You’ve probably come across the terms ‘freelancer’ and ‘contractor’ often, including if you’re looking for an accountancy service – if you do project-based work, you are likely one or the other. It can also help you to choose the right path for you, seeing that they offer different benefits and come with different responsibilities.
What exactly are the differences between both types of working individuals? To minimise confusion and ensure that you’re aware of what’s best for you, especially if you’re just starting out, we’re clearing up what it means to be a contractor and a freelancer.
Similarities Between Freelancing and Contracting
While there are differences between the two terms, there are also similarities that you should be aware of. Whether you’re a freelancer or a contractor, you must handle your own tax and National Insurance contributions as you may not have the same rights as permanent employees (for example, minimum wage), and you’re responsible for your health and safety. You also determine how and when you do the job, hire a replacement or a helper if the situation calls for it, take financial responsibility, work on your own premises and how many clients you deal with at a time.
What is a Freelancer?
Freelancers are self-employed individuals who may work via a contract, though they usually don’t. If you’re a freelancer, you have the opportunity to work from anywhere you want, be it your home, a coffee shop, the library or even your bed. These types of workers also tend to move between contractors and clients as they see fit – and work for different project at the same time. In addition, if you’re not employed in the usual PAYE sense, you’re a freelancer, not a contractor.
Freelancers are also known for working on bespoke products or services within more creative industries; this means that, for example, a writer may be commissioned to create a set of articles and will be paid upon completion. It’s up to the freelancer to manage time and ensure the project is completed in a timely manner. Because freelance work tends to be of a more short-term nature, it’s often chosen by individuals who simply want to supplement their income or are working part-time. Freelancers can also be found in industries like photography, translation, and design.
Pros and Cons of Being a Freelancer
There are many advantages to becoming a freelancer in the UK. One of the biggest reasons why individuals choose freelance work – perhaps even the main reason – is being able to charge more and keep all the profits. By being your own boss, you set your own rates and adapt to changing costs of living too.
The fact that you can have flexible hours is a major benefit as well, especially as it allows you to work whenever and wherever is best for you. if you want to sleep in or go out for a walk in the afternoon instead of working, you can do so – as a freelancer, you can choose to work during your most productive hours, which don’t have to be the regular 9 to 5. This means you can also take as many breaks as you desire.
As a traditional employee, you don’t have a choice of co-workers or clients; if they’re unprofessional, for example, there isn’t much you can do except move on to another job. However, as a freelancer, you have a choice of who you work with. If you believe working with a certain client isn’t the best option for you, you can simply miss out on that opportunity.
The amount of control you have as a freelancer, when compared to more traditional employment, makes this type of work highly desirable. You only need to answer to yourself and your clients and have the freedom to make all business decisions.
There are also some downsides to becoming a freelancer. While you can charge more per project, both your income and workload are unlikely to be consistent; this means you can’t depend on regular clients or wages. For many individuals, working from home can also make it more difficult to separate work time from personal life, which may lead to longer hours.
Being your own boss offers many advantages, but it can also mean that you have to do everything. From finding new projects and clients to promoting your business, you have to do all the legwork yourself. In addition, there is also a risk that you won’t get paid – either on time or at all – when you work as a freelancer, so you’ll have to be prepared to chase payments if the need arises.
What is a Contractor?
Contracting is often associated with industries such as IT and construction. As a contractor, you’ll usually work on long contracts and it’s rare that you’ll have the chance to work from home – most times, you’ll do your projects on-site or in a client’s office. You will also work for just one client on a full-time basis for a set period of time. When you enter into a contract with a client, you need to define the nature, duration and payment of the project.
Many employers hire contractors because they only work for the set time that their skills are required, meaning they’re not considered employees of the company. This also means that, as a contractor, you won’t receive employee benefits, like pension contribution or sick pay, from your client. The flip side is that you can charge higher rates to make up for this.
If you’re looking for contractor accountants, we can help you sort out your finances and ensure you’re compliant with the latest regulations.
Pros and Cons of Being a Contractor
Similarly to freelancing, contracting work offers you a great degree of flexibility. This independence allows you to choose the projects and clients you want to take on while still offering you plenty of time for personal commitments or hobbies. This leads to a better work/life balance as well, since you can take time off if you want to, be it just to relax, travel or enjoy the school holidays with your kids.
Contractors benefit from increased earnings as well, since you’ll be paid more per hour or day than a traditional employee and will take more net pay home due to your tax situation. You can use Gorilla Accounting’s contractor tax calculator to figure out your take-home pay right now. You will also never be bored; you can choose your projects, so you’re free to pick only the ones that interest you.
Developing your own skills is crucial for contractors, as that enables you to charge more per project and to take on more specialised work. By working as a contractor, you’ll be able to train yourself at your own pace and to control which skills you wish to develop. Traditional employees often have to deal with office politics, micromanagement, pressure to do overtime, work hard for promotions that may never come, and so on; as a contractor, you only need to answer to yourself and can avoid all of this.
Just like with freelance work, contracting can have its disadvantages too. The lack of job security is one of the main reasons individuals hesitate to become contractors, and this downtime between projects can also be stressful for many. There are no additional benefits (such as holiday pay) when you work as a contractor, although being able to charge higher rates can offset this, as we mentioned before.
In addition, running your own limited company can be time-consuming as well, which will take you away from projects. Before making the leap, then, you may want to consider becoming an umbrella company employee first, since you’ll have less paperwork to deal with. However, if you want to operate through a limited company, we can take away some of that paperwork by handling the financial side of your business.
How do Freelancers and Contractors Operate?
Even though both freelancers and contractors are considered to be self-employed, they can operate in different ways. Contractors can sign up with recruitment agencies and, therefore, be paid by them and not directly by clients. You may also become an employee of an umbrella company, who acts as the middleman between you and an agency or a client. This company structure is considered the employer – however, they don’t offer work or recruitment opportunities, but transform your invoices into wages, for instance.
If you choose to operate as a limited company, you can be a director of the company, meaning you can draw a salary as well as dividends.
If you’re a freelancer, you will not normally be on the payroll of an agency or umbrella company but you can operate as a limited company or a sole trader.
Which is Best for You?
Often, being a contractor or a freelancer can be interchangeable, and the best choice for you will depend on the work you’re doing at the moment. It will also impact your rates and how HMRC sees you. Likewise, the type of industry you’re in matters too, since health, education and engineering, just to name a few, tend to attract contractors instead of freelancers. No matter what you decide, the most important thing is that you can do the job at hand, just like if you were a permanent worker.
At Gorilla Accounting, we’ve been providing superior accountancy services for contractors and freelancers for a long time. From ensuring you have the best relationship with HMRC to being there for you whenever you need us, we can help no matter which title you choose.
