Are You Being Hired as an Employee or a Freelancer?

Have you wondered if you should be considered a freelancer or employee? Here’s what you need to know, from determining your status to why it matters.

Sometimes when a client hires you they misclassify you as a freelancer instead of the employee the government would consider you to be. That can have big consequences, for both your client/employer and you.

In this post we’ll explore what those consequences are and how to get clarity around whether you are being hired as an employee or freelancer.

But first, a quick look at why misclassification is becoming more of a risk. The simple answer is that the way companies hire and how we work has been rapidly evolving. Sara Horowitz, who founded the Freelancers Union, wrote the following in a recent Fast Company article:

“As the availability of the traditional 40-hour-a-week job wanes, so does its appeal. Who wants to “clock-out” at the end of the day when you can dictate your own schedule?”

There are now more than 42 million freelancers in the US alone…many of whom are drawn in by the allure of breaking free from the grind of the standard workweek.

However, sometimes a freelancer gets sucked back into working off their client’s schedule, but this time it’s without the perks, benefits, and rights of a full-time employee. Does that sound familiar?

As more companies are turning to contract and freelance workers, the lines are becoming blurred between who’s truly a freelancer and who should be re-categorized as a full-time worker. Have you wondered if you should be considered a freelancer or employee? Here’s what you need to know.

Control: the essential difference between a freelancer and employee

The difference between an independent contractor/freelancer and an employee boils down to how much control is exercised over the freelancer’s work and schedule. In short, if an employer/client spells out exactly how the job must be done (including when, where, and how), it’s most likely an employer-employee relationship.

This distinction holds true whether or not the need is just part-time or temporary. Many businesses and freelancers mistakenly think that if someone is hired for a short duration, then they are automatically considered a contractor. However, according to the IRS and employment law, whether someone is a contractor or employee is based on the independence of the worker, not the length of the relationship.

You can read more about the distinctions between contractor and employee at the Small Business Association website. But in short…

  • A contractor operates under a business name, may have his or her own employees, invoices for the work done, has more than one client, sets his or her own hours, determines which projects/clients to take on, advertises his or her business’s services, and has his or her own tools. Tip: Create professional invoices with the FreshBooks freelancer invoice templates
  • An employee does work as dictated by the employer, is given specific training by the employer, and works for only one employer

Determining your status

If you are unsure whether your working relationship falls under the freelancer or employee categorization, ask yourself the following questions:

  • Who sets my hours? How much control does your client have over your schedule? For example, a client can set a final deadline or milestones for deliverables; however, if they tell you to work from twelve to five Tuesday-Thursday, that could be crossing the line into employee status.
  • How reasonable are the deadlines?If a client’s deadlines are so tight that they force you to work 40+ hours per week to get it done, this can be a red flag that you should be considered an employee. A freelancer and independent contractor should be able to work for several clients simultaneously.
  • Who determines how the work should be done?A freelancer will be given high-level directives on the ultimate goal of the job to be done. Then, he or she has the freedom to determine the best tools, process, schedule, and work habits to get the job done. In short, there’s little micro-managing involved with freelancers and contractors. And in most cases, the freelancer/contractor will use his or her own tools to perform the work.
  • What are you being hired to do? Are you being hired to perform the same services/work as the company? For example, a graphic design company may want to hire an SEO or social media expert to help them market their business. However, when a graphic design company hires a graphic designer as a contractor, this might indicate a classification mistake.

Why does any of this matter?

Maybe you’re happy to get the gig, and you don’t particularly care about your classification as long as you get paid. That’s fair enough, but the IRS and other government agencies are looking out for cases of misclassification and there can be costly legal consequences for the employer.

If an independent contractor is determined to meet the criteria of an employee, the employer may need to reimburse the contractor for any missing wages such as overtime pay or minimum wage standards; pay back taxes for Social Security, Medicare and unemployment; pay any workers’ compensation benefits if applicable; and provide standard employee benefits like health insurance and retirement.

As you can see, if you have been misclassified as a contractor, you have been missing out on major benefits. You’ve had to pay Social Security/Medicare yourself; you haven’t received any kind of unemployment/workers’ compensation benefits; and you’re not enjoying any other employee perks (like sick days, vacation days, etc.).

If you think you might be misclassified, the first step is to speak directly with your employer/client. Ask them to review your classification. Perhaps, they will reclassify you as an employee, or they may adjust the working relationship to ensure that you are properly treated like an independent contractor. If you’re not satisfied with the results from that conversation, you can opt to contact the IRS and ask them to determine your employment status. To do so, you’ll need to file IRS form SS-8 “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.”

In many cases, classification errors are the result of confusion or ignorance surrounding the rules, rather than a blatant attempt to circumvent labor laws. This is particularly true when your clients are smaller companies that may not have proper HR infrastructure in place. Understanding the distinctions yourself will help you better navigate the evolving labor landscape, and ensure you are being treated and compensated fairly.

In addition, bear in mind that as the IRS begins buckling down on classification errors, companies will be looking to avoid trouble as much as possible. For this reason, they may ask if you have a formal business structure (i.e. an LLC or corporation vs. a sole proprietorship) and if you have other clients. These two things will help them easily justify to the IRS that you are indeed properly classified as a contract or freelance worker.

More great ideas to grow your business

Find out whether you need an NDA when hiring a contractor

Check out contract 101 when hiring freelancers.

FreshBooks tips

Find out how to set up a contractor in your FreshBooks account.

about the author

FreshBooks is the #1 accounting software in the cloud designed to make billing painless for small businesses and their teams. Today, over 10 million small businesses use FreshBooks to effortlessly send professional looking invoices, organize expenses and track their billable time.