Sometimes it might get confused whether you are hiring a freelancer or an employee.

Or one may ask when does a freelancer you hire become your employee?

Agreeing on a personal contract, when the individual you hire calls him to be self-employed, has advantages in itself both for the employer and for the individual as well.

They have perceived flexible arrangements where the individual doesn’t get holiday pay, sick pay, or pension payments of the individual, and of course, his national insurance contributions and the payments are denied. 

If you want to fix your relationship with the individual you call your freelancer or employee at the start, you would avoid further complications later.

Whenever you decide that you do not need to use the services of the freelancer anymore due to his unsatisfactory work or because of some other reasons, the problem may arise here.

You keep on expecting that you just hired a self-employed person so that you would easily be able to end the arrangement.

However, in this case, the self-employed freelancer may proclaim to be your employee all along.

That self-employed individual may now demand you to pay him redundancy pay, notice pay, backdated holiday pay, or sue you for unfair dismissal.

As of April 2021, the maximum compensatory award for unfair dismissal is £89,493 and redundancy payments could reach £16,320.

It has been seen in the working relationship that the workers claim holiday pay, sick pay, national insurance but keep on escaping from tax implications.

The HR advice service can support you with any freelance job issues and can keep problems at bay further down the line.

Freelancer Vs. Contractor Vs. Employee

The independence of the workers is important when determining the employee’s status.

If an employee is specific about how the employment should be done that is probably an employer-employee relationship. 

This distinction applies whether work is part-time or temporary no matter how long it lasts. 

The IRS claims the independence of workers and considering employee benefits are the vital factors that influence a person whether they are a freelancer or an employee.

However, when we compare the working hours, workplace, and taxes upon the individual, we would find various key differences between a freelancer, a contractor, and an employee.

Below are the key differences we may consider.

FreelancerContractorEmployee
Employment stateSelf-employedSelf-employedWorks for a specific client or company
Working hoursFlexible work hoursFlexible work hoursSet work hours as per contract
WorkplaceWorks remotelyWorks remotely or at the client’s officeWorks at company’s office
No. of clients at a timeHas several clients at onceHas several clients but not at onceUsually works for an individual client at a time
TaxesOnly pays self-employment taxes; not subject to FICA tax withholdingOnly pays self-employment taxes; not subject to FICA tax withholdingThe company withholds various taxes including income, social security, and medicare taxes.

Determining Your Employment Status

There is no exact method by which you can determine your employment status.

In case, if there is a dispute between an employer and an employee, an employment tribunal will make a decision after considering all the circumstances of the subject.

These are the main categories to look at:

ItemDescription
InstructionsDo you have the right to give instructions?
TrainingDo you train a worker?
InvestmentDoes the worker have a significant investment in equipment or facilities that are not typically maintained by employees?
Hiring/firingDo you have the right to hire or fire a worker? 
RelationshipIs there a continuing relationship between the worker and yourself?
HoursDo you set hours during which the individual must complete the task?
Tools and materialsDo you provide the worker with tools or materials?
Profit or lossCan the worker incur a profit or loss as a result of his or her work?
OrderingDo you have the right to set the order in which services are performed?
ReportsDo you require the worker to give you written or oral reports?
Hourly rate, weekly, or monthly payDo you pay the person by the hour, week, or month?
Worker’s right to terminateCan the worker quit at any time?

The department of public health said its guidance titled Supervising Directions or Control ’ 2014 could be useful for anyone.

There’s also a fascinating reading of the employment status manual by HMRC with all the detail you could ever need about the subject.

These questions are only a summary to guide the case only and the courts take a look at all of the tests – none will decide all of it alone.

 Aside from this advice, you may also need the advice of another expert in such a situation.

Other things to consider

HMRC may be able to help you decide. 

You don’t qualify as employed if you make a job as an employer. 

If you’re deemed an employee and have been appointed a partner (not a freelancer) HMRC might seek compensation for this ‘extra work’ as the income taxes paid in respect of the firm’s clients. 

What can I do if my employer believes I should be the sole self-employment – and not the only job for which I could have a job?

 How are the people doing it?

 And you might not be employed at every job – each must be considered separately.

What Is A Contractor?

A contractor is an individual or entity that provides his services to another individual or organization on the basis of a contract.

Any contractor sells his services through an independent company.

While they will always require clients they are technically self-employed. 

Contractors execute their work pursuant to special contract arrangements and invoice the outside party. 

They are not permanently affiliated with the company. 

This is important for tax purposes. Because they are in employee status, they are not entitled to benefits like permanent employees. 

A contractor’s maximum length of time is not specified. 

Problems usually arise when it is not clear what the relation of the job is and how reliable the worker is. 

HMRC has proposed legislation that separates fake contractors from real contractors.

The importance of establishing your status

ACAS has published guidance to employers in relation to employment status in the “gig economy”. 

The guidance will be of great value to companies after numerous situations involving employment status. 

This includes agency workers, apprentices, fixed-term employees, piece work, volunteers, work experience, internships, and zero-hour contracts.

It is about how to deal with the ‘gig economy’ of working individuals. 

There is a difference in taxation and benefit contributions between self-employed people employed and employees.

Can You Work For A Company On A Self-Employed Basis?

Self-employed workers are generally hired by a company where they offer their specified services.

Even though they may work in a variety of occupations or trades under their own employment without being employed by others. 

Lawyers, investors, insurance agents, salespeople, and doctors are considered self-employed.

HMRC introduced the regulations because certain shopper firms can use their work as self-employed. 

Ideally, this arrangement would be acceptable for individuals who were working in their own interests. 

Nevertheless, it is becoming increasingly concerned about how firms are profiting from a small subset of the labor force. 

The UK has been lost on national insurance revenues – says the HMRC. 

Companies that accept employees as part of their payroll shall pay tax. 

Employers must then pay an annual maximum of £2200,00 in interest. 

Taking on a freelancer can reduce most of these burdens.

Decide your Worker Status with these IRS Categories

The more your client controls the financial aspect of your job, the higher your possibility of hire. 

The job position of the workplace also determines your status. 

Important factors to account for are finances and control relations between employer and company. 

What’s even more important is if you are an employee or an independent company.

 In reality, the more that people control money and the less chance they have of being an employee.

 It also can be harder for an employee to make contracts if their employer controls their contract. 

A partnership between the employee and the employer decides whether you’re a contractor or an employee in an employer’s office.

Your Worker Status and Beyond

It’s more important whether someone is a freelancer or an employer. 

It ensures you don’t lose out on any benefits, giving you clarity about work titles and putting you in a position that keeps you legally accountable.

Given how important your status is, it seems only fitting that you acquire the information you need and determine that. 

Why does correct classification matter?

The proper classification of a worker reflects a number of reasons. 

Proper classification helps you and employers understand what taxation is to be handled. 

If an employer considers you an independent contractor it won’t have to withhold taxes on your wages and payees. 

You will then be able to fully manage your taxes and reports for a self-employment business in the United States. 

If you are an independent worker you will be required to file a self-employment income report. 

What should I do if I think I have been misclassified?

In most cases, improperly classified data is simply an error based on ignorance or confusion around the rules. 

When you seek to reclassify, do this with understanding and get them the information they should need to explain their classification with you. 

If the employers still choose to not do anything until you alert them to the situation, contact the IRS for a report on it. You must do this through IRS form SS8.

If you’re still categorized as a sole proprietorship you will have to file a document with the IRS with the numbers of people you use and structure it.

Tips to make your long contracts easier

Here are a few tips by which you can make your contracts easier and make them run longer without any dispute.

  1. Deal with the right person.
  2. Identify each party correctly.
  3. Get your contract in writing.
  4. Keep things simple.
  5. Be confident.
  6. Specify payment obligations.
  7. Agree on a way to resolve disputes.
  8. Agree on circumstances that terminate the contract.
  9. Spell out all of the details.
  10. Pick a state law to govern the contract.

 Frequently Asked Questions

Can a company make you go self-employed?

Always make a good decision before accepting whatever you do not like.. and be careful about this decision.

From 2024 sole traders must report their earnings and pay quarterly taxes. This is known as Making tax digital, information that can be accessed here. Depending on what happens HMRC could charge a person an income tax on the earnings you have earned while you were an independent. You should also have to file both the HMRC tax return and the self-employment tax return to the HMRC.

Are you really self-employed?

HMRC doesn’t simply take UTR information at face value as they look at the resiliency of the contract. They have rules on what makes you self-employed. If your contract does not meet these rules then you may be forced to work for a company you worked for. If you don’t work for HMRC you should possibly do something for that company you work for. If a person is not registered to work at HMRC he will be considered self-employed.

Am I self-employed?

You are probably likely to work as a freelancer if: Your contract is called a ‘contract for service’ You can read what rights you have if your client cancels your contract in our Article. If your contract falls under the requirements of IR35 are those clauses within the contract or outside? How can I become a freelance writer?

Am I an employee?

There is no single law test determining whether you are an employee or a worker. 

You’re unlikely to be working for the contractor you’ve signed with the employer if you have one of these ‘contracts of service. In case the person’s job title changes after. We work under the “consent of duties.”

Fixed-term contracts

Fixed-term contracts can be fixed period (off-line) contracts. They’ll be extended if the contractual terms expire. Unemployed people are offered permanent contracts with no terms or bonuses.

Am I a worker?

This is a larger category than an ‘employee’ in EU legislation. An employee is anyone who works with an employer under a contract of employment which may not be a written contract. 

How can I check my employment status?

HMRC has an online tool used to check your employment status on companies’ sites. Alternatively, you can contact HMRC to discuss your situation.

How long does it work?

In determining this by two criteria Contractors must pay a reduced tax rate: how long they are doing work and cost. The disguised employees will probably work long contracts because it’s actually a full-time position. While it doesn’t include how long your work time is, ‘disguised employees’ will work longer ‘contracts’ since they’re essentially full-time employees. But the definition is lacking.