Understanding Independent Work: Glossary of Key Terms

Freelancer vs. Independent Contractor vs. Sole Proprietor: Understanding the Terms

When navigating independent work or hiring external talent, understanding key terms can help you make informed decisions.

This glossary provides clear definitions of commonly used terms in freelancing, contracting, and business structures.

Glossary

Freelancer

  • A self-employed individual who offers services to multiple clients on a project or hourly basis. Freelancers set their own rates, schedules, and work independently without long-term commitments. They typically handle their own taxes and business expenses.

Independent Contractor

  • A self-employed worker hired on a contract basis to complete specific tasks or projects. While similar to freelancers, independent contractors may have longer-term agreements with clients and follow specific deliverables outlined in a contract. They are responsible for their own taxes and business management.

Sole Proprietor

  • An individual who owns and operates their business as a single entity without formal business registration. Sole proprietors are personally responsible for all business debts and liabilities. Many freelancers and independent contractors operate as sole proprietors unless they form an LLC or other business structure.

LLC (Limited Liability Company)

  • A business structure that provides personal liability protection while allowing pass-through taxation. Many freelancers and independent contractors choose to register as an LLC to separate personal and business finances while maintaining flexibility.

Consultant

  • A professional who provides expert advice in a specific field. Consultants may work as freelancers, independent contractors, or through an LLC, typically offering strategic guidance rather than hands-on work.

Fractional

  • A term used to describe part-time or on-demand professionals who provide high-level expertise without full-time commitments. Fractional executives (e.g., CFOs, CMOs) work with multiple companies, similar to independent contractors but often in leadership roles.

1099

  • A tax form used to report income earned by self-employed individuals, freelancers, and independent contractors. Clients issue a 1099-NEC to workers who earn $600 or more in a tax year, and recipients must report this income on their tax returns.

W2

  • A tax form issued to employees that reports wages, taxes withheld, and benefits. Unlike freelancers and independent contractors, W2 employees have taxes automatically deducted and may receive employer-provided benefits.

Final Thoughts

Understanding these terms is essential whether you're starting an independent career or hiring external talent. Choosing the right structure for your work or business can impact taxes, liability, and long-term opportunities. Be sure to consult your lawyer and tax professional before making final decisions.

At Kelly Perry Consulting, we help individuals and businesses navigate independent work structures and optimize their processes.