Your freelance work can be liberating and fulfilling on many levels. When you're your own boss, you are also a small business owner. As with any business, freelance work has regulations and requirements that you need to be on top of.
Freelance Business and Responsibilities
Going freelance is attractive for plenty of good reasons. The perks of flexible scheduling, workload control, independence, workplace flexibility and freedom to choose new clients and projects are all stellar reasons for trying out freelance work or going full-time freelance.
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Eleanor Roosevelt said, "With freedom comes responsibility." When you are an employee of a company, the employer manages the business entity, provides the workplace and is ultimately accountable for compliance with all local, state and federal regulations. When you operate a freelance business, those responsibilities fall to you.
To fully enjoy the freedoms of your freelance or independent contractor business, be prepared to act in accordance with the legal requirements and government regulations that apply to your business.
Zoning Ordinances, Licenses and Agreements
Depending on the type of business you do as a freelancer, you may need to check with local and state ordinances to ensure you can legally conduct business from your home or other chosen workplace. If your home has a homeowner's association (HOA), make sure your business isn't prohibited from operating there.
On the subject of permissions, know what non-disclosure agreements (NDAs) or non-compete agreements you are bound by. NDAs are relatively common to protect a client's intellectual property and confidential business information. Non-compete agreements are more limiting in terms of what new clients you can accept. If you have a non-compete in place with a client or previous employer or are being asked to sign one, seek legal advice.
Business Structure and Legal Documents
You can set up your LinkedIn profile, hop on Upwork, Fiverr or other freelance platforms and start accepting projects as a sole proprietorship without any formal action. But digging a little deeper into structuring your new business venture can pay off down the road.
A sole proprietorship doesn't separate a business entity from the business owner. The business name is often the owner's name. A sole proprietor can file for a "doing business as," or DBA. But the owner and business are still one package, and the business owner has personal liability for the operation, its debts and legal actions against it. Without any separation from your business, your personal bank account and assets can be at risk.
Other business structures form a business entity that is separate from the freelancer. Whether you organize your freelance business as an LLC (limited liability company), a corporation, or a partnership will depend on your business type, what potential liability it carries and how much you expect it to grow.
Choosing a legal structure for your business will influence how and where you register your business and what legal documents you need to file with your state or county. Each structure type impacts how you report your income, how you file your state and federal tax returns, what kind of income tax you pay and what recordkeeping you need to do for the Internal Revenue Service (IRS).
Freelancers and independent contractors may even find that formalizing and registering their business makes them more credible and attractive to potential clients and new referrals.
To fully enjoy the freedoms of your freelance or independent contractor business, ensure you are prepared to act in accordance with any and all legal requirements and government regulations that apply to your business.
Recordkeeping for the IRS
When you are your own boss, you are also your own bookkeeper. The IRS has specific regulations for what records businesses need to keep and for how long. Fortunately, the IRS also provides a lot of recordkeeping guidance, and a wide selection of software providers, apps and templates are available for freelancers and other small business owners.
Whenever you are in doubt about bookkeeping rules, contact the IRS, your Certified Public Accountant (CPA), or the local SBA office to get headed in the right direction.
About Self-Employment Taxes
The IRS states that if you are a sole proprietor, independent contractor, LLC or otherwise self-employed and have net earnings above $400, you must pay self-employment taxes to cover your Social Security and Medicare. To pay self-employment taxes, you need a Social Security number or taxpayer identification number and payments may need to be paid in quarterly estimated installments.
The business will pay corporate taxes if you are set up as a corporation. Before you structure your business, check with a freelance-savvy Certified Public Accountant (CPA) or tax attorney to discuss your options.
Regulation and Your Freelance Work
Working for yourself is exciting and rewarding, whether you are a part-time freelance writer or are embarking on a freelance startup. Tackling regulations and legal obligations ensures that you are set up for success so you can focus on enjoying all the best parts of your freelance business!
- National Association for the Self-Employed (NASE): How to Start a Home-Based Business That Works
- IRS: Small Business and Self-Employed Tax Center
- Small Business Association (SBA): Self-Employed
- U.S. Department of Labor: Project-Based or Freelance Workers and the Affirmative Action Program Frequently Asked Questions
- U.S. Department of Labor: Small Business and Self-Employment
- Freelancers Union: The Freelance Isn't Free Law
- The Freelancer's Union: Freelance 101
- National Business Association
- Small Business and Entrepreneurship Council
- Upwork: Business Entities Pros and Cons You Should Know as a Freelancer