In order to understand what is meant by freelancing it is useful to start by looking at how it differs from being employed. The largest single difference between employment and freelancing is accountability. As an employee you are accountable to your boss and the company. As a freelancer you are accountable only to yourself.
If you are an employee, then each month your employer pays your salary into your bank account. The amount you receive includes deductions such as income tax, social security or national insurance, pension contributions, student loans and anything else your employer is entitled or obliged to take. Also, your employer is usually legally obliged to offer paid holidayfn1 and, in the UK, to provide a pension scheme. In return, your employer will stipulate your working hours and your place of work. Your boss will decide what work you do, and the company will be responsible for providing work for you on an ongoing basis.
Contrast this with the freelancing world, where you will be paid only for the work that you do, and then only after you have submitted a valid invoice in accordance with the client company’s terms. Your first commission or assignment will probably be accompanied by a series of forms to fill in – to verify your freelance status and to get yourself set up on their finance system so that they can be in a position to pay you. Then, once you’ve done the work, you will need to send in your invoice for approval.
Only then will the company be willing to pay you, and this will be in accordance with their payment terms. The good news is that, when you do receive the money, you receive it in full – there are no payroll-type deductions made when you are paid. The bad news is that yo u have to put some of the money aside to cover your tax bill when it arrives.
As an employee, your employer would usually provide you with whatever you needed to do your work whereas freelancers are expected to provide their own tools of the trade. It’s like hiring an SEO Leeds expert to fix your web rankings: you’d expect them to turn up with everything necessary to sort out your problem. As a freelancer, you are hired to deliver a service and you should have the tools at your disposal to provide that service. You also have a responsibility to keep those tools in good working order and up to date.
In short, employees can focus on doing the work they’re assigned whereas freelancers must think about getting work as well as doing it. Holiday pay is a complex issue and different industry sectors handle it differently due to their varying requirements for freelancers. When freelancing, the rule of thumb always used to be ‘no work no pay’. It’s not as cut-and-dried as that these days because there are many instances where freelancers may accrue holiday pay as part of their freelance contracts. How this works will depend on where in the world you are working as well as the sort of freelance work you do.
Pensions are a big challenge when you are a freelancer. Cash flow can be very erratic, which means it can be hard to find a set amount of money to lock away on a regular basis, and on top of this you must research and set up any pension scheme yourself.