Financial considerations when deciding between freelancers and permanent employees

Updated: Jun 2, 2021

The use of freelancers in creative agencies has long been the norm, and with websites such as Upwork gaining popularity, it’s never been easier.


There’s no denying freelancers play an important role in creative agencies, but should they ever replace a permanent team member?


Deciding whether to hire a freelancer or a full-time employee can be a difficult decision. In this article, we’ll run through the financial and tax implications of using freelancers to help you make the right decision.


Freelancers are expensive


The first thing to consider is cost.


Over the long term, freelancers are far more expensive than a full-time employee. The main reason is that they’re running their own business and need compensation for the risk they've taken on.


They don’t enjoy the same job security as a permanent employee; sick pay, pension, annual leave etc. and so build the additional risk into their price.


Further, they’re often specialists in a certain area and command a premium for it, like copywriting or development.


But they're motivated to deliver high-quality work, and fast


In the same way an agency owner strives to deliver amazing work to maintain their reputation, freelancers survive off repeat business and are motivated to deliver on time and to a high standard.


They’re experienced at working on multiple projects at once, and their maximum earnings are determined by how much work they can do.


They want to complete their work fast and to a high standard, which is a win-win for the agency!


They’re a flexible workforce


Agencies often experience peaks and troughs in the volume of work they have going on. This can make planning for future staffing requirements difficult.


By opting to work with freelancers, you can benefit from extra team members during busier times and a smaller (and less costly) permanent team when things settle.


Using freelancers helps you manage capacity. They help to reduce the risk of recruiting permanent staff outside of your long term resourcing plans.


It’s important to remember that in the same way you can flex your use of a freelancer, they can do the same with you! Freelancers usually work with multiple agencies and manage their own workload, and so may not be available when you need them!


And can bring specialist skills that you don’t have in-house


Building an in-house team of specialists in all areas takes time and money, and isn’t an option for most agencies, especially in their early days. Yet, being able to offer a full suite of services is often expected by clients.


Freelancers are great for plugging the skills gaps in your core team to enabling you to deliver the work your clients need to a high standard.


The tax position for freelancers has become more complicated


When it comes to the tax position of freelancers, there have been a few changes in 2021. Before 6th April, freelancers were responsible for determining their working status and paying the correct tax.


Recent changes to IR35, the regulation that determines the working status of contractors, has made the situation much more complex.


Now the onus is on you as an agency owner to not fall foul of the rules


As the hiring agency, you need to assess your contracts against a set of criteria and determine whether it sits ‘inside’ or ‘outside’ of IR35.


Being deemed outside of IR35 means the freelancer can continue to pay themselves through their own limited company. You would pay their invoice as normal without any further obligations to the tax authorities.


However, being deemed inside IR35 means the freelancer must be taxed as an employee, sometimes leading to further responsibilities on you.


The assessment criteria include:

  • Mutuality of obligation – Are you obliged to offer the freelancer work, and are they obliged to accept it?

  • Personal service – Is the freelancer obliged to carry out the work personally, or could another member of their company do it?

  • Control – Do you control the freelancers' output, or can they conduct the work in the way they see fit?

  • Financial risk – Would they get paid even if they didn’t perform the job given to them?

  • Equipment - Do you provide them with the equipment they need to perform their work, for example a laptop, or are they expected to bring their own?


These changes could make freelancers more expensive in the future


Freelancers may pass on the additional tax costs they incur to the end employer, making them more expensive to use than before.


They’ll also be less inclined to work with agencies on contracts deemed inside of IR35, and favour work that sits outside the regulation.


And may reduce the talent pool in the longer term


With freelancing being less lucrative than it was before, we may begin to see a reduction in the pool of talent available on a freelance basis.


There’s a greater incentive for freelancers to take up permanent positions and enjoy the security and perks that come with it.


CONCLUSION


There will always be a need for freelancers, whether to smooth peaks and troughs in workload or to bring in specialist skills.


Generally, they’re more expensive than using a full-time employee, however, that’s the price you pay for flexibility.


The changes in IR35 shifts the onus onto the agency to determine whether a piece of work falls inside or outside of the legislation. If inside there's an increased administrative burden and a need for external tax expertise.


In the longer term, we could see a reduction in the pool of freelancers available and increased cost.


If you’re a creative agency owner looking at whether a contract falls inside or outside of IR35, HMRC’s CEST tool is a good place to start! https://www.gov.uk/guidance/check-employment-status-for-tax




It’s more important than ever to have a robust capacity and resourcing plan, to ensure your projects remain profitable and you can continue to grow sustainably.


We help creative agencies increase profits, cash flow, and save tax. If you want to learn more about how we can help you get in touch at hello@autus.uk.

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