FreelancePay

🔍 Contractor vs Employee in Iceland — Know the Difference

If you work for one client, use their tools, follow their schedule, and cannot send someone else in your place — you might legally be an employee, not a contractor. Skatturinn can reclassify you retroactively.

Fake contractor Iceland

TL;DR

If a contract says "contractor" but the reality indicates employment, Skatturinn can reclassify the arrangement — with back taxes, penalties, and interest. This is called gerviverktaka (fake contracting). This page helps you check if you are at risk.

1) Contractor vs Employee — Key Differences

CriteriaContractorEmployee
Multiple clients✅ Yes, typically❌ Usually one employer
Own tools and equipment✅ Yes❌ Employer provides
Sets own schedule✅ Yes❌ Employer decides
Can send a substitute✅ Yes❌ Personal obligation
Bears risk of result✅ Yes❌ Employer bears risk
Paid on time-unit basis❌ Paid per project/result✅ Per hour/month
Only one client❌ Risk flag✅ Normal

2) What is Gerviverktaka?

Gerviverktaka occurs when a contract labels you as a "contractor" but in practice you are actually an employee. This can happen intentionally or unintentionally.

Typical example

You are hired by a company on a "contractor agreement" but work only for that company, on their equipment, with their schedule, and show up at their premises daily.

Incentives behind fake contracting

Companies save on pension contributions, payroll taxes, and employee rights. In practice this means you get fewer protections.

3) The 7-Point Test — Are You at Risk?

Answer yes or no to each question. Each "yes" is a risk flag:

1

Are you working for only one client?

→ Yes = Risk flag

2

Are you using tools and equipment provided by the client?

→ Yes = Risk flag

3

Does the client control your working schedule?

→ Yes = Risk flag

4

Can you not send someone else in your place?

→ Yes = Risk flag

5

Does the client bear the risk of the work result?

→ Yes = Risk flag

6

Are you paid on a time-unit basis (per hour/month)?

→ Yes = Risk flag

7

Do you have no other clients?

→ Yes = Risk flag

0–2 flags

Likely: Contractor

3–4 flags

Grey zone — Review arrangement

5+ flags

High risk: Likely employee

4) What Happens If You Are Reclassified?

  • Skatturinn recovers all taxes the employer should have paid
  • Late interest from the date taxes should have been paid
  • Penalties depending on severity
  • Both contractor and client can be held liable
  • You lose the right to deduct business expenses
  • Possible rights claims from you as an employee

5) How to Stay Compliant

  • Work for more than one client
  • Use your own tools and equipment
  • Maintain a written contract that describes your contractor role
  • Invoice correctly — contractor invoices, not salary
  • You can substitute someone else if needed
  • Your own work methods and project management
  • FreelancePay ensures correct invoice format

6) FreelancePay Ensures Proper Invoicing

With FreelancePay you always send invoices in the correct contractor format. We handle everything that follows — tax filings, VAT, and pension payments — and ensure you are properly registered.

Start freelancingInvoicing guideBeing a contractor in Iceland