Q: What’s the difference between contractors, consultants, and freelancers?
Learn about distinct differences between contractors, consultants, and freelancers before you engage with these different types of workers.
The terms freelancer, consultant, and contractor are sometimes used interchangeably. However, there are distinct differences between each that you should understand before engaging with these different types of workers.
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What a Contractor Is
A contractor is a person or company “that contracts to perform work or provide supplies.” While this may sound like what a freelancer does, a crucial distinction is that the freelancer must operate as an independent contractor. With a contractor, the hiring company still retains some control over how the contracted work or services will be completed. Contractors typically work on-site, on specified days for certain hours.
Contractor Versus Independent Contractor
An independent contractor is a legal term defined by the Internal Revenue Service (IRS): “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” Reports have shown that 10-20% of independent contractors are misclassified. Behavioral, financial, and relationship control factors determine whether you are hiring a W2 employee or an independent contractor.
Contractors may receive benefits and are often paid by W2 and will have taxes withheld. Independent contractors will receive a Form 1099 from the company paying for their services and must pay self-employment tax.
What a Consultant Is
A consultant is defined as “one who gives professional advice or services.” A freelancer can also act as a consultant for companies, for example, serving as an on-demand advisor for a corporate board. However, a consultant might not also be a freelancer.
Whether or not a consultant can also be considered a freelancer goes back to the factors of control discussed in the comparison of contractors and independent contractors. An independent consultant is also a freelancer if they meet the same criteria required to be an independent contractor.
What a Freelancer Is
In legal terms, a freelancer is a self-employed person who is classified as an independent contractor. Freelancers can also be considered independent consultants. They are likely to work for multiple companies at one time, choosing projects and retaining control over how the contracted work is done. Freelancers work from their own location, at the time and place of their choosing. For tax records, freelancers will receive a 1099 statement and will be responsible for paying self-employment tax.
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Category: Compliance Freelancer Management Ask Liquid
Updated: January 3, 2021
Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.