Employment vs. Self-Employment: Defining the Freelancer
There is a growing trend in our economy, as well as others across the world, and its self-employment. It’s not only young millennials leading the way either. Many individuals are making mid-life career shifts from employment to self-employment, and some are even leaving retirement to start their own freelance businesses. Without a doubt the self-employed community is becoming an increasingly valuable aspect of our economy.
So is freelancing the right career path for you? Before you can answer this, it’s necessary to understand exactly what it means to be a freelancer.
The word freelance, in terms of business, is defined as, “working on a contract basis for a variety of companies, as opposed to working as an employee for a single company.” This means that as a self-employed freelancer, your services are purchased by one or more clients to complete specific projects. The word “purchased” is used rather than “hired” to emphasize the distinction between employee and freelancer. Freelancers and contractors are not employees. To be successfully self-employed, you need to understand how they are different. A few examples are:
- Your relationship as contractor and client has a clear beginning and end and is contingent on the completion of a project, unlike employees, whose status is ongoing until they are either let go or voluntarily leave.
- Your client is not legally responsible for you. Legal requirements for employees include things such as payroll, time tracking, benefits, and workers compensation. Your client is not required to offer any of this to freelance or contract workers, and therefore the responsibilities for these activities falls on your shoulders.
- Your tasks are specific. Employee job descriptions often include a range of more general activities that may be required to help support the daily operations of the organization. In contrast, your tasks are specific to the project you were hired to complete and end there.
- Your client should not be managing how you do your job. Ask questions when necessary or if clarification is needed, but your client should not be managing you as they do their employees. Despite this, it’s still important to communicate with clients on the progress of a project, so that they will be satisfied with the finished product.
Even with these distinctions, lines sometimes become blurred and your status as a freelance worker can be called into question by the IRS and DOL. As a result, your client may be ruled your employer and will be forced to pay back taxes and possibly even fines. To protect your status as a self-employed freelance worker there are three things we always recommend:
- Form an LLC.
- Purchase your own workers comp insurance.
- Create a legal contract signed by both yourself and your client defining the specific details of your relationship and the work you are being paid to complete.
All three of these assert your independence from your clients’ businesses, preventing you from accidentally qualifying as an employee.