There is a joke among freelancers: "You are a contractor when you are getting paid, and a freelancer when you are unemployed." This joke, however, chuckle-worthy, is not accurate. Freelancers are independent contractors, not contractors, and there is a difference between the two. Understanding this difference is important because it affects tax liability as well as your rights under business law.
Outsourcing and Freelancing Have a Symbiotic Relationship
Outsourcing seeks a service, and freelancing provides a service. Although freelancers can be recipients of work that has been outsourced, typically, when we think of outsourcing we think of hiring contractors for cheaper (usually foreign) labor.
Companies that outsource on a large scale most frequently contract with other companies (particularly in another country where labor is cheaper) to perform ongoing major operations such as providing customer support or manual labor (manufacturing). In other words, when we talk about 'outsourcing,' we are referring to using an outside company to handle what would otherwise be an in-house service or department.
Freelancers are more likely to be hired to do one specific job, or for a certain project, or for a limited short-term period of time, and rarely would a freelancer be retained to handle truly outsourced work such as to function as a customer service or manufacturing and distribution department.
Dictionary.com defines outsource as: (verb) to subcontract (work) to another company. Further, "outsourcing (of a company or organization) to purchase goods or subcontract services from an outside supplier or source." By that definition, you might mistakenly assume that if a freelancer is also an outsourcee, and outsourcers subcontract, then by default, a freelancer is, therefore, also a contractor. But that is not the case.
Contractors, Independent Contractors, and Freelancers
Although the terms are often used interchangeably, freelancers and contractors are different from each other.
Merriam-Webster defines contractor as:
"A person or company that undertakes a contract to provide materials or labor to perform a service or do a job."
Again, with that above definition, it would appear that freelancers, because they are "a person," and they do provide services, would, therefore, be contractors. So we must also look at two additional definitions to make sense of all this:
'Freelance' (as an adjective) is defined with tighter criteria:
"Working for different companies at different times rather than being permanently employed by one company." As a verb, "to earn one's living as a freelancer."
It is important to distinguish between contractors and independent contractors as well. The Small Business Administration does see freelancers as independent contractors as opposed to contractors and seems to indicate the freelancer is someone who works for themselves and by themselves (meaning they have no employees of their own.)
The Internal Revenue Service (IRS) provides the following definition and examples of independent contractors:
"People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax."
So aren't freelancers independent contractors and therefore, all freelancers are outsourcees? Again, that depends on how you define both. The IRS further explains when you are not an independent contractor this way:
"You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed."
In the case of outsourcing customer service to another company, a relationship exists where the employer (the company outsourcing work) does maintain some control over how things will be done.
Freelancers are independent contractors who should receive 1099 from the company using their services and are subject to paying their own taxes, including self-employment tax.
The contractor may get benefits such as worker's compensation insurance and is often paid by a W2 and will have taxes deducted from them and are not required to pay self-employment taxes.
Contractors often work on-site and are expected to work certain hours and days for a set fee and often employ their own staff as well. Contractors also work for a company (or own their own company.) The federal government is a good example of a system that employs (uses) many contractors. These contractors often work for other companies who will the government and then pay the contractor.
A freelancer is more likely to work for multiple clients and receives a 1099 statement for tax records. Freelancers are more often used for one-time jobs or on-call as needed and are usually work off-site.
In the grand scheme of things, it does not matter how you think of yourself, independent contractor or a freelancer, as long as you can find enough jobs to sustain yourself.