Contracting, Freelancing and the Forms Behind Each

Two people doing similar work here can occupy entirely different legal categories. Which category applies determines how you are paid, taxed and protected.

The classification is not a matter of preference

Whether somebody is an employee or an independent contractor is determined by the nature of the relationship: control over how the work is done, integration into the business and economic dependence.

The tests are applied by tax authorities and labour agencies, and they differ between them and between states. A contract calling somebody a contractor does not settle the question.

Misclassification is a real enforcement area, and the consequences fall mainly on the engaging business rather than on the individual, though the individual's tax position is affected too.

Withholding is the visible difference

An employer withholds tax from each payment and remits it. A contractor receives the gross amount and is responsible for setting money aside and paying it periodically.

Contractors also bear both halves of certain payroll contributions that are split with an employer in employment, which is a meaningful difference in the effective rate.

Because the amounts and schedules are specific and change, anybody taking contract work should establish the position with a tax professional before the first payment rather than at year end.

What employment includes that contracting does not

Health cover, retirement contributions, paid leave and unemployment protections are attached to employment. A contractor buys or forgoes each of them individually.

This is why a contract rate that looks higher than a salary often is not, once benefits, unpaid time between engagements and the tax difference are counted.

Certain workplace protections also attach to employment status, which is a consideration beyond compensation for anybody weighing the two.

Work authorisation sits above all of it

For non-citizens, whether any given work is permitted depends on immigration status, and some categories restrict work to a specific employer or to authorised activity only.

Independent or freelance work can fall outside what a particular status permits, even where it is unpaid or occasional, and the rules differ substantially between categories.

This is genuinely attorney territory. The consequences of getting it wrong attach to your status rather than only to your taxes, and the rules change over time.

The staffing layer in between

Much American technical work is arranged through staffing firms, where you are employed by one company and work at another. That is employment, not contracting, despite the language used around it.

These arrangements carry their own considerations around who controls the assignment, what happens between placements and how the relationship is documented.

Reading who the actual employer is on the paperwork, rather than who directs the daily work, is the way to establish which set of rules governs your position.