Sole proprietors and independent contractors in the UK are self-employed individuals.
In the eyes of the law and most labour regulatory bodies, they are not classified as employees. Self-employed people are individuals who do not earn a standard wage and instead earn their living by contracting and providing goods or services to one or many clients.
To clarify, sole proprietors and independent contractors work for themselves rather than an employer, separate their business expenses from their expenses, and must pay self-employment tax on all business income.
In some instances, a self-employed person can be both a sole proprietor and an independent contractor, with the only distinction being how they make their money, as well as how their companies are structured.
With that said, let’s take a closer look at the major differences between a sole proprietor and an independent contractor, the difference between freelance and self-employed workers, the sole proprietor vs. self-employed dynamic, where a UK sole trader fits into the mix, as well as how to hire contractors in the UK.
What is a Sole Proprietor?
With the UK private sector business population comprising 3.1 million sole proprietorships (56% of the total) as of the start of 2022, it’s clear that this type of legal entity is popular.
A UK sole trader, also known as a sole proprietor, is a self-employed individual who owns and runs their own business as an individual. Setting up a business as a sole trader is one of the most popular ways to start a business in the UK.
As long as the owner registers their business as such with the UK government, they will be considered legal and operational. It’s worth noting that while registering other business entities has a fee, setting up as a sole proprietor will cost you nothing.
The business does not exist as a separate entity from the owner, which comes with both advantages and disadvantages.
On the one hand, the autonomy a sole proprietor has over their business is advantageous so far as the operational flexibility they can enjoy, not to mention the total control they’ll have over overall assets and profits after tax.
On the other hand, a UK sole trader also assumes unlimited liability, which means they are responsible for any business debt, which could leave their assets at risk if they cannot be paid. UK sole traders are also held accountable for ensuring their businesses not only run smoothly but compliantly.
Examples of sole traders include tradespeople, like plumbers and electricians, and freelancers, like photographers and artists.
What is an Independent Contractor?
In a similar way to sole proprietors/sole traders, as self-employed workers, independent contractors assume full responsibility for their business operations.
Typically highly skilled in their area of expertise, and known for providing their clients with specialist skill sets, independent contractors are responsible for paying their own insurance and self-employment taxes.
As implied by their classification name, independent contractors work on a contractual basis with their clients for an agreed-upon timeframe and fee. To help protect themselves, an independent contractor agreement is imperative and should be prioritized.
It is common for independent contractors to work with multiple organizations simultaneously on both a short and long-term basis. As they will not be on the employee payroll, they will submit invoices for the service they provide.
The advantages of being an independent contractor include retaining all your profits, choosing your hours, deciding who you want to work with, as well as enjoying some tax-deductible business expenses. Disadvantages could include precarious income, no protection from employment legislation, and no employee benefits.
Examples of independent contractors include freelance writers, IT professionals, and real estate agents.
Can a Sole Proprietor Also be an Independent Contractor in the UK?
In short, yes!
Depending on the type of work they do and how income is received, self-employed business owners and workers alike can legally operate as both sole proprietors and independent contractors.
Many independent contractors work with numerous clients while simultaneously offering work on a freelance basis as a sole proprietor.
Similarly, some independent contractors synchronously provide services or products for clients while pursuing their full or part-time job as an employee.
What Are The Key Differences Between A Sole Proprietorship and an Independent Contractor?
As an employer, knowing the classification of your workers is essential if you are to remain payroll compliant. How you pay independent contractors and sole proprietors is essential to the compliance of your business, after all.
Outside of the working arrangement, several distinctive factors distinguish a sole proprietor from an independent contractor.
How sole proprietors and independent contractors structure their business will directly impact tax and legal liability, all aspects of finances, and even the growth trajectory.
How Income is Generated
What determines whether a self-employed worker is a sole proprietor or an independent contractor is how their money is made.
If, for example, you haven’t legally set up a formal business entity, but you are earning money through teaching music lessons, you would be classified as a sole proprietor. You are, in the eyes of the law, earning a business income.
On the other hand, if you take up an offer to compose a musical score for an agreed-upon fee, you would also be earning money as an independent contractor. In certain cases, such as this, it is possible to earn money, both as a sole proprietor and an independent contractor.
Tax Requirements
Independent contractors submit a 1099 form with the IRS, in addition to a self-employment tax form that calculates their tax liability. Sole proprietors instead file their business taxes with their taxes. Both are usually personally responsible for paying their taxes every quarter.
Financial Risk
The levels of financial risk are stratified when considering sole proprietors and independent contractors.
While it can be argued that sole proprietors have notably less tax complexity than independent contractors, because a sole trader’s legal business does not exist as a separate entity from the owner, they carry greater risks. Exposing their assets to debt collection, bankruptcy, or legal proceedings is also a possibility.
The personal assets of independent contractors are better protected, though in any case, liability protection is encouraged to protect against possible lawsuits.
Business Models
Where sole proprietors tend not to follow a contract and instead provide their services or products based on client needs, independent contractors operate a little differently.
Independent contractors typically establish contracts, itemize the work they will be performing, indicate how the work will be executed, and specify how much the client will be charged. The contract will often also signify that guidelines or schedules must be adhered to throughout the contract.
Responsibilities
Despite sharing the same self-employed classification, sole proprietors and independent contractors tend to take on different responsibilities.
For example, it’s not unusual for a UK sole trader to hire employees who they will train, manage, and be involved in tasks or projects based on the workload of their business.
Independent contractors, however, will typically work alone and tend not to hire. On the chance they do end up working alongside others, it will be the client who has hired another contractor to help fulfill the job at hand.
Industries
While there is no rule of thumb when it comes to the industries sole proprietors and independent contractors usually operate in, there are common industries where you are likely to find them both working.
While sole traders often work in the industries they are considered experts, independent contractors will often work, for a predetermined fee, in the construction and transportation industries. They may also consider working in a more creative avenue, such as marketing or the beauty industry.
Sole Proprietor vs. Self-Employed
If we’re considering the day-to-day dealings of a sole proprietor vs. a self-employed worker, the differences are minimal; however, dissimilarities exist between the two.
The devil is in the detail when it comes to distinguishing the main difference between a sole proprietor or sole trader and a self-employed worker. A UK sole trader is classified as self-employed, but to be self-employed, you don’t necessarily have to be a sole trader.
What it comes down to is the business structure. A “sole trader” or “sole proprietor” refers to your business structure, while “self-employed” refers to a person who works for themselves or who pays their taxes through the pay-as-you-earn (PAYE) system.
What is the Difference Between Freelance and Self-Employment?
Although all freelancers are technically self-employed, all self-employed workers are not freelancers, and there are legal nuances that distinguish the two.
While it’s common for freelancers to work on multiple short-term projects for many different businesses and for self-employed workers to likely be entrepreneurs or business owners, those are not the key differentiators.
As with sole proprietors and independent contractors, the key difference between freelance and self-employed is how the work is executed. In most cases, freelancers almost always exclusively work alone for a client with an hourly or project-based fee.
Self-employed workers, on the other hand, are much more likely to have a registered business in which they have more autonomy. Often working for themselves, self-employed business owners frequently hire employees or freelancers to complete work for them.
So far as skills and expertise are concerned, freelancers will typically concentrate on expanding their skillset with the gigs they take on, while self-employed business owners will seek freelancers and other professionals to help them expand their business and business offerings.
When it comes to freedom and flexibility, although freelancers control how much work they undertake and have a say in the hours worked, they will still have to adhere to client instructions. A self-employed person who is working for themselves will have much less if any, external influence.
What Are Some of the Advantages and Disadvantages of Being a Freelancer?
Pros
- More flexibility and freedom in terms of work and hours
- Wide and varied work
- Being your boss
- Opportunities to upskill and specialize
- High earning potential
- Global remote work opportunities
Cons
- Precarious earning
- Liability for business debts
- Paying your national insurance
- Constant self-promotion is required
- Based on self-motivation, drive and resilience
- Potential for social isolation due to predominantly independent work
What Are Some of the Advantages and Disadvantages of being Self-Employed?
Pros
- Autonomy and independence
- A better work-life balance
- Job satisfaction
- Creative control
- High earning potential
- Collaboration opportunities
- Business growth opportunities
- Opportunity to learn new skills
- Transforming a passion project into income
Cons
- Full accountability
- Making money usually takes time
- Lack of employee benefits
- Long work hours
- Unpredictable finances
- Potential for social isolation due to predominantly independent work
Is it Possible To Be Employed and Self-Employed At the Same Time?
Yes, it’s possible to be employed and self-employed at the same time, and it’s actually quite common!
If you are employed on a full or part-time basis throughout the day and decide to start working for yourself in the evenings, for example, you’ll be classed as a sole trader.
As a sole trader, you will also be classed as self-employed, which will entail getting in touch with HM Revenue and Customs (HMRC).
As an employed and self-employed worker, some of your income will be taxed through PAYE, while another portion will have to be declared on a Self Assessment Tax Return.
Avoiding overpaying or underpaying tax and national insurance can become complex, and fast, but working alongside Borderless can help alleviate the burden.
Why Should A Business Owner Hire Independent Contractors in the UK?
Independent contractors are self-employed workers who operate under a contract for a fixed period, or as and when needed. An independent contractor contract is not to be confused with an employment contract that is only applicable to employees.
There are pros and cons to hiring an independent contractor in the UK.
Pros
- Likelihood of saving money (e.g. lower overheads)
- Staff flexibility (which is great if your business has fluctuating workloads)
- Access to skills
- Reduced legal liability
- Reduced onboarding
Cons
- Less control over your workers
- The complexities of paying global contractors
- Retaining talent or lack of stability
- Temporary staff are often far less dependable
- Risk of misclassification
If you need help hiring independent contractors, Borderless is here to help!
Work With Borderless
Whether you are considering an alternative independent contractor route, looking to expand your business and hire independent contractors in the UK, or would like more information on sole proprietorship, reaching out to our team of experts at Borderless can help.
With our easy-to-use automation tool operating from one account, everything from how your workers should be classified and signing contracts, to collecting tax forms and making payments in a timely and compliant way, is efficiently managed.
Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
