What is the difference between freelancer and contractor?

Question

I have been hearing about freelancers, especially in the software industry.

• What is the difference between freelancers and contractors?
• What are the advantages and disadvantages of each?

As to my own situation, I've been working as contractor in the software industry (mostly in Java technology). I have my own company and I get paid for every hour that I work. The end client pays the vendor and the vendor takes a 20% cut and vendor pays my company. I am the sole employee of my company. Usually the projects/contract lasts between 1 year to 5 year.
I go to my client's office location for my work.

What would be the difference between my current situation and being a "Freelancer"?

Answer 1

They are used somewhat fuzzily interchangeably, but when there is a distinction, it is that a freelancer is self-employed possibly with a contract whereas a contractor may or may not be self-employed with an employment that is usually defined by the terms of their contract. This is the case in the USA but it may be different in the UK or other countries.

The "difference between your current situation and being a 'Freelancer'?" is that currently the client pays the vendor and the vendor pays you as opposed to you being paid directly.

Answer 2

You're a contractor when you're getting paid and a freelancer when you're unemployed.

But, seriously, in my experience in the USA, here's how it works.

A contractor generally works for one client on an exclusive basis through a recruiting/placement firm. They're essentially a temporary employee and will usually be expected to keep certain office hours and so forth. The projects will tend to be longer term, typically 3-12 months, although there are cases where short term projects are farmed out this way. You're paid by the hour, usually on a W2 basis, with the sponsoring company providing some benefits, taking care of employment taxes and taking a cut of the hourly rate. For example, you're paid $40/hr and the client is billed $70/hr for your time, the recruiter pockets the difference.

Freelancers generally work for multiple clients and find work on their own. They have a 1099 relationship with the client companies, meaning they're totally responsible for their taxes, including employment taxes, and benefits themselves. Most projects are short term or are on an "on call" basis. Some work on site but often they'll work from their own location and only visit the client office as needed. It's common for freelancers to get overbooked and not be able to complete work for all clients within the required time frames. That's why some companies, those that have been burned, prefer to use contractors since they have greater control.

There are some people who have kind of a hybrid arrangement where they work on a 1099 basis without a contracting company taking a cut but the tax laws can get messy if things aren't done right. I screwed this up once and ended up owing the IRS a huge amount of money.

Answer 3

Freelancers are usually their own boss, more like a 1 man business even if they work in a team. A contractor is more likely someone who works for a company who provides contractors on demand to whoever needs them. Thus a freelancer has a lot to handle own their own especially when it comes to their payment/taxes/legal also finding work/projects/contracts and negotiating the price for their work, while contractor has their company's support to handle many(all) aspects for them. On the other hand a freelancer gets paid whatever was agreed for the work, while contractor most likely gets paid the fixed rate from their company.

Answer 4

There is no clear definition but here is mine:

A contractor is an hourly worker with an extended or open ended contract. This may be direct (i.e. 1099) or through a agency (i.e. w2 employee of the agency)

A freelancer is hired on for a specific job and paid a fixed price for the product.

As for the advantages and disadvantages. It depends on the job and the worker. Obviously if you are being paid by the job you may underestimate your time and get paid less per hour. This can work the other way around of course.

There are probably many many tax implications which are quite variable and it is difficult to know which arrangement would be best for any individual.