Licenses, contracts, and tax responsibilities for freelancers
When you work as a freelancer, you're in charge of these aspects of your service just like any other business. Learn which bases to cover.
Once you decide to work as a freelancer, you are considered a business owner and will have critical and consequential legal and tax obligations including registration, licenses, contracts, insurance, and taxes.
Register your freelance business
Much like any business, to start a freelance business, you have to establish your legal presence by registering it with the appropriate government authorities, which may include:
The Secretary of State for establishing a formal business entity
Your state's department of revenue and the federal IRS for acquiring a tax identification number
Your state for obtaining workers' compensation and unemployment insurance
Your municipality for securing a license to do business
Get licenses specific to your work
Businesses that require expertise or can cause injury to customers require a license. For instance, you have to get a license to practice cosmetology or run a law firm. If you work from home, you might need a Home Occupation Permit. Research the types of licenses you may need in your industry. You may also want to talk to a lawyer. And, if it turns out you have been operating without some required license or permit, stay calm and try to make it right as soon as possible.
Set up protections for your business
Contracts and insurance can protect your business — and yourself — from injuries you experience or might cause.
Contracts with everyone in a 360-degree radius of your business activities — your suppliers, workers, customers, and partners — will help form the ceiling of your responsibilities and the floor of your rights.
Partners: You need to document how you will own and run the business together, including contributions, compensation, ownership shares, and escape plans.
Contractors and employees: In addition to work and payment terms, you need to identify the owner of the work product and protect trade secrets, inventions, and confidential information. Talk to an employment lawyer before you make offers, promises, or put anything in writing.
Suppliers: List what you will buy, what they will charge, and delivery terms.
Customers: List what you will sell, what they will pay, what you promise and what you don't guarantee. Make these terms available early — via a menu, website, invoice, or point of sale.
Your lawyer can draft standard form contracts, and you can fill in specifics as needed. However, if someone prefers his or her standard form contract, have your lawyer review it and either negotiate it immediately or comment on it so you can compromise.
You should also invest in another type of contract: insurance. Insurance can cover you in the event of legal issues or damage to property, body, and income. Find a business insurance broker through your networks to price and order coverage for your business.
Pay your taxes
There are a variety of tax responsibilities you may have as a business owner — income tax, property tax, and sales and/or use tax. Accountants and tax lawyers are critical partners who should not only be experts at tax law, but also ought to objectively and responsibly capture deductions and memorialize obligations.
Getting your business' legal and financial house in order as a freelancer is the least fun part of striking out on your own, but it is crucial. Take it seriously and invest in the creation and maintenance of a system for legal and tax compliance. You'll save yourself headaches and money in the long run.
Learn more about the basics of financial and business responsibilities for freelancers.