Employee, Contractor or Freelancer: Differences in Tax Approaches

Today's workforce is undergoing rapid and dynamic change. While being an employee is still the most common type of work arrangement, the number of independent contractors and freelance workers has been growing significantly over the past several years. Freelancers now account for over one-third of workers in the US economy. But what's the difference between these groups and how does it impact tax approaches?

Here's a real-life example of the difference between a freelancer or contractor and an employee. A writer starts writing DIY tutorials for a home improvement supply company. The materials for the project are purchased and she fixes up her home while completing the tutorials. As a freelancer, she claims the income from the job while counting the materials as a business expense and pays her own payroll taxes. An employee may have the materials provided by the employer while being paid hourly or on a salaried basis with the employer submitting payroll taxes, allowing the employer to claim the materials as a business expense. That being said, in some situations, independent contractors may choose to have income taxes withheld from their payment.

Generally speaking, independent contractors and freelancers tend to have more in common than either group does with employees. An independent contractor may be on a contract for a single company for an extended period of time or to several different companies at the same time. A freelancer generally has a number of different companies for which they work, but may not have a specific contract beyond an individual project. These groups won't usually have protections in place once the agreed-upon work is completed, while employees have an expectation of future employment for the most part.

There can be vastly different tax liabilities and categories of expenses that can be written off depending on whether you're an employee or a freelancer or independent contractor. For that reason, it's important to know which classification you fall under. By knowing the differences in how employees, contractors and freelancers approach financial and tax matters, it's much easier to determine what you need to do should you find your employment status change in the future. If you need help with determining the right approach after such a change, please feel free to reach out to the business and accounting professionals at AccountRely today.