Freelancers may work as subcontractors, independent contractors, or gig workers under the term “freelancer.” Under the law, freelancers are treated as business owners rather than employees.
Unlike other workers, you are not subject to the laws governing employment. You operate like a small business; generally, the law treats you that way. You can take on multiple clients without worrying about employee benefits.
If you’re running a freelance business, it’s crucial to understand how the law affects your ability to operate legally. You must understand what the law is and how it affects your freelancing. This will help ensure that you don’t encounter any problems with tax or contract issues that could cause trouble for your freelancing.
Legal Issues to Consider for Every Freelancer
You may not have the resources of a larger company to handle legal matters, but it’s important to know the basics of what every freelancer should know about legal issues.
Here are some of the most important things every freelancer should know about legal issues and what they mean for your business:
Form an LLC
Although you can run your freelance business as a sole proprietorship, it is usually better to form a limited liability company with one member. Most importantly, a limited liability company reduces the risk of business debts being paid with personal assets. Depending on your circumstances, the S-Corp tax election may reduce your taxes.
LLCs are also better business structures for freelancers. An LLC lets you add owners, get an EIN, open a business bank account, and better track business expenses. Finally, potential customers view LLCs as more credible. Get help from a business lawyer if you need help forming an LLC. As a freelancer, you may think that legal issues are only for big businesses, but that’s not true. Even freelancers need to know about legal matters — especially if they want to stay in business.
Business lawyers are experts in their field, and they can quickly help you form an LLC. They can also advise what steps to take after starting your company.
Freelancers are responsible for fulfilling their tax responsibilities. This indicates that the federal government, state governments, and local governments will look to you to pay your income taxes, taxes for social security and Medicare, taxes for local governments, and other taxes.
Setting aside thirty percent of your net income for taxes is generally recommended. You should pay estimated taxes quarterly and prepare to make additional payments at tax time if you owe more than you paid last year. The most effective way to handle this administrative work is to talk to an accountant.
Contracts and Agreements
When you start working for clients in any capacity, you must have some kind of contract or agreement between yourself and them. This could be anything from an invoice for work to a non-disclosure agreement (NDA).
A good contract will protect both parties from misunderstandings or disagreements in the future; it should clearly state what each party expects from the other party, how payments are made and when they are due, what happens if one party fails to do what they agreed upon, etc.
Contracts with Subcontractors
Make sure all your subcontractors have written contracts. In hiring a subcontractor, you will make a contract with a format similar to the agreements you make with clients, but they are undoubtedly written differently.
Intellectual property provisions should be included in the subcontractor agreement template you use. Make sure your template states that you own the work product created by the subcontractor (and all associated IP). Otherwise, the subcontractor may claim ownership of all that work. You won’t be able to pass ownership on to your clients.
You must be insured. If you live in a state with individual mandates for residents, you must have health insurance or pay the penalty. If you’re an independent contractor and don’t have an employer-sponsored plan, you can buy insurance on your own through the exchanges set up by the Affordable Care Act (ACA). Otherwise, you can purchase individual coverage from an insurer participating in the ACA’s small business exchange or through Healthcare.gov.
When freelancers work for clients or other businesses, they often sign contracts that specify the contract’s duration, rights to terminate the contract early, and penalties if the contract is terminated by one party, not the other.
If you agree with someone paying you for your services, you must know what your rights are in case anything goes wrong. Clarify the terms and ensure that you and the clients are on the same page regarding the specifics. If there are disagreements later, the contract will serve as a point of reference for both of you.
Also, the contract should serve as a warning sign. You should not engage in commercial transactions with a customer unwilling to sign a contract or attempting to negotiate terms that heavily favor their requirements.
Freelancing is an excellent way to earn money on your own schedule. You get to set your own hours and pick and choose projects that interest you. However, it can also be a very challenging lifestyle without the right protections.
As a freelancer, the law will only protect you if you take the necessary steps to protect yourself in the first place. To avoid being on the losing end of a legal dispute, do some research and speak with a lawyer about potential issues.