35 Freelancing Terms You Need to Know
Learn all the freelancing terms you need to know to engage independent contractors, consultants, freelancers, and gig workers in our freelancing glossary.
Working with freelancers and independent contractors is different than working with full-time or part-time employees. If you’re new to working with freelancers, all the details can sometimes seem overwhelming. Never get stumped again with the aid of our handy list of all the essential terms you need to know.
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The term 1099 worker comes from the Form 1099 (see below) that is filed with the IRS each tax year for independent contractors that are paid $600 or more by a company. 1099 workers have been classified as independent contractors, rather than employees.
The 20-Factor Test is also referred to as the 1099 Test or “Right-to-Control” Test. This test was established by the IRS in Rev. Rul. 87-41 to provide a common-law test for employers and the IRS to evaluate whether a worker should be classified as a 1099 independent contractor or W-2 employee.
California Assembly Bill 5 or AB5, specifies the three main factors that must be met to determine that a worker in California is a 1099 worker. (See ABC Test and Behavioral, Control, & Relationship Factors).
The ABC test is a three-prong test for classifying independent contractors and freelancers. Many states use the A and C prongs of the test and, so far, only Massachusetts, New Jersey, and California require all three.
Behavioral, Control, & Relationship Factors
These three categories of factors determine whether you are hiring a W-2 employee or 1099 independent contractor / freelancer. What behavioral control do you exert on your workers and their work performance? What financial control do you have on your workers and their work performance? What is the working relationship between your company and the worker? The ABC Test and the IRS 20-Factor Test reflect these three common law categories of factors.
A blended workforce is a non-traditional workforce that includes both W-2 employees and 1099 workers.
The Borello Test was used to classify workers in California before the ABC Test. Borello is also sometimes referred to as the “right to control” test. The Borello Test is still in use in California when AB5 is inapplicable, or exemptions apply.
Companies must meet worker classification compliance requirements. This means that your company must correctly classify workers as either 1099 workers or employees. Depending on your company’s location, you may need to follow compliance laws and regulations at the federal (like the IRS factors), state (such as California’s AB5), and local level (like New York.City’s FIFA). Each country has its own requirements.
Contingent Worker or Workforce
Freelancers, independent contractors, and consultants are all contingent workers. Contingent workers are 1099 workers.
Consultant / Independent Consultant
Consultants provide professional services. A consultant is classified as an independent consultant if they meet the factors of control criteria (same as independent contractor / freelancer). Independent consultants are 1099 workers. These consultants are engaged on a project-by-project basis to provide on-demand expertise and support.
Contractor / Independent Contractor
Independent contractors are 1099 workers. The IRS defines a contractor as an independent contractor when “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.” Contractors who are not classified as independent contractors may receive benefits, be paid by W-2, and have taxes withheld. Independent contractors receive Form 1099-NEC and pay self-employment tax.
Contractor Management System
A Contractor Management System (also referred to as software or solution) is a cloud-based technology platform that powers the sourcing, management, and payment of contractors. Liquid provides a complete solution for contractor management.
Employer Identification Number
An Employer Identification Number or EIN is a unique nine-digit number that the IRS issues and uses to identify businesses. The EIN is used by businesses when filing and paying business taxes, similar to using an employee’s social security number. Freelancers who have formed C corporations, S Corporations, or partnerships must have EINs. Freelancers who have a single-member LLC may also use an EIN (and must use one if they have any employees). An EIN reinforces a freelancer’s classification as an independent contractor.
IRS Form 1099-NEC is used after each tax year ends to report nonemployee compensation — also called self-employment income. The payments received by independent contractors are nonemployee compensation. Companies must file Form 1099-NEC for every independent contractor that they pay $600 or more in a given tax year. Prior to the tax year 2020, the IRS required that companies use Form 1099-MISC.
If you are not sure if your worker is an independent contractor or employee, you can complete and submit IRS Form SS-8. The IRS will review the form and officially determine the status of the worker. However, this process can take six months. An alternative solution is to consult with a legal professional.
IRS Form W-9 is also known as a Request for Taxpayer Identification Number and Certification Form. A W-9 is used to confirm a person or entity’s name, address, and taxpayer identification number (TIN) for employment or other income-generating purposes. Companies use W-9s to collect the data that they need from independent contractors to file Form 1099-NEC.
IRS Form W-8 is similar to Form W-9 but is used when engaging foreign freelancers and vendors. The W-8 is used to confirm that international freelancers / vendors are not US taxpayers, and hence you do not need to withhold taxes from your payments to them.
Freelance Management System
A Freelance Management System or FMS like Liquid is a cloud-based technology platform that simplifies and automates sourcing, onboarding, managing, and paying freelancers. An FMS may also be referred to as Freelance Management Solution, Freelance Management Software, or Freelance Management Platform.
A freelancer is a self-employed person who is classified as an independent contractor. Freelancers can also be considered independent consultants. Freelancers can work for multiple companies at one time.
A gig worker is another term used to describe a freelancer. Gig work includes all income-earning work outside of the traditional employer-to-employee relationship — not just gig workers with Uber and Lyft.
Independent Contractor Agreement / Master Services Agreement
An Independent Contractor Agreement is also referred to as a Freelance Contract Agreement or Master Services Agreement (MSA). It’s a legally binding document between the independent contractor and the hiring company that defines the terms of the work. It’s a must-have document for every freelancer relationship.
The term liquid workforce encompasses all 1099 workers — independent contractors, freelancers, gig workers, and independent consultants. This includes attorneys and freelance bookkeepers.
Misclassification occurs when a worker is incorrectly classified as a 1099 worker instead of an employee of a company. Misclassification has both legal and tax ramifications for companies.
A Non-Disclosure Agreement (NDA) is also referred to as a Confidential Disclosure Agreement (CDA) or Confidentiality Agreement (CA). NDAs are legally binding contracts that protect confidential information. An NDA will outline what information may be shared between your company and a freelancer and what cannot be discussed or shared with other parties.
When working with freelancers, onboarding refers to the workflow process of bringing on a new freelancer. This process includes completing all the necessary documentation (like independent contractor agreement, work order, NDA, W-9, payment information, etc.) as well as sharing anything the freelancer will require to begin a project.
1099 workers are also referred to as on-demand workers. This term reflects the project-by-project nature of freelancing work, where talent is tapped “on-demand” to fill specific needs for a company.
Payment terms are the agreed-upon terms for when and how you will pay. A common payment term example is Net 30, which means that you will pay 30 calendar days after being billed for a good or service.
Permanent Establishment Risk
Permanent establishment risk can occur when engaging foreign freelancers, overseas independent contractors, and global vendors. It’s the risk that a local tax authority in a foreign country determines that your business has permanent establishment — a stable and ongoing presence in that country (and hence owes taxes). The two main factors that determine this risk are the fixed place of business test and the dependent agent test.
Reasonable Basis Test
The Reasonable Basis Test is part of the relief from federal employment tax obligations provided to employers by Section 530 of the US Revenue Act of 1978. The Reasonable Basis Test defined three methods by which a business could establish a reasonable basis for classifying a worker as an independent contractor. The IRS created and uses the 20 Factor common law test as an alternative to the Reasonable Basis Test.
Request for Proposal
A Request for Proposal or RFP is released when you need services, goods, or assets from an outside vendor. Freelancers respond to your RFP with their proposal on the work that they will do for your company.
1099 workers must pay self-employment tax – this means that they are paying their own payroll taxes on their own.
Workers can be classified as 1099 workers or W-2 employees based upon behavior control factors (see Behavioral, Relationship, and Financial Control Factors). W-2 refers to the IRS tax form that companies use to report compensation paid to employees and the payroll taxes withheld from that compensation.
Work Order / Statement of Work
A Work Order (WO) or Statement of Work (SOW) defines the project details for which an independent contractor has been engaged. A WO will include a project description, timeline, tasks, deliverables, etc. The WO also sets the performance expectations. WOs are also known as Scope of Work (SOW), Service Order, or Engagement of Services. WOs are governed by the terms set in an Independent Contractor Agreement / MSA.
Value-Added Tax (VAT) is also known as a Goods and Services Tax (GST). VAT is a country-specific tax on products and services and is most commonly used in the European Union (EU). If your company is found to have a permanent establishment in a country (see Permanent Establishment Risk), you may owe VAT.
Vendor Management System
A Vendor Management System or VSM is a cloud-based technology platform to manage vendor-related activities, like the sourcing and procurement of goods and services. A VMS can be used for managing independent contractors and freelancers (particularly those set up as business entities). However, a VMS may not have some of the features of a Freelancer Management System (FMS), like talent pool management. Liquid provides the features and services of a VMS and an FMS.
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Updated: March 23, 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.