Comparing Contractors, Freelancers, and Permanent Employees

Guest blog by Petra Odak

Companies have various choices to make as they consider their next hire, enabling them to choose the right people for their projects. Freelancers and contractors have emerged as viable alternatives to doing everything in-house, with many businesses now relying on them for niche and recurring tasks as well as ad-hoc assignments. 

This guide will walk you through the three main types of workers: freelancers, contractors, and employees. We will look at how they differ from each other and which one you should choose. 

Let’s dive in.

Who are freelancers?

Freelancers are self-employed people who often work on short-term projects with various clients. They receive no employee benefits from their clients and pay their own taxes. A defining feature of freelancers – and the reason the path is attractive to many workers – is their ability to set their own hours and work with more than one client simultaneously. 

• Freelancers set their own rates, which may be hourly or on a per-project basis.

They typically work remotely, though may occasionally meet with clients in person or visit the office for meetings.

According to a study by the Freelancers Union and Upwork, about 35% of Americans were freelancing as of last year. The image above is a snapshot of the study’s findings, which estimated that freelancing income touched nearly $1 trillion last year. 

Who are contractors?

Much like freelancers, contractors also set their own hours and pay their own taxes. They also receive no employee benefits from their clients and have control over their rates for any given project. However, this is where the similarities end. 

• A contractor usually takes on one client at a time.

Their projects are typically large and can last weeks, months, or longer. Their contract usually defines a specific period of engagement. They are most commonly found in construction and IT, business consulting, and creative industries.

Who are permanent employees?

Employees work for a single employer permanently and are paid fixed remuneration such as an hourly rate or annual salary. They might work in the office or be a part of a remote team hired and are hired to fill a designated role as opposed to working on a single project. 

The employer provides benefits (such as vacation time, healthcare, and pension plans) and is also responsible for taxes and contributions. Employees typically have a fixed that determines their work hours, role, and the terms of their employment. 

Since they are a permanent part of the company, employees are usually required to serve a notice period before leaving the company. They also enjoy more job security than freelancers or contractors.

Breaking down the differences

Now that we know what freelancers, contractors, and employees are, let’s look at how these categories of workers differ. Here are a few of the critical areas of difference:

• Employment status. Freelancers and contractors are self-employed, while an employee works for the company.
• The number of clients. Freelancers take on more than one client at a time, while contractors usually have one client at a time, and employees work for a single company. You can find valuable insights on how to get and impress new clients as a freelancer or a contractor in the book called “The Price of Freelancing”, by Better Proposals’ Adam Hempenstall.
• Project duration. Freelancers usually work on shorter projects, while contractors work on longer and more involved projects. On the other hand, employees are engaged to fill a specific role and may work on multiple projects during their time with the company, Place of work. Freelancers are almost always remote, while both contractors and employees may work in the office, remotely, or a combination of the two. 
• Tax and benefits. Freelance and contractors are responsible for their own tax contributions. They are not eligible for any benefits from their clients. Companies take care of both taxes and benefits for their employees.