General Question

lapilofu's avatar

What's the difference between working freelance and working as an employee?

Asked by lapilofu (4325points) August 5th, 2008

This fall I’m going to go from working as a full-time employee to working as a freelancer. This is really only a technical designation necessary for my boss to keep me hired after the summer (I guess it has to do with the way budgeting works), but what should I know about the legal differences between working as an employee and working as a freelancer? For instance, I heard that freelancers have to pay a higher social security tax. Is that true?

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15 Answers

richardhenry's avatar

If you’re in the UK, you’ll want to speak to an accountant. You will have to pay both income tax and file for NI. You will also be required to submit your own tax return every April (if you actually hire your accountant, they will make this much easier for you).

As a freelancer, you are essentially running your own business and will have to keep an accurate book of your income and expenditure, and hold on to all of this information for six years. In addition, you will probably want to notify your bank… as they will require that you open a business account unless the account isn’t going to be particularly active.

HSBC currently offer two years free business banking, which is useful. After that, you’ll probably pay between £4 and £8/month in business charges.

Perhaps it’s similar in the US… if anyone knows? Being a freelancer means much more paperwork than just being an employee.

richardhenry's avatar

Oh, and you will have to invoice your ‘employer’ (they aren’t your employer anymore!) instead of them simply handing you a pay-cheque.

(Quite a bit of this is probably the same as the US, I would imagine.)

damien's avatar

Like richardhenry said, freelancing means you’re essentially self-employed. No paid sick days, no paid holiday entitlement.. It’s all managed by you. Rather than being an employee to a company, you’re selling them your services.

Freelancers tend to cost a company more than a full-time or part-time employee in the same role because they have to compensate for equipment costs, holidays, their office (if they have one), etc, etc.

danclements's avatar

Watch out because taxes suck when you enter into self employment. In the states FICA and SS get taken out of your paycheck automatically but when you are self employed, you have to keep track of your income and put some aside to pay Uncle Sam at tax time. I would seriously look for another job because you will be loosing a lot. It sounds like your a sharp guy and they don’t want to loose you but you deserve better.

megalongcat's avatar

Health, medical, dental benefits, possibly.

Breefield's avatar

@danclements – not like the gov’t will be taking more than if you work for an employer, you just don’t have to hand it over yourself when it’s for an employer.

ljs22's avatar

Freelancers in the US pay the self employment tax, which is both the employee and employer share of Social Security. When you’re an employee I believe it is 7.5% of your paycheck. When you freelance, you pay 15% (both halves). I’ve been a freelancer for seven years and to take care of taxes I have an accountant. Each quarter, I must send an income tax payment in based on an estimate of what my total income will be for the year. This estimate is based on last year’s income.

BronxLens's avatar


On a slight tangent, there is something else to ponder…

When/if you choose to become an employee, new areas come into play, pay wise, as the law, not your employer and not your job title, defines the differences between a salaried and an hourly employee.

Determining Who Is Nonexempt and Exempt

jballou's avatar

You should definitely speak to an accountant, everything everyone here has said is accurate, but you’ll also want to do some planning before hand because in addition to the changes in taxes you’ll be paying and benefits you will have to pay for out of pocket, you also will be entitled to write off any business related expenses, which should help to offset some of the increased cost.

If you drive to work, you can write off gas, car maintenance, and any tolls you may pay. If you ever work from home, you can write off portions of your rent and utility bills. If you use your own phone, you can write that off. Speaking to an accountant about your situation will be good because you can prepare beforehand and set up a system for yourself to organize your receipts (which is way easier then trying to find all your damn receipts and bills come tax season, trust me!)

Depending on your field and where you live, there might also be local guilds, unions, or associations you can join which you can pay them dues and have access to many of the benefits which would normally be provided from your employer if you worked full time. Stuff like health insurance, dental insurance, 401k, disability, etc.

You have a lot of research to do!

Bri_L's avatar

well, unless you have a special arrangement, you don’t get health benefits, paid sick leave holidays or vacation. Your not promised 40 hours of work a week. I would be careful with what I sign. It might also effect how easy it is to let you go.

Sorceren's avatar

@damien — “Freelancers tend to cost a company more than a full-time or part-time employee in the same role because they have to compensate for equipment costs, holidays, their office (if they have one), etc, etc”

That’s what all full-time employees tell their bosses so they won’t get replaced by one.

Full-time employees get paid for everything they do while at the job. Even slacking. Freelancers often have to submit a quote for the job or work by the finished piece. That’s tons more efficient.

Sorceren's avatar

@BronxLens — if taxes were meant to be fair, the Income Redistribution System wouldn’t need a 12-inch-thick book to explain them. Or a Website.

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evajoseph's avatar

The main difference between working as freelancer and working as employee is that, freelancer are the people who work from home or any other place of their convenience but employees are bound to work from their office. Another difference is that freelancer job is task bound instead of time bound i.e they do the work when they feel to do but employees have strict timing for their work in office.

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