What Do You Need to Start Freelancing?
The great thing about freelancing is that you can start with a small budget and there’s very little legal paperwork needed to start. While there is a small number of forms required to begin working as a freelancer, operating a freelance practice as a company could require more legal records and filings.
Legitimizing everything can seem to be a tedious and long journey, but it also helps:
- Protect you when it comes to receiving payment
- Verify claims on tax returns with IRS
- Build a brand for yourself on social media and other platforms
The first choice that you must make as a freelancer is deciding if you wish to operate under a business name or under your own name. Using your personal name can help your company feel more personable. However, it may be easier and sometimes even quicker to build a trustworthy brand under a company name.
Depending on which you choose will determine your options when choosing the type of bank accounts, social media pages, and eventually determine which forms will be needed to file your annual tax return.
Whether you plan on starting as a freelance sole proprietor or are choosing to incorporate from the get-go, here are some essential forms all freelancers should be familiar with.
The Employer Identification Number, also known as the Federal Employer Identification Number (FEIN), is a unique nine-digit number assigned to business entities by the Internal Revenue Service operating in the United States for the purposes of identification. This identification number is similar to an individual’s social security number. Choosing for the IRS to assign you a number is a very simple and quick way to make your freelance practice more official. Once you are assigned this number, you are able to use it to open a business bank account, as well as reference it if your clients or vendors need to issue tax-related forms. Applying for an EIN is highly recommended since it will safeguard your own personal information. It is completely free, fast and easy when applying through the IRS website.
2. Fictitious Business Name (FBN)
If you file for an EIN, the FBN follows almost hand-in-hand. However, this does not always have to be the case. The Fictitious Business Name (FBN) is needed if you choose to operate under any name other than your own. For example, you could do business with your social security and your legal name. Another option is to use the EIN, and your legal name. A third option is to use the EIN and the FBN, for example, John Smith Doing Business As Exel Systems. If you choose to incorporate then you will need to file for an FBN only if you plan on doing business under a name different than stated in the incorporation documents, for example, incorporating as ABC company, but doing business as Company Inc. If you choose to freelance as a corporation then Articles of Incorporation, Minutes, and filings with your state are necessary. This is not seen often, because incorporating is a very long-term decision that incurs a lot more fees than freelancing.
3. IRS W9 Form
If you plan on freelancing for an extended period of time, you should become familiar with the W9 form. This form is used to collect your information (EIN or SSN and FBN or legal name) so your clients can issue you the form you will use to file your taxes. This form should be filled out by each vendor or subcontractor to which you pay. If you outsource your workload to individuals or subcontractors, it is highly important that you implement gathering this form as part of your onboarding or contracting procedure and store them securely for recordkeeping and year-end purposes.
In my experience, I have seen many businesses fail to comply with the IRS’ 1099 issue deadline due to lack of W9 implementation. If you would like us to help implement or determine if you or your vendors need to fill one out, contact us so we can guide you through the do’s and don’ts.
4. IRS 1099 Form
Whether you are freelancing full-time or part-time does not matter. What matters is how much in compensation you have earned. If you earn more than $600 from a client or project in a year, they will most likely provide you with a 1099 form at the beginning of the year. The information you provided on the W9 is used to generate a 1099-Misc form issued to you. There are some cases where filing a 1099-Misc for a vendor will not apply, which makes issuing 1099s much more uncertain area for freelancers and small business owners.
The IRS receives one copy of the 1099 and you receive another to file your taxes. The IRS will expect you to report the whole amounts of all the 1099 forms they have received from all of your clients. Similarly, depending on your line of work, you will be required to issue a 1099-Misc to your contractors as well as file a copy with the IRS.
5. Invoices and Estimate Forms
Invoices and estimate forms are a very important part of freelancing. It helps with credibility towards clients and prospective projects. Being able to generate consistent invoices and estimates that capture all of the services provided or expected to be provided will help with following up with prospects, as well as keeping track and enforcing timely payments. Certain software available has add-ons available that come with free or low cost invoicing capabilities.
These are specific freelancers who will need a seller’s permit. This applies to retailers and e-commerce freelancers who are expected to collect and pass-along sales tax. Because of the different rates of sales tax throughout different geographic locations, registering fees and regulations for this form will vary with your location.
7. Contracts and Engagement Letters
Depending on the service you provide, these documents would include Operating Agreements, Project Contracts, Non-Disclosure Agreements, and Independent Contractor Agreements. These documents will outline what is expected from both parties as well as any payment terms and schedules.
Engagement letters are thought of as contracts but can vary on the protection and enforceability it provides. When drafting each of these documents, it is highly advisable that you consult with a legal expert to ensure you are not omitting important details, clearly defining rights of both parties as well as maximizing the protection and enforceability that contracts and engagement letters come with. You want your contracts to serve its purpose in guaranteeing payment as well as protecting you as a freelancer. With a growing freelance community, you can contract vetted contract lawyers to review or draft a contract specific to your services and industry.
The Bottom Line
Contracts are thought to create a point of mistrust, which can create an awkward relationship between you and your client. However, consider that the contract clearly outlines what the client will be receiving and assures any steps that will be taken if the work is not completed to their satisfaction. Since both parties are protected contracts are a win-win.
You should ensure to have the forms mentioned above in order to:
- Protect you, ensure timely payment, and make sure that payment is recorded properly for tax purposes.
- Protect your personal assets from any action taken against you, if the situation ever arises.
As a Freelancer, it is always better to be safe rather than sorry.
Drawbacks of having formal documents in place:
Starting to freelance is a very exciting journey, with many perks and benefits. But ultimately it is a business whether you adopt a business name or decide to market yourself. The price for these forms can become expensive for Freelancers to acquire, but not having them can limit your ability to take on clients or projects. The protection these forms serve is a very large benefit to any Freelance.