Freelance vs Self-Employed

November 21, 2023
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The Indian tech industry, with its rapid growth and dynamic landscape, presents a lucrative opportunity for US tech founders aiming to expand their global footprint. Notably, India's tech sector has become a hub for innovation and talent, fuelled by a strong educational system and a burgeoning startup ecosystem. A significant and growing number of freelancers and self-employed professionals further enrich this fertile ground. According to the latest data from the Centre for Monitoring Indian Economy (CMIE), the proportion of self-employed individuals stood at 83.8% during January-April 2023. 

Source

At the same time, India also boasts of being one of the largest freelancing communities in the world, with over 15 million people engaged in freelance work, contributing significantly to the global gig economy. 

The rise of digital platforms and remote work models has amplified the potential of leveraging freelance and self-employed talent in India. However, tapping into this reservoir of talent necessitates a clear understanding of the distinct legal and operational nuances between freelancers and self-employed individuals. For US tech founders, this distinction is critical, as it influences various aspects such as contractual agreements, tax implications, compliance requirements and overall workforce management strategies.

Understanding the difference in freelance vs self-employed status in the Indian context is a matter of legal compliance and a strategic move. It enables businesses to effectively manage their Indian tech teams, optimise costs and ensure smooth operational integration, all without the complexity and expenditure of setting up a legal subsidiary in India.  

This article will delve into the definitions and significant differences between freelance and self-employed work in India.

Defining Self-Employment vs Freelance Work

Self-Employed

Self-employment in India refers to individuals who are sole proprietors or who run their own businesses. Self-employed individuals may have a more stable and continuous operation, potentially serving a regular clientele or running a standalone business venture.

Key Features of Being Self-Employed

1. Business Ownership: Self-employed individuals own their business and are responsible for its success or failure.

2. Continuous Operations: In contrast to freelance projects, self-employment often involves continuous business operations.

3. Financial Responsibility: Self-employed individuals handle all financial aspects of their business, including investment, revenue and expenses.

4. Regulatory Compliance: They are responsible for complying with relevant business regulations, taxes and licences.

5. Client Relationships: Self-employed professionals may have long-term relationships with clients or customers, unlike the short-term projects of freelancers.

6. Autonomy: They exercise complete autonomy in decision-making regarding business practices and strategies.

Freelance Work

Freelance work refers to professional services individuals provide on a project-by-project basis without a long-term employment contract with any single employer. This model has seen a significant rise in popularity, particularly in the tech sector, due to its flexibility and the growing demand for specialised skills. The ecosystem is supported by India's robust digital infrastructure, which facilitates remote work and access to global markets.

Key Features of Freelance Employment

1. Project-Based Work: Freelancers undertake specific projects or tasks for a set period with clear deliverables.

2. Flexibility: 48% of freelancers have cited flexibility as the major reason they have switched to freelancing. They can choose projects and clients, offering a flexible work schedule.

3. No Long-Term Commitment: Unlike traditional work, freelance employment does not entail long-term commitments to any single employer.

4. Diverse Clientele: Freelancers often work with multiple clients, diversifying their income sources.

5. Skill-Centric: Freelance employment is typically specialised, with individuals offering niche skills or services.

6. Payment Terms: Compensation in freelancing differs from one project to another. It is usually based on project completion or on an hourly basis, as agreed upon with the client.

Freelance vs Self-Employed — The Key Differences

Legal and Operational Differences

1. Legal Status in India

Freelancers operate as individual entities without formal business registration unless their income or nature of work demands it. They usually engage in contracts or agreements with clients for specific projects.

Self-employed individuals often register as a sole proprietorship or a similar legal entity. This registration provides a more formal business structure, which might be necessary for continuous operations or dealing with certain types of clients. According to stats by Global Data, self-employment in India increased by 7.6% in 2021 on a year-on-year basis.

2. Operational Implications    

Hiring freelancers involves project-based contracts, while engaging with self-employed individuals may require more comprehensive business-to-business agreements.

Freelancers typically require less management and oversight, working independently on deliverables. In contrast, working with self-employed individuals might involve more coordination, especially if they are part of larger projects or operations.

Financial and Tax Implications

1. Self-Employed vs Freelance Taxes

In India, there is no significant difference in self-employed vs freelance taxes. Both are subject to income tax under the Income-tax Act, 1961. Individuals must pay advance tax if their tax liability exceeds ₹10,000 in a financial year.

They can also avail of certain deductions on expenses related to their work, which can differ based on the nature and scale of their operations.

2. Managing Financial Transactions

Freelancers usually charge hourly rates or project-based fees. When hiring Indian freelancers, you should ensure clear terms regarding payment schedules, currency of transactions and any applicable taxes.

Financial dealings with self-employed people may involve more complex arrangements like retainer fees, recurring payments or revenue-sharing models. Clear agreements detailing all financial aspects, including handling of taxes, are crucial.

Does Freelance Work Count as Self-Employed?

The question of whether freelance work counts as self-employment is nuanced, especially in the Indian context. Generally, freelancers are considered self-employed, but there are specific distinctions to consider:

1. Taxation and Legal Status: In India, freelancers and self-employed individuals are typically subject to similar tax obligations under self-employment. They are responsible for their own tax filings and do not have taxes withheld by an employer.

2. Nature of Work: While freelancers engage in project-based work with various clients, self-employed individuals often run a continuous business operation. However, both are seen as conducting their own business in terms of legal and tax classifications.

3. Registration and Compliance: Freelancers may need to register as a business entity if their earnings exceed certain thresholds or they require formal contracts with clients. It is more common in the case of self-employed individuals who run a business.

4. Financial Independence: In both cases, individuals are financially independent, not relying on a fixed employer for their income. They both have to manage their own financial affairs, including taxes, invoices and expenses.

To distinguish freelance vs self-employed, freelance work in India falls under self-employment's broad umbrella. Businesses need to recognise the difference between self-employed and freelancing to make informed decisions regarding hiring and collaborating with Indian talent.

Seek EOR Assistance to Hire Freelancers or Self-Employed Individuals 

Given the overlapping nature of self-employment vs freelance work in India, it gets confusing to make the right hiring decisions, especially for remote talent. But with the help of an employer of record (EOR), you can focus on the core growth strategies while the HR and compliance are taken care of. In the diverse landscape of Indian laws, it is best to partner with an experienced service provider like Rapid. 

As a trusted EOR in India with over 25 years of mastery in the region, we can help you make the best hiring decisions with access to a wide pool of talented freelancers. Our team can also manage the complexities of regulatory compliance, including taxation and legalities, allowing you to concentrate on business growth.

To learn more about our services, click here.

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