Agencies and consultancies rely on freelancers: designers, developers, video editors, copywriters. Paying them as contractors is simpler and cheaper, which is exactly why getting it wrong is risky. Here's the difference and how to handle each correctly.
What is the difference between an employee and a contractor?
| Employee | Independent contractor | |
|---|---|---|
| Relationship | Contract of service | Contract for services |
| How paid | Monthly salary through payroll | Invoices per project or retainer |
| Tax | PAYE deducted by you | WHT deducted by you (usually 5% for professional services) |
| Pension | 8% + 10% if you have 3+ employees | Not applicable |
| NHF, NSITF, ITF | Apply | Don't apply |
| Control | You set hours, methods, tools | They decide how to deliver the result |
| Exclusivity | Usually works only for you | Free to work for other clients |
| Equipment | You provide it | They use their own |
How do I know if a "contractor" is really an employee?
Look at how the relationship works in practice:
- They work fixed hours that you set, often only for you.
- You direct how the work is done, not just what is delivered.
- They use your laptop, email and office.
- They're paid a fixed monthly amount whatever the output, for months or years.
- They're integrated into the team: on the org chart, attending staff meetings, approving leave.
If most of these are true, the person is likely an employee in substance. A tax or labour inspection can reclassify them, and the company could owe back PAYE, pension contributions and penalties.
How do I pay a contractor correctly?
- Get a written agreement that defines deliverables, fees and independence.
- Ask for their TIN (or their company's TIN) and an invoice for each payment.
- Deduct WHT, usually 5% for professional, technical or consultancy services, and pay the balance.
- Remit the WHT: to the NRS by the 21st of the following month if the contractor is a company, or to the State IRS if they're an individual.
- Give them evidence of the deduction so they can claim the credit.
Example: A freelance developer invoices ₦600,000. You deduct ₦30,000 WHT (5%), pay ₦570,000 and remit ₦30,000.
What about long-term freelancers?
Retainers are fine when the freelancer stays genuinely independent: other clients, their own tools and control over how they work. If a freelancer has worked full-time for you for a year on a fixed monthly fee, consider making them an employee. It's often cheaper than the risk, and good people value pension and stability.
How BizBooks handles both
In BizBooks payroll, choose Staff salary (PAYE and pension) or Contractor (WHT) for each person. Both appear on the same monthly pay run, each gets the right deductions and a payslip or payment advice, and PAYE and WHT land on your tax calendar. See payroll.
Frequently asked questions
Do contractors pay PAYE in Nigeria?
No. Independent contractors aren't on PAYE. The company deducts withholding tax from their fees instead, usually 5% for professional services to residents.
Do I have to pay pension for contractors?
No. The contributory pension scheme applies to employees, not independent contractors.
What WHT rate applies to freelancers?
For Nigerian resident freelancers providing professional, technical, consultancy or management services, 5% under the 2024 withholding regulations.
Can a contractor be reclassified as an employee?
Yes. If the working relationship looks like employment in practice, authorities can treat it as employment, and the company may owe back PAYE and pension.