Contractors and Freelancers – What’s the difference?
In business, the terms ‘contractor’ and ‘freelancer’ get used somewhat similarly with very little distinction often made between the two. Yes, both a contractor and a freelancer do usually work in a similar way, often with multiple clients and on a client by client basis but there are in fact several differences between the two occupations – although not in terms of the way they both pay tax. Whilst both are typically self-employed (not always), the terms are usually associated with very different industries. In this blog, we have highlighted the differences between the two and how a contractor and freelancer should deal with tax to operate successfully.
A freelancer typically provides services for a client or employer for a specific period of time or for an individual job. We typically see freelancers that are based out of their home or own rented office space. It’s common for a freelancer to work for several different clients during a year sometimes simultaneously. Freelancers rarely have stipulated working hours giving them far more flexibility than most careers and we find this is usually one of the key benefits that draw people to the freelancing career.
How does tax affect Freelancers
Freelancers, unlike Contractors, are usually found in creative industries such as advertising, marketing, design, publishing, and architecture. Whilst the term ‘freelancer’ is widely accepted in these industries, it isn’t a legal status – so it’s important to know this before thinking about a freelancing career. For a UK tax standpoint, freelancers typically fall under the self-employed bracket, so as an individual they are responsible for registering with HMRC and a self-assessment tax return, every financial year. You’ll pay Income Tax and your NI contribution based on the information you put in your self-assessment.
With regards to VAT, it will be dependant on the yearly income of the individual and your options should be discussed with an accountant.
Contractors are usually highly skilled professionals who often work independently. They are usually hired by businesses to provide a service or complete a project on a contract term basis. The contract will usually include the rate of pay and this will be signed and agreed on before a contractor begins work on a project. The industry in which you find a majority of contractors is usually in the IT industry. The construction industry also uses contractors, but building contractors are slightly different. An IT contractor will typically work on site at their temporary employer’s premises and will complete their contract for the specified period of time, however, it is common for contracts to be extended. Contractors will usually only work for 1 business at a time and in that businesses office.
How does tax affect Freelancers
Like Freelancers, Contractors are also self-employed workers, so they are also usually registered as self-employed and need complete their own self-assessment tax returns. Contractors are responsible for sorting out their own tax bills and National Insurance contributions. Whilst their job roles may be significantly different, from a tax point of view, there’s actually no difference between a freelancer and a contractor.
What else can Freelancers and Contractors register as?
Very popular contractors and freelancers who are looking to grow sometimes opt to turn their career into a business. It’s common to find some freelancers and contractors that are registered as sole traders, while others work through their own limited company. Operating as a sole trader or a limited company makes a difference to your liability and tax responsibilities.
Whilst contractors and freelancers may pay tax the same way, their careers and financial responsibilities may be vastly different, that is why we offer a service for both Freelancers and Contractors – independently. For more information about any of our services, please get in touch.