If you’re considering making the transition from paid employee to freelance writer or consultant, make sure the working relationship you have with clients doesn’t breach the taxation laws in your country. This blog explains the difference between true freelancers, contractors, and paid employees.
REMEMBER: this is general advice for informational purposes and does not take the place of a consultation with a qualified Accountant or Tax Agent.
Paid employees have the benefits of job security, regular wages, paid allowances (holidays, sick leave etc), supervision, and guidance. Their employer provides the tools, equipment, and space they need to work. And if they make a mistake while doing their job, they’ll still be paid while they fix it (though they might be disciplined and demoted).
Paid employees are:
- Working to hours determined by the employer.
- Working in a location directed (or approved) by the employer.
- Working to company or organisational standards.
REMEMBER: Employees receive a salary, wages, or commissions and their employer withholds tax from those payments, then forwards it to the relevant taxation authority.
Freelancers are independent writers (or other professionals) who work project-to-project. They quote for jobs in advance and the client pays the agreed price. They provide their own tools (software, computers, subscriptions) and office space. They don’t receive any allowances for annual/sick/long service leave. Freelancers are legally responsible for the work they produce and are liable for the cost of fixing mistakes.
- Working to a project deadline, but at hours they choose themselves.
- Working from their own office space, or where they choose.
- Working to a project brief.
REMEMBER: freelancers are self-employed and pay the their own taxes and superannuation. Once a project is finished there is no ongoing relationship with the client — unless another project is negotiated.
A word about contractors
If you want to get into technicalities freelancers and contractors are slightly different — many contractors actually work for labour companies and temp agencies while freelancers are usually self-employed. But taxation agencies (at least in Australia anyway) only differentiate between employees and contractors. For all intents and tax purposes, a true freelancer would be considered a contractor.
So the what’s the big deal anyway?
Some organisations try to dodge their tax, sick leave, and superannuation obligations by attempting to hire their employees as freelancers or contractors. The big deal is that if you are being paid as a freelancer but the tax authority classifies you as an employee, you’ll be in breach of taxation and employment laws. Mistakes like this can land both you (and your client) in hot water with the taxation office — and both parties may be liable for hefty penalties.
It’s important to remember that your taxation authority is the one to decide on your classification as either a freelancer/contractor or an employee – meaning you can’t just take yourself off the payroll, work from home, and start issuing invoices.
Here’s a couple of common myths:
- Having a Tax ID or ABN number. Just because you have an ABN or Tax ID number and send invoices to your client does not guarantee you’ll be classified as a freelancer or contractor. If you’re working on premises, using company equipment, and being paid a travel allowance you’ll probably be classed as an employee.
- Only doing short projects. It doesn’t matter if the job lasts a week, a month, or three years. If you’re working alongside other employees at hours set by the company, or using a company car you’re probably an employee.
- 80-100% of working time . In Australia if you do more than 80% of your freelancing work with one client you may still be classified as an employee. Check with your accountant for the ruling in your own country.
REMEMBER: when operating any legal business entity (including writing businesses) always engage a qualified Accountant or Tax Advisor to ensure your business structure, and tax classifications are correct.
© 2019 Melinda J. Irvine
If you’re a real freelance writer (or want to become one), hook in to my weekly(ish) zine neXtDRAFT. It’s my best WritingBiz tips, book reviews, poetry, and stories all in one place. Every week.