Is freelancing considered employment?
For the government freelancing is being self-employed and thus employment. While there are clear differences between freelance and employment, the more nuanced answer is that it depends on the work arrangement and the relationship between you and the company.
Generally speaking, freelancing is not considered employment. However, in certain cases and depending upon the relationship between the employer and the worker, the law can deem freelancers as employees. Both have different roles, responsibilities, benefits, and tax liabilities. Let’s start by going over the differences between the two.
Differences between a freelancer and an employee?
Freelancers and employees have some significant differences between them. These differences play a crucial role in deciding your tax liability, the benefits you are entitled to, and the relationship you will have with the clients.
Who is a freelancer?
Simply put, freelancers are self-employed individuals who don’t work for one particular company. Because of this, they are not entitled to the company benefits (like workers’ comp, health insurance, etc.) that employees might have.
As freelancers are self-employed, they are required to pay their own taxes. The taxes they pay are known as self-employment taxes. On the one side it is more work to keep an overview on this but on the other sides freelancers have more control.
They can decide their own rates on an hourly basis or a per-project basis and can incorporate the tax rate into that equation. If you are interested to learn about your own freelance rate or want to compare it within your sector with other freelancers go to our homepage at lancebase.io
Who is an employee?
On the other side we have employees, they work for one company on a contractual basis. Their job role, salary, and work hours are determined by their employment contract.
Usually, employees have a fixed job title and salary that can be in the form of hourly pay, weekly pay, or commission. As employees are hired by a company on a permanent basis, the employers withhold their taxes (including income, social security, and Medicare) taxes. These taxes are automatically deducted from their salary.
Unlike freelancers, employees don’t have complete freedom to choose their projects or their rates. They are however entitled in most countries to several employment benefits including a fixed number of paid leaves, workers’ comp, and unemployment insurance.
Common differences between the two
It is clear that freelancers differ from employees in the following points:
1. Work hours: Freelancers have flexible work hours, and they can choose how many hours they want to dedicate to their work each day. On the other hand, employees have fixed work hours depending on their employment contract.
2. Taxes: As self-employed individuals, freelancers are required to pay self-employment tax. On the other hand, employers withhold the taxes of their employees, and the same is automatically dedicated from their salary.
3. Employment benefits: Freelancers don’t get the usual benefits offered to employees by their employers. They are responsible for their own benefits. Employees, on the other hand, are eligible for all the usual employment benefits.
4. Clients and projects: Freelancers have the flexibility to work with multiple clients and handle various projects at the same time. Employees generally work for one company at a time.
When does a freelancer become an employee?
Now that we have established the differences it might be interesting to look into the more grey area. As some specific cases, the law can deem freelancers an employee of a company if their relationship with the employer begins to look like it.
So, “is freelance considered employment?”
The correct answer would be that it depends on the work arrangement and the relationship between the freelancer and their employer/ client. Here are some instances when the law starts considering freelancers as employees and makes them eligible for all the usual employment benefits:
1. Number of clients
Freelancers have the freedom to work with as many clients as they can handle at a time. However, they are also allowed to work exclusively for one company without becoming a full-time employee of that company.
However in the US, if this exclusive working arrangement continues for more than 24 months, the freelancer may become eligible to some of the same rights and benefits as employees, such as claiming expenses for travel.
Freelancers have the freedom of deciding their own rates. They usually charge hourly or on a per-project basis. Thus, if the client wants to hire them, they have to agree to the rates stated by the freelancer.
However, if the employers start determining how much to pay the freelancer and when to give them a raise/bonus, this will reflect an employer-employee relationship. It may lead to the freelancers being considered an employee of the company and will make them eligible for the same rights that employees have. Again this such a situation is contract dependent.
3. Work hours
Freelancers work independently and have the freedom to choose when and where they want to work since there can’t be such obligations in a freelance contract.
This isn’t the case with employees. They have fixed work hours, office location and likely a manager overseeing their work. Unlike freelancers, employees have an obligation to complete the work allocated to them as long as it is within the limits of their employment contract.
Any changes in this working arrangement can lead to freelancers being considered employees of the company.
As mentioned above, freelancers have the responsibility of filing their own taxes on time. They have to register themselves with the Tax Authority of their country as self-employed individuals. Some freelancers may also have their own agencies. Thus, their tax status will vary depending on that.
On the other hand, employers have the responsibility of calculating and deducting the taxes of their employees. These taxes are automatically deducted from the employees’ salaries.
If there are any changes in the nature of the freelancer’s tax status, like the employer paying the freelancer’s taxes, it may lead to the freelancer becoming an employee.
That was all about the difference between freelancers and employees and when freelancers become employees. Knowing these characteristics and differences will help you make the right career choice. It will also ensure that you are not losing on any benefits and are managing your taxes correctly.