Jump to Main Content
USA flagAn Official Website of the United States Government
Starting a Business

Blogs.Starting a Business

Register

Starting a Freelance Business – How to Take Care of Legal, Tax and Contractual Paperwork

Comment Count:
12

Comments welcome on this page. See Rules of Conduct.

Starting a Freelance Business – How to Take Care of Legal, Tax and Contractual Paperwork

By Caron_Beesley, Contributor
Published: July 18, 2012

If you are new to freelancing or thinking of becoming a freelancer, you’ll no doubt have lots of questions, especially about the legal and regulatory paperwork you need to obtain and manage throughout the business year.

Freelancing, particularly if you are unincorporated, is one of the least paperwork-intensive forms of business ownership. Nevertheless, you are still a business and you need to be sure you have the right licenses or permits, make estimated tax payments on time, report your earnings each year, and deal with client paperwork such as contracts, non-disclosure agreements, and more.

To help you stay on top of your obligations, here’s a breakdown of key legal and regulatory processes, plus important “business-ready” documentation you’ll need when dealing with new clients.

Legal and Regulatory “Must-Dos”

Here’s what you’ll need to do to ensure you set up and manage your freelance business legally:

1. Get the Right Licenses and Permits – All businesses need some form of license or permit to operate in their state, county or city. In all likelihood, your freelance business is operated out of your home. So you may need a Home Occupancy Permit and a General Business License. You can get both from your local government website. Or simply use SBA’s “Permit Me” online tool for information about the licenses or permits you may need based on your zip code and business type. Be sure to obtain these before you start doing any business.

2. Register Your Business Name – If you want to name your business anything other than your given name, then you’ll need to register a “Doing Business As” name with your local government. This guide explains how. If you use your own name, skip this step.

3. Pay Estimated Taxes – This one often comes as a surprise to freelancers, who may be used to having their taxes withheld by an employer. As a freelancer, it’s your responsibility to pay Uncle Sam and your state revenue agency almost as soon as you earn income each quarter. If you expect to owe $1,000 or more when you file your annual return, then you must pay estimated taxes on income. For information on how to calculate and make your payments, read: How To Calculate and Make Estimated Tax Payments.

4. Complete a W-9 Form When You Get a New Client – When you ink an agreement or start work with a new client, it’s likely they will ask you to complete IRS Form W-9 (you may have to ask them for it). Filling out a W-9 is straightforward: provide your name and social security number, or “Doing Business As” name. The client holds this form and doesn’t send it to the IRS; it’s a formal certification by you that your tax ID (SSN) is correct. The form also asks if you are subject to backup withholding – most taxpayers are exempt.

5. Annual Tax Reporting: The 1099 Form – If you’ve earned more than $600 in a year from a client, they have to report these payments to the IRS through Form 1099-Misc. Your client will send you a copy by the end of January each year. Be sure it’s accurate – does the amount the client stated they paid you match your records? You don’t have to do anything with the form other than it in your records and use it as a reference when you report your annual income to the IRS.  Think of it as the freelancer’s equivalent of the W-2 form.

I’ve deliberately excluded incorporation as a “must-do” legal and regulatory step for freelancers. Incorporation isn’t a legal must-do. While it has its benefits, it can also have cost disadvantages. To help you decide if incorporation is right for you take a look at: Should You Incorporate Your Freelance or Consulting Business? SBA’s Incorporating your Business guide is also a useful reference.

Essential “Business-Ready” Documentation for Freelancers

Here’s a list of some of the day-to-day documentation and paperwork that you will likely need or encounter as a freelancer:

1. Cost Estimate and Proposal Documents – Give your business a professional touch by creating your own branded template for project quotes and proposals. You can pay a graphic designer to create many of your basic business documents and graphics, or use freely available templates in software such as Microsoft Word and Google Docs. Sites such as FreelanceSwitch also offer free templates and resources.

2. Contract Documents and NDAs – Most clients will have their own contracts in place for independent contractors or freelancers. Be sure to read through the terms with a fine tooth comb. Don’t be afraid to question anything that doesn’t make sense or is irrelevant. The Non-Disclosure Agreement or NDA is usually included and is pretty standard. It requires you to agree to the client’s legal rights for protecting company knowledge or information you may have access to during the course of business, as well as intellectual rights relating to the work you produce.

If your client doesn’t present you with a contract, you may wish to protect your own interests by producing your own. This blog offers tips: Setting Up a Client Contract.

3. Statement of Work – Even if you have a client contract in place, many clients will also ask for individual statements of work (SOW) for each project. It’s a good idea to volunteer one even if they don’t ask for it. A SOW is a project-specific agreement outlining the mutually agreed scope of work and the timeframe for its completion. It sets expectations, deliverables, and the price. It may also include information on resources needed for the project, including roles and responsibilities on both sides. The secret to a good SOW is to avoid being vague – if it’s too broad and non-specific, you may end up with a dispute.  Once the SOW is agreed and signed, you are ready to begin the project.

Got questions? Post them in the SBA Community Discussion Boards.

Related Blogs

 

About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

Excellent information, Caron, Thank you. I need an inexpensive or free freelance/independent contractor contract document that will be valid in California. Will the "Project Team Operating Agreement" that comes with MS Word 2010 suffice for a general purpose contract? If no, where should I go, what should I get?
I am going to start a freelance business of mine. I must say that this information really helped me a lot in knowing the details on starting a new business. This post was edited to remove a link. Please review our Community Best Practices for more information about how best to participate in our online discussions. Thank you.
I am new to business industry.This is such a accurate very well written information thank you so much. This post was edited to remove a link. Please review our Community Best Practices for more information about how best to participate in our online discussions. Thank you.
Excellent article! It is important to see where your customers go on social media and then to invite them into your social media. Posting current info about your product or service via an article would be good. Social media likes quality content.
Nice job Caron... and can I add a point? I see more and more businesses operating in multiple jurisdictions (three municipalities, two states, etc.) In these cases, a business owner may unfortunately need to get licenses, pay taxes, etc., from/to several different agencies.
Hi Caron, what are the stipulations (if any) if I want to use part of my legal name as my business name...for instance, if my full legal name is "Taylor Marie Smith" and I want my business name to be "Taylor Marie"...is this considered a "fictitious or dba name" since i'm not using my full name?
Taylor - I would check with your city/county government office to be sure, but since you are omitting your last name from your business name, then your business name is technically different to your given name. More info here: http://www.sba.gov/content/register-your-fictitious-or-doing-business-dba-name
Great article Caron.
MS Beasley, I have always wondered what the term freelance meant in regards to a business. Your information is very informative. I wonder could you give a "down and dirty" comparison between freelance and non-freelance business, so even a silly nurse could understand it?? :) Respectfully, Alan Day RN, BSN, BSW
Alan - a freelancer is quite simply a self-employed individual who provides services to other businesses on an hourly or contractual basis. Freelancers are not employed by these firms, and do not receive any benefits other than payment for their services, nor are their taxes withheld. Freelancers pay self-employment tax to the federal and state government on a quarterly basis - also known as estimated taxes. Freelancers can be self-proprietors (i.e. there is no separation of personal and business income for tax purposes), limited liability companies or incorporated. Freelancers are also known as independent contractors. Some freelancers do work with temp agencies or specialist agencies who place them in positions (the agency takes a cut). Hope that helps! Caron

Pages

Leave a Comment

You must be logged in to leave comments. If you already have an SBA.gov account, Log In to leave your comment.

New users, Register for a new account and join the conversation today!