What’s best – being self-employed or a contractor?

In small business, you hear a lot of terms describing the status of how you work. Self-employed vs contractor – in this article we put the two to the test.

For starters, have you considered the benefits of being self-employed or the benefits of contracting? You could also work freelance or as a subcontractor, so we’ll also throw those in the mix.

So, which is best for you – and how do you decide? It depends on how you want to run your trade business.

Decide how you want to work

Overall, choosing which is best for you depends on factors like:

• How you want to work
• When you want to work
• Where you want to work
• Who you want to work with

Additionally, there are other considerations:

• What trade skills you bring to the mix and whether you want to learn a new trade
• What kind of business accounts and bookkeeping that you want to be responsible for doing
• The amount of business insurance you are comfortable with to protect your trade business
• How you want to pay tax on your taxable profits and National Insurance
• How your work ideas fit into your business development strategy

Choose a business format that’s best for you

Generally, the benefits of being self-employed or a contractor apply to more than one type of business structure:

• You may prefer to be a self-employed sole trader, which is a great way to start a trade business
• You might want to enter a partnership as an option when colleagues set up a trade business together
• Another option is to set up a limited company if you want to be a contractor or subcontractor

When you’re just starting out as a tradesperson, there is lots to consider. Especially if you’re starting your own business and considering the different legal structures.

But one key thing to note is that you can’t be self-employed for a limited company that you own.

What are the benefits of being self-employed?

If you haven’t gone it alone before, then going self-employed might seem like a big step. However, there are a number of reasons you may want to start out on your own:

• Be your own boss
• Work when and where you want to
• Earn more by charging higher hourly/daily rates than an employee earns
• Pay tax through self-assessment on your taxable profits after deducting your allowable business expenses
• Work for lots of different customers on a wide variety of jobs
• Take on new customers when you want
• Build your own network of suppliers and useful contacts
• Learn new skills when you want
• Sort out your work-life balance and work at the right time for you

You need to truly weigh up the old self-employed vs contractor debate, and see which best suits your circumstances.

What are the benefits of being a contractor?

The benefits of contracting are broadly similar to those listed above. That’s because as a contractor you can also be self-employed.

Being a contractor might suit you better if you’re looking to:

• Work for a smaller number of customers on longer-term projects compared with being self-employed
• Build your business by taking on employees
• Use subcontractors on projects
• Earn more by taking on more complex work that can also involved higher costs
• Take out the worry of sourcing a separate stream of customers
• Reduce risks on jobs by having written contracts and Terms and Conditions with customers that can be legally binding

What are the drawbacks of being self-employed or a contractor?

When we look at both self-employed vs contractor for their potential drawbacks, you’ll find they’re similar in many areas. Both job types can carry these key risks for tradespeople:

• You can’t guarantee your business income and it could come in peaks and troughs
• You don’t have the same rights as a company employee
• You don’t get holiday or sick pay
• You have to sort out your own pension
• You might be working alone on jobs
• You could end up working long hours
• You’ll need business insurance to protect you, your customers and the public
• You’re responsible for managing your finances, cashflow and business accounts
• You’ll have to bring in new business by marketing your services
• You might need to borrow money to start up your self-employed trade business
• If you’re starting out as a tradesperson, it would be harder to get a loan or mortgage until you have a few years of trading records

There are many benefits of being self-employed. There are many benefits of contracting. It is therefore important to weigh up the pros and cons of each. As you would with any trade business venture.

Subcontractor v self-employed

Contractors take on subcontractors to help them complete jobs.

Generally, as a subcontractor, your customer is the contractor rather than the end customer. In contrast, self-employed tradespeople work directly for their customers.

You can be a labour-only or a bona-fide subcontractor. It is much better to have the support and legitimacy provided by being bona-fide.

Self-employed v freelance

There isn’t much difference in the question of self-employed vs freelance. The two terms are often interchangeable.

Freelancers tend to work in creative trades. The way to decide which you are comes down to how you like to work.

• Often, freelancers work alone – or team up with other freelancers on bigger projects
• Additionally, freelancers typically work on multiple short-term projects for lots of different customers
• On the other hand, self-employed tradespeople are more likely to have ambitions to build up a business
• When you’re self-employed you may only have a handful of contracts on the go

From a tax point of view, they are usually the same. Freelancers and self-employed tradespeople generally pay tax on their annual taxable profits under HMRC’s self-assessment scheme.

Always check the tax position

HMRC sums it up neatly for self-employed tradespeople. When looking at subcontractor v self-employed in the construction industry you need to know about Construction Industry Scheme (CIS) rules.

The scheme ensures contractors and subcontractors pay the tax and NI they owe.

Self-employed tax rules

You’re self-employed if you run your own trade business.

That means you are responsible for its success or failure. How you run your business tells HMRC whether or not you are self-employed.

As self-employed, you’ll probably need to pay tax under the self-assessment scheme. The same self-assessment rules usually apply to contractors.

Contractor tax rules

If you’re a contractor or subcontractor, always check carefully whether you – or whoever you are working for – is responsible for paying your tax and National Insurance (NI).

A big difference for self-employed v contractor is that contractors have to follow IR35 rules regarding how they pay income tax and National Insurance.

IR35 closes a loophole of company employees getting paid as contractors to reduce their tax bills.

How to check your employment status

There’s a handy way to check your employment status if you’re not sure. HMRC’s employment status-checking tool is a good way to find out.

Contractor responsibilities in the construction industry

If you are a contractor or subcontractor working in contraction then you could have additional health and safety duties.

These are the Construction (Design and Management) regulations that provide safeguarding measures.

For contractors, this is focused on looking after individuals or companies who are carrying out the work. CDM regulations are about knowing and managing risks.

Get help with your trade business either as self-employed or as a contractor

Checkatrade can help your business grow, whether you work predominantly as self-employed or as a contractor.

As well as the recognisable Checkatrade tick and customer reviews, our members also receive help with new enquiries.

But there are also many other benefits of a Checkatrade membership too. They include:

• Dedicated membership advice team
• Work guarantee up to £1,000 for 12 months
• Exclusive offers and discounts
• Up to 20% off Public Liability Insurance
• Reduced cost of workwear and branding
• Savings on other business essentials such as vans, fuel and materials

FAQs

What’s the difference between being self-employed and an independent contractor?

An independent contractor is basically the same as a contractor. Working for yourself makes you self-employed.

What’s the difference between self-employed v freelance?

These two terms often mean the same thing. That can be the case for how you pay tax. Freelancers tend to work in creative trades.

What’s the difference between subcontractor v self-employed?

The main difference is often down to your customers. Self-employed tradespeople work directly for a customer. The main contractors usually take on subcontractors, so, subcontractors are not paid directly by the end customer.

Can you be self-employed and employed at the same time?

Yes. You can be both at the same time if you want. An example is an electrician or plumber who works for an employer during the day. They then also run their own business at other times.

Content disclaimer: This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer here.