legal aspects, Match will take care of them too.
Freelance vs contract – there is no ‘right’ or ‘wrong’
Whether you choose to become a freelancer or a contractor, both options give you plenty of opportunities to engage in amazing projects, especially if you know where to look. One of the best ways of working with the world’s most prestigious brands is by signing up to MVP Match. Be sure to give it a go!
