Freelancer, independent contractor, small business or consultant – what’s the difference?

10.04.2019

Freelancing as a whole has gained a marked increase in popularity over the past decade or so. But what is freelancing? Is the same as a contractor? And where exactly do consultants fit in?

The term freelancer is often misused. This isn’t too surprising with terms such as independent contractor, consultant or, indeed, freelancer mostly lacking clear definitions.

So, what’s the difference between a contractor, a consultant, a freelancer, a small business and a self-employed?

This article aims to clear up some of the common misconceptions surrounding these terms. It has to be said, however, that a strict and fully separating definition does not officially exist. What is universally accepted, however, is that people who are referred to as a freelancer, contractor, self-employed or consultant generally do not work as employees or at least not on a permanent employment basis.

With that disclaimer in mind, feel free to read on as we attempt to distinguish between an independent contractor, consultant, and freelancer!
 

Independent contractors

Contractors, as the word in itself suggests, work on particular predetermined tasks and are bound by contracts. A big difference from that of freelancers is often in the exclusivity of the relationship with the client. Freelancers can, like contractors, be hired for a certain task or project. But unlike freelancers, independent contractors are often bound by the contract they have with their client and are sometimes legally obliged to only work with that particular client until the job is finished, e.g. Website Development projects or ABAP implementation projects.
 

Independent Contractor


Such non-compete clauses result in an independent contractor choosing to simply focus on one project at a time, making it more beneficial for them to look for long-running projects. This is also why contractors tend to work directly on site at the company office instead of at home from a remote location.

Basically, contractors exclusively offer their services, meaning a “stronger” connection to the company. If you are going to have someone work for you on a 2-year-project and that someone is going to work just for you, it makes complete sense to have that person on site, deeply involved with the project. That way the contractor can exchange ideas, talk to co-workers and get a better general feeling about what he or she is supposed to do and why/how exactly it needs to be done.

Typical independent contractor occupations include - accountants and auditors, lawyers, bookkeeping clerks, tax consultants, etc.
 

 

So what’s the difference between independent contractors and employees?

 

It might look like a contractor is actually a temporary employee. However, legally there is a huge difference. For an independent contractor, the company is not required to pay taxes and no employment or labor laws apply to them.
 

Freelancers

Having read about independent contractor carefully, you now already have a pretty good idea of what the main aspects defining a freelancer are. 

If we take a look at Wikipedia’s definition of a freelancer, a freelancer is defined as someone who is self-employed and is not necessarily committed to a particular employer. They are sometimes represented by a company that resells their services to a client or work independently.
 

Freelancer


So, freelancers are usually not constricted by contractual agreements such as a non-compete clause, allowing for more flexibility. This opens the door to working on multiple projects at a time. Since a person working for several clients at once cannot be present at all offices, freelancers usually work from home and off-site work is preferred.  

Freelancers often find themselves working on several one-time jobs or projects as needed.  

Typical freelancer occupations include IT roles such as developers, web designers or system administrators and media and advertising roles such as logo designers, Google Ads experts, etc.
 

 

But what’s the difference between a freelancer and a contractor?

 

You’ll often find the terms freelancer and contractor interchangeably used when discussing work that is to be outsourced. But do they mean the same thing? Hardly.

Contractors are generally defined as “A person or company that undertakes a contract to provide materials or labor to perform a service or do a job.”  

Now you may think “Hey, that sounds an awful lot like what a freelancer does!” This is where it becomes crucial to highlight a key difference between freelancers and contractors - employment duration.

While contractors may or may not be self-employed, their employment period is determined via a constructed contract that mentions a fixed period of time. Freelancers, on the other hand, are 100% self-employed and work by hour, day, or project.

Also, freelancers also tend to work with multiple clients while contractors generally work with one client at a time.
 

 

 

Consultants

The main aspect that makes consultants different from the two groups described above, is again to be found within the word itself. Consultants do just that - they consult, meaning they provide a client with an expert opinion, advice or direct training in their field of knowledge, e.g. in the field of SAP.

Generally, a consultant is brought in to a company to help the company grow and learn, or when a project requires more expert opinion. They are well-experienced in the area they offer their consulting services in and so are generally recruited to deliver plans and solutions quickly, thus saving valuable time for the management team. 
 

Consultant


Typical consultants occupations include roles such as SAP consultants, IT business consultants, software consultants, data migration consultants, etc.

 

Consultant vs Contractor

Over time, the term consultant and contractor have become blurred. Wrongly so - as mentioned above there is indeed a difference between a contractor and a consultant role.  

It can be noted, however, that once a consultant provides the company with advice or information on what needs to be done, they might sign an agreement with the client to carry out this particular service. At that point, a consultant becomes a contractor, which is why these two terms can often be confused.

However, while a consultant who finally leads and works on the implementation is also technically a contractor, you will not generally find consultants who call themselves contractors.

Conversely, a contractor is not necessarily a consultant if they work under the manager’s directions or happen to lend expert advice on a larger project.
 

So what’s the real difference? 

The biggest difference lies in the price and the (usually) higher hourly rate from consultants. In fact, consultants often charge per project rather than per hour when the project is well-defined and the scope of work can be listed down carefully. Due to the vast insight gained from experience, consultants are often the best choice for companies looking for quick and detailed solutions to their specific problems.
 

Small Business

When starting out with a freelance job, most freelancers don’t have a bigger business in mind. But freelancing has a way of growing exponentially – especially if you’re great at what you do! A job well done usually results in long-term clients who stick around, while new clients continue to come in. As your client list continues to grow, you may find that the workload is quickly getting out of hand for you to manage alone.

This is when you might want to consider starting a limited company and become a business owner with your small business. Small business owners usually hire people to work with them (Maybe hiring a family member?), meaning they have increased responsibility and have to manage their team.
 

Small Business


The number of employees one is allowed to have and still remain a small business varies quite a lot depending on the country. You can hire no more than 15 people in Australia, going up to 50 in the EU and reaching a staggering 500 employees in the US. Once again, a small business usually means more employees and more responsibilities, but can be useful for making a name for yourself.

 

Self-employment

The definition of a self-employed worker seems quite simple from its own name: People who work for themselves and not for an employer. However, the definition of the term self-employment varies across countries and so you need to consider where the person operate the business.

For example, in the U.S, self-employed people have one of the following business types:

  • Independent contractor
  • Sole proprietor or sole trader (most common business in the U.S)
  • Member of a partnership
  • Member of a limited liability company

On the contrary, in the UK a self-employed person can’t operate through a limited (or unlimited) liability company. 
 

To quickly sum it up, here's a table listing down the different terms and their definitions. 

Comparison


Hopefully, this short explanation did more than just further confuse you!

Distinguishing between these roles can be difficult but you now have an inside look at the different roles, what they mean, and the main differences between freelancers, contractors, consultants and small business owners. What is your business? Are you a freelancer or a contractor? Let us know in the comments!

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