Freelancing nowadays is fast becoming the route of choice in the gig economy. It means one can be free with their time, work independently, and literally engage in a wide variety of segments of services. If you have gone through the basics of freelancing, perhaps you might wonder whether freelancers fall under the category of self-employment. This article will explain whether that is the case and everything about its legal and practical consequences.
What is Self-Employment?
Defining Self-Employment
Self-employment is when a worker operates independently, rather than under the employment of either a firm or another individual. The self-employed are independent and in control of their schedule and take responsibility for the business. Characteristics of self-employment include:
- Independence: Self-employed workers are in full control of whatever goes on in the business.
- Tax Obligations: Unlike employees, it is the responsibility of the self-employed worker to compute and pay his or her taxes.
- Risk and Reward: Whatever the risk attached to the business venture undertaken by a self-employed individual, he or she will bear it alone and enjoy all the fruits of his or her success.
Types of Self-Employed Workers
There are many modes of self-employment. Following are some typical examples:
- Freelancers: Those who provide their services on a per-job basis and, in most cases, work for more than one client.
- Sole proprietors: those who are usually running their own businesses and most of the time, they do not hire workers.
- Small business owners: those entrepreneurs owning and managing a business with some employees hired.
Independent Contractors: professionals offering their services under contract but are not full-time employees of the client.
Freelancers and Self-Employment: Defining the Relationship
Freelancers as a Subset of Self-Employed
Of course, freelancers are self-employed. In a nutshell, freelancers represent a particular segment of self-employed people who can work independently, usually project by project. They do not have any binding contract with a single employer for the long term and, therefore, can engage in multiple projects with different clients. Whereas all freelancers are self-employed, the opposite is not necessarily true; not all self-employed persons are freelancers.
How Freelancers Differ from Other Self-Employed Individuals
While freelancers share similarities with other self-employed workers, the differences are as follows:
- Difference between Freelancer and Sole Trader: The sole traders usually operate a business that may involve retailing products or services directly to the customers. As for a freelancer, they usually focus on the professional services they can offer, such as writing, graphic design, or consulting.
- Freelancers vs. Independent Contractors: Although both freelancers and independent contractors work on a contract basis, freelancers will often work with more than one client at one time while independent contractors may work with longer-term, more regular clients.
Legal and Tax Considerations of Becoming a Freelancer
Taxes a Freelancer Must Pay
Freelancers are considered self-employed and must pay their own taxes. This includes:
- Reporting Income: Income earned by all of the freelancer’s clients must be reported.
- Estimated Taxes: Because freelancers are not like any other employee, taxes are not withheld from their paychecks. In its place, they are supposed to pay estimated taxes every quarter.
- Forms and Documents: In the United States, most freelancers receive Form 1099-MISC from clients for tax returns. Similarly, each country has its own form of tax documents.
Business Registration and Legal Requirements
Although freelancers are their own bosses, most are not obligated to file the business entity unless mandated by local ordinances, or in cases when they want the name of their business protected. In this regard, some freelancers might want to incorporate a sole proprietorship, LLC, or partnership as their freelancing career grows to ease tax filing and protection of assets.
Benefits and Challenges of Being Self-Employed as a Freelancer
Advantages of Self-Employment to Freelancers
Several advantages come their way because freelancers are self-employed:
- Flexibility: In freelancing, one is allowed to decide on the amount of time they will commit to working, the kind of projects to accept, and the people to work with.
- Potential Income: Freelancers can determine their rates; thus, they can earn more than those who are employed traditionally.
- Freedom in Creativity: Freelancers have much freedom to apply personal creativity.
Challenges Faced by Self-Employed Freelancers
- Income Insecurity: Freelancers may not know one month from the next how much money they will have coming in because it all depends on what work is available.
- No Benefits: Freelancers are responsible for their health insurance, retirement plans, and benefits.
- Administrative Headache: Freelancers must do it all themselves – invoicing, bookkeeping, and filing their taxes.
Self-Employed But Not Freelancers: Examining Alternative Scenarios
Examples of Self-Employment Without Freelancing
Not all self-employed are freelancers. Here are some examples.
- Business Owners: Those who run their own businesses involving the hiring of others, as in the case of a retail store or restaurant, are self-employed but not freelancers.
- Independent Tradespeople: Electricians and plumbers fall under the category of independent business people; however, these individuals, too, do not operate as freelancers.
Why Knowing What the Differences Are Is Important
Having a deep understanding of the difference in freelancers from other self-employed is critical for many reasons, which includes but is not limited to tax, law, and business planning. There may be differences in tax obligations or other legal requirements that a freelancer has to meet as opposed to other classifications of self-employment.
Final Thoughts about this
While freelancers are indeed self-employed, not every self-employed worker is a freelancer. Drawing that it was important to understand the difference such workers create in legality, taxation, and operation. Being able to find out where the position of a freelancer fits within the wider spectrum of self-employment will help you better navigate the innumerable challenges and opportunities you face when you are your own boss.