People & Leadership

Contractor versus employee or freelancer: What’s best for your business?

Undecided about whether to hire a freelancer, contractor or employee? Read on to find out who would be the best fit for your business.

Published 5 August, 202612 min read Share

Is your small business at a point where things are changing for the better? 

Maybe you’ve won a big contract and need some help fulfilling it. Or you’re in a position to expand and need to bring on more people. 

You know the answer to growing your business is more workers, but should you hire a freelancer for short-term help, a specialised contractor, or a full- or part-time employee? 

Making the right decision starts with understanding the pros and cons of hiring freelancers, contractors, or employees and their implications for your small business. 

Key takeaways

• Freelancers, contractors, and employees differ in how they work, how they’re paid, and the level of responsibility your business takes on for tax, payroll, benefits, and employment rights. 
• Freelancers are usually best for flexible, short-term, or specialist support, while contractors can suit longer projects that need specific expertise and agreed deliverables. 
• Employees usually offer the most stability and control for ongoing work, but they also come with greater legal, payroll, and benefits responsibilities for your business. 

Here’s what we cover:

What’s the definition of a freelancer? 

Freelancers are self-employed professionals who handle their own taxes and don’t receive benefits. They are sometimes known as sole traders. 

According to UK independent professionals association IPSE, the country ended 2024 with about 2.05 million freelancers in the workforce. IPSE defines freelancers as those working in highly skilled occupations, as opposed to the 2.15 million self-employed people who focus on less-skilled areas like gardening, cleaning, and babysitting. 

“They’re ideal for short-term or specialised work,” says Joanne Bell, managing director of accountancy practice Bells Accountants. 

However, Dave Chaplin, CEO and founder of tax compliance firm IR35 Shield, cautions that “sole traders present a tax risk where HMRC can investigate and rule that the sole traders were really employees, leaving the firm with a sizable tax bill”. 

So, it’s important to understand what makes a worker a freelancer according to HMRC employment status guidelines. 

Advantages of hiring freelancers 

The flexibility of freelancers is a plus for small businesses. They’re usually available to fill in skill gaps at short notice. 

With freelancers, there’s also less of a contractual and legal burden compared to employees. 

“There are not normally any HR issues to take into account, as you are not the freelancer’s employer, but it is important to ensure that you have a contract in place,” says Mike Keeling, director of Meades Umbrella, a company that provides umbrella services for contractors and freelancers. 

Chaplin sums up the main benefit of hiring a freelancer, saying, “The freelance arrangement is remarkably straightforward. You specify the project requirements and deliverables, agree on a price, and the work is completed.”

Disadvantages of hiring freelancers 

Hiring a freelancer could cost your business less than an employee over the long term, but according to Keeling, “A freelancer traditionally would be paid more than an equivalent permanent employee—after all, they come with a specific skill set that commands a price.” 

Another disadvantage is a lack of quality control. Freelancers have complete autonomy over their work, so there’s little in the way of quality assurance. 

The process of finding a qualified freelancer can be time-consuming. 

Chaplin says another downside of hiring a freelancer is that sole traders could claim they are “workers” under employment law and seek additional rights and holiday pay. 

What’s the definition of a contractor?

Contractors are independent workers or businesses hired to deliver a specific service, project, or piece of work under agreed terms. They are not on your payroll and are typically engaged through a service contract. 

Contractors cannot be considered employed by your business because they don’t usually work under an employment contract. They are generally responsible for paying their own tax and National Insurance under the UK’s IR35 rules. 

However, their employment status can depend on how the working relationship operates in practice, including the level of control, supervision, and ongoing obligation involved. 

In some cases, contractors can be classed as employees if they’re employed by an agency and work for a client. 

Contractors are responsible for their own tax and are governed by IR35 rules. 

Consider hiring a contractor if you need someone with highly specialised skills and your project will last for a significant amount of time. 

The contractor terms would normally be specified in a fixed-term contract. This may be agreed directly with the contractor’s limited company or arranged through an agency or umbrella company. 

Benefits of hiring contractors 

Chaplin says, “Contractors who operate via limited companies offer an advantage to small businesses. 

“The risk of misclassifying a contractor as being outside IR35 does not apply when small companies hire contractors. The IR35 reforms only shift the risk to firms once they are medium or large.” 

Due to the size and complexity of the work involved, contractors normally work with one client at a time. This means you have more control over how the work is performed. 

It’s not unusual for contractors to work at your business premises, which can result in forming stronger working relationships. 

Although contractors demand high fees, they could be more cost effective because you don’t have to pay employee costs. 

Drawbacks of hiring contractors 

Contractors generally charge high rates, so it’s important to budget for these costs. 

In addition, the contractor can work for a competitor when they have completed your project. You can protect yourself by including a non-compete clause and a confidentiality agreement in their contract. 

Keeling states that compliance “isn’t normally a major issue for small businesses who fall under the IR35 threshold, and you won’t have to worry about dealing with disguised employment issues”. 

He adds, “If, however, your business is over the threshold, it is your responsibility to ensure that your contractor is paying the correct amounts of tax and National Insurance, so you may need to check how the worker is paid—via their own limited company or via an umbrella [company].”

What’s the definition of an employee? 

An employee is someone who works for your business on an ongoing basis, full-time or part-time, and for a specified number of hours. 

Employees usually work under an employment contract, which sets out their role, pay, working hours, responsibilities, and employment rights.  

You are responsible for deducting income tax and National Insurance contributions for your employees. They normally work at your place of business but can also work remotely or on a hybrid basis. 

Chaplin adds, “Employees are entitled to employment rights including minimum wage, sickness rights, maternity/paternity rights, etc.” 

Think about recruiting a permanent employee when you have ongoing work.

Pros of hiring employees 

An advantage of hiring employees is that you have more predictability because there’s a dedicated person doing work over the long term. This enables you to more accurately forecast your cash flow. 

Employees can contribute to a strong business culture. This can lead to greater collaboration and better results for your business. 

Overall, you have more control when you hire employees since you set their working times, targets, and performance indicators. 

Cons of hiring employees 

Chaplin notes that, “Employees require the most administration, as you are responsible for their income tax and NICs via PAYE and must maintain accurate payroll records.” 

The cost of salaries, tax responsibilities, and benefits can quickly add up and can be a disadvantage of hiring employees.Employers must also manage employee training and development, which can be time-consuming and costly because you might need to hire a manager to take on this role if you’ve not got one in place already. 

Lack of flexibility is another downside of hiring employees. If your business experiences a downturn, it’s more difficult to adapt to the new circumstances when you have permanent employees. 

You need to be aware of and compliant with all employment laws to ensure you avoid falling foul of legal requirements. 

What to consider when deciding who to hire 

The right type of hired help depends on how long you need the support, how much control you want over the work, and what level of paperwork your business is ready to take on. 

Consideration	Freelancer	Contractor	Employee
			Part-time	Full-time
Employment laws	Usually not covered by employee rights, but status should be checked carefully	Usually not covered by employee rights, unless the working relationship suggests otherwise	Covered by employment law and statutory rights	Covered by employment law and statutory rights
Tax	Responsible for their own tax	Usually responsible for their own tax, depending on how they are engaged	Employer deducts PAYE tax through payroll	Employer deducts PAYE tax through payroll
National Insurance contributions	Pays their own National Insurance contributions	Usually pays their own National Insurance contributions, depending on the arrangement	Employer deducts employee National Insurance contributions and pays employer contributions where required	Employer deducts employee National Insurance contributions and pays employer contributions where required
Employee benefits	No automatic right to employee benefits such as sick pay, holiday pay, or pensions	No automatic right to employee benefits, unless their status or arrangement gives them additional rights	Entitled to relevant employee benefits, usually on a pro rata basis	Entitled to full relevant employee benefits
Contracts	Usually works under a contract for services covering scope, fees, and deadlines	Usually works under a project-based or fixed-term contract	Works under an employment contract or written statement of employment particulars	Works under an employment contract or written statement of employment particulars
Job security	Typically lowest, as work is usually short-term or project-based	More predictable for the length of the contract, but usually ends when the project does	More stable than freelance or contract work, but with fewer hours than a full-time role	Usually offers the most stability because the role is ongoing
Work environment	Usually chooses where they work and often works remotely	Works according to the location and working arrangements agreed in the contract	Works where you need them to, for agreed part-time hours	Works where you need them to, usually for set full-time hours
Equipment	Usually provides their own equipment	Usually provides their own equipment, although you may need to provide specific tools or access	Employer usually provides the equipment needed to do the job	Employer usually provides the equipment needed to do the job
Payroll	Invoices your business for the agreed work	Invoices your business or is paid through an agency or umbrella company	Must be included on payroll	Must be included on payroll

Think about your reasons for hiring. 

Is there a skills gap? Is your business going in a different direction? Is it growing? 

Chaplin, at IR35 Shield, suggests: “Is the requirement for an individual to provide skills on an ongoing basis for fixed hours per week or month or for a one-off project that needs completing? If it’s the former, then the firm needs an employee.” 

Here’s a checklist of additional points to consider when hiring:

Employment laws

Freelancers and contractors normally don’t have any rights under employment law. Employees have statutory rights, such as holiday pay and auto-enrolment pensions (if they’re eligible). 

An employee might be the best option if you need the stability of someone to work with you long-term. 

Tax

You’re responsible for deducting PAYE tax for your employees. Freelancers and contractors are responsible for paying their own tax. 

You might consider hiring a freelancer or a contractor if you want to be free of the admin burden that comes with deducting tax. 

National Insurance contributions

Freelancers are responsible for paying Class 2 and Class 4 National Insurance Contributions (NICs). Contractors also make their own NICs. You’re required to pay Class 1 for your employees. 

Freelancers and contractors are the better choice if you would prefer not to deal with deducting NICs.

Employee benefits

Freelancers and contractors have no rights to employee benefits, such as sick pay or pensions. You’re required to provide employees with benefits, such as holiday pay and maternity/paternity pay. 

Hiring a freelancer could be the smart choice if you don’t have the budget for employee benefits.

Contracts

The contract for freelancers normally outlines the scope of work, duration, and how much you’ll pay. 

You can either provide contractors with a project-based or fixed-term contract. 

Employees have a detailed employment contract, which outlines their responsibilities, rights, and terms and conditions. 

If you’re looking for flexibility without the legal burden, then hiring a freelancer or a contractor is a good choice. 

Job security

Freelancers usually have the least job security because they are hired for specific projects or short-term support. Contractors may have more predictable work for the length of a fixed-term contract, but that security usually ends when the project does.

Employees generally have the most stability because they work for the business on an ongoing basis and have employment rights that protect them if the role changes or ends.

Work environment (on-site, remote, or hybrid)

Freelancers usually have the most control over when and where they work, so they often work remotely and manage their own schedules. 

Contractors work according to the terms agreed in the contract, which may include set locations, deadlines, or working arrangements. Employees work wherever you need them to. 

Employees could be your best bet if you want a degree of control over the work and where the work is done.

Equipment 

Freelancers and contractors use their own equipment. However, you may need to provide specific equipment to contractors. 

You’re responsible for making sure employees have all the necessary equipment they need to do their jobs. Freelancers provide the best value for money in terms of equipment costs. 

Payroll

Freelancers and contractors produce an invoice detailing the amount you have to pay them (the rate would have been agreed on beforehand). 

You need to provide payroll management for your employees. You might want to think about using freelancers and contractors if you want a hands-off approach to payroll.

Hiring employees, contractors, or freelancers: Your decision

Deciding whether to hire a freelancer, contractor, or employee depends on your company’s needs, budget, and long-term objectives. 

Freelancers offer dedicated skills and optimal flexibility, contractors provide high-level expertise for certain projects, and employees bring stability and commitment. 

But combining freelancers, contractors, and employees may be the smartest way to position your business for success. 

“The optimal solution often involves strategically combining permanent employees with flexible talent,” says Chaplin. 

Bell agrees, adding, “A mix of all three can provide flexibility while ensuring compliance with HMRC rules.”

Frequently asked questions

Browse more topics from this article

• How to grow your business
• How to recruit people
• HR processes for small businesses
• HR, payroll and benefits