In the ultra-competitive modern workforce, freelancing seems to be a potentially rewarding strategy. The possibility of building a sustainable business out of freelance jobs from home seems very alluring. And with the explosion of freelance jobs online, it seems more and more possible to work for yourself, doing what you love, as a freelancer.
However, freelancing is also risky. You know yourself best, of course. You are able to determine your talent, business potential, and competitive advantage. We can help with the other big piece of the puzzle: all things legal. As a freelancer you are ultimately responsible for your own legal protection and compliance. Here are some of the considerations you should be taking into account:
Contractual Obligations to Current and Former Employers
In most cases, it takes some time to establish the client base and reputation you need to make freelancing a reliable source of income. For this reason, many freelancers start their business with a few random freelance jobs online while still formally employed.
This lowers your financial risk, but be sure to keep in mind that it might place you in breach of your employment contract. Many employment contracts contain non-compete agreements, non-solicitation agreements, and/or intellectual property assignment agreements. If your employment contract contains any of these provisions or another provision that prohibits your freelancing work, you might be held contractually liable.
What’s more, you might still be bound by these types of clauses after employment: many employment contracts prohibit competition or solicitation even after the employment relationship terminates. It is important to have a thorough understanding of any contractual impediments to your freelancing venture.
Your Freelance Business Structure
Before you start earning money as a freelancer, you should make an informed decision about your business structure. If you simply freelance in your personal capacity without forming a separate business entity, you will automatically be working as a sole proprietor. This can be beneficial: it requires no paperwork and you retain complete control over your business. Sole proprietorships are also taxed at very low rates.
However, there is one significant disadvantage to a sole proprietorship: there is no legal separation between your personal assets and those of your business. This exposes you to a lot of legal risk in your personal capacity. It also poses a risk to your clients: many clients require freelancers to have liability insurance as a prerequisite for using their services precisely to avoid such risk.
Long story short: you need to be able to survive potential liability issues, and guarantee clients that they will also be covered. Liability insurance is of course possible regardless of your business structure, but a separation between personal and business assets makes it much easier (and often cheaper). For this reason, most freelancers decide to form an LLC.
An LLC limits your personal liability exposure, and in some circumstances you might be able to save on taxes by opting for an S-Corp tax election. Using an LLC for your freelance business also allows you to add owners, obtain an EIN, open a business bank account, and easily account for expense deductions. Finally, an LLC adds legitimacy to your business.
You will ultimately be responsible for all taxes on your freelancing income, regardless of the type of business entity you decide on. This includes federal, state and local taxes. If you expect to make a lot of money, it is advisable to file quarterly returns.
As a rule of thumb, you should set aside about 30% of your income for tax purposes. There are some steps that you can take to make the process easier and limit your liability:
Know which deductions you are entitled to. Importantly: know about this at the beginning of the tax year, not at the end. You want to spend the year keeping accurate records of everything deductible.
Look into the possibility of a home office deduction. Refer to the rules published by the IRS about your eligibility for this deduction.
Deduct your healthcare expenses. Without an employer, you are likely covering your healthcare premiums yourself. You are able to deduct these premiums and lower your overall tax liability accordingly.
Your freelance contract is your most important source legal protection. Always have a contract before you start doing any work for a client. This will avoid unnecessary uncertainty by clearly setting out your duties and rights. It also serves as a useful mechanism for managing your client’s expectations. If anything goes wrong, your freelancing contract will determine how and if you can enforce your rights, or how your liability is limited.
The contents of your contract will depend in your services, the industry in which you work, as well as your individual needs and unique situation. Using a standard template could be sufficient, or you might potentially want to enlist the professional services of a lawyer to draft a contract uniquely suited to your situation.
Looking for a lawyer? Have all your legal questions answered at LawTrades
If you would like assistance with creating a freelancing contract or enforcing one, then you should seek the help of a qualified lawyer. LawTrades is a marketplace for online legal services that connects clients with the appropriate service. Our lawyers are freelancers, too. They understand the importance of making sure that freelancers are treated properly. Be sure to check out our legal plans that offer ongoing legal assistance for a subscription price