👋 Over 15,000 freelancers have found this article on Google. If you’re new here, welcome! I hope these business insights help you too. — Matt
When I first started freelancing, I didn’t give any thought to the legal requirements and paperwork involved. I was in college when my first client agreed to pay me to design and build a website.
It was a verbal agreement. No contracts. No forms. No paperwork.
I designed and built the website, the client paid me, and I told my accountant how much I earned as a freelancer the following tax season. It was that simple.
At a bare minimum, that’s all you need to start freelancing. So don’t let legalities and paperwork deter you from what could be the beginning of a wonderful journey!
- You don’t need to create a legal business entity.
- You don’t need to use contracts.
- You don’t (technically) need to get tax forms from your clients.
- You don’t need a website or business cards.
The only legal requirement for most freelancers (at least in the U.S.) is that you pay taxes on any income that exceeds $600 in gross income.
However, this isn’t the best way to approach freelancing.
Doing Business as Yourself
The only time you legally need to register a new legal business entity is if you want to operate under a name other than your own. That is to say you want the client to be paying your business rather than you personally.
For example, I can create a website and social media presence for “Matthew’s Design Company” without legally registering a business. However, when a client pays me, they are still paying me personally. The payment will be associated with my personal tax ID number, not with “Matthew’s Design Company”.
If I wanted the client to pay Matthew’s Design Company, I’d have to create a legal business entity with that name. Then when the client pays the business, the payment will be associated with the business’s tax ID number.
If you’re comfortable operating under your own name (which is what most freelancers do), then you don’t need to register a new business.
In this case, you’ll be operating as a “Sole Proprietor”, “Freelancer”, or “Contractor” regardless of how you brand yourself. You should become familiar with two tax forms: W-9 and 1099-MISC.
Note: A sole proprietorship is still technically a legal business. It just exists under your own personal name instead of as a separate business name.
A W-9 form is simply a copy of your basic personal information that clients can keep for their legal records and use to properly complete a 1099-MISC tax form for you. You can download a blank copy of the standard W-9 form on the IRS website.
A 1099-MISC form is essentially a receipt from your clients. This form is proof that their business paid you a specific amount of money. Clients are legally required to provide you with a 1099 form by January 31st in the following calendar year. You can view this form here (although you don’t need to download it as a freelancer).
I recommend filling out all the information in the W-9 form and keeping a completed copy on your hard drive. Mine is called mattolpinski-w9-completed.pdf. This form is the same for every client, so there’s no sense in completing a new W-9 form every time you start a new project.
Filling out this form is extremely simple. Just enter your name, address, and social security number. Then check the “Individual/Sole-Proprietor” box and sign the form. That’s it!
Now just email this form to each of your clients sometime during the project. Make sure they receive a copy of your completed W-9 by the end of the calendar year.
Here’s another great article that explains how W9 and 1099 forms are different and when you should use them.
You should have a 1099 form for each client you worked with no later than January 31st of the following calendar year. If you don’t, ask your clients for one. Then, take all your 1099 forms and give them to your accountant. I highly recommend using an accountant if you’re mixing freelance income with hourly or salary income or if you’re freelancing full-time using only 1099 forms.
It will likely cost you less than $300, which is worth it to avoid filing your taxes incorrectly or not maximizing your legal deductions.
In summary, you give each client a completed W-9 form and in return, they give you a completed 1099 form. Then, you give all your 1099 forms to an accountant and let them handle your tax filing for you.
When you collect payments under your own name, simply use your personal bank accounts. If the client sends you a check, they make the check out to your personal name and address. If you use PayPal or another form of online payment, use your personal account as well.
There’s no need to create “business accounts” of any kind (including bank accounts) when you’re operating under your own name. You can do it for organizational purposes, but it makes no difference from a legal perspective.
Estimated Tax Payments
As a sole proprietor, you’ll need to make estimated tax payments each quarter (4 times annually) if no taxes are being withheld on your behalf. In other words, if you have an hourly or salary job where taxes are being taken out before you get your paycheck in addition to your freelance income, you don’t have to make estimated tax payments on that income.
But if you’re freelancing full-time or have no income other than 1099-MISC, then you must make estimated tax payments four times a year on the following dates:
- January 15th – taxes due for income earned from September 16 – January 15
- April 15th – taxes due for income earned from January 16– April 15
- June 15th – taxes due for income earned from April 16– June 15
- September 15th – taxes due for income earned from June 16– September 15
Downsides to Doing Business as Yourself
The major downside to operating under your personal name is that you leave yourself and your personal assets legally exposed to lawsuits. That means if a client decides to file a lawsuit against you, your personal bank accounts, car, house, and other belongings are up for grabs. If you were operating under a legal business entity, only your business-related assets would be at risk.
I operated under my own personal name for eight years without any major incidents. But one day a client threatened legal action against me and I realized just how exposed I was from a legal perspective. So I decided that it was time to form an S-Corp, which saved me thousands in taxes and gave me complete legal protection.
Another obvious downside is that you’ll be entirely responsible for every aspect of your business from getting clients to collecting payments. Freelance work is a high-risk, high-reward endeavor and it’s not for everyone.
DBA (Doing Business As)
A DBA is the most basic legal business you can have. The only benefit is that you’re able to operate your business under a fictitious name. A DBA does not offer any personal liability protection or tax benefits and it is not a separate legal entity. The only time you’d want to set up a DBA is if you want to use a business name other than your personal given name.
LLC’s & S-Corps
If you want to protect yourself from personal liability (the ability for clients to access your personal assets in a lawsuit) you might consider registering an LLC (Limited Liability Company) or a Corporation (Inc, C-Corp, S-Corp, etc).
It will cost more (up to $1,000 in some cases) to register the business initially and you’ll pay a premium to an accountant to file taxes for the business. There will also be an annual fee associated with keeping the business running and registered. However, you’ll gain legal protection and possibly save money in taxes each year. Other perks include the ability to hire employees and receive dividends.
While you might think you need to form an LLC, an S-Corp might be the best option for solo freelancers. With an LLC, you pay yourself a salary while any extra income is held up in the business. This is not an ideal setup for solo freelancers who aren’t looking to hire employees.
With an S-Corp, you won’t get double-taxed (for corporate and dividend earnings) and you can withdraw money at your discretion in the form of dividends. Basically, you can still operate the same way you did as a sole proprietor, but with added tax benefits and legal protection.
Using Legal Contracts
Contracts are legally binding agreements that set clear expectations and help ensure you get paid. While it’s beneficial to both parties, you have no legal obligation to use a contract for any project. There’s also no legal requirement to make your clients sign a contract just because you operate as a legal business entity.
The use of a contract comes at the discretion of the two parties doing business together.
In a previous version of this article, I suggested that contracts are based on mutual distrust. That is no longer my perspective.
Contracts help create alignment between two parties and set clear expectations for how various circumstances should be handled. While it may not be realistic to enforce a contract in court, it’s still a good idea to use one.
If you do use a contract, make sure it’s professional and legally binding. You might think that clients don’t read the terms and conditions, but they will read anything they’re going to sign. More likely, they’ll have their legal team review it, which is why it’s so important that it’s extremely professional.
If you want to use a contract, I suggest paying a lawyer to draft an MSA (Master Services Agreement), but this could cost $1,500 or more. Alternatively, you can download my proposal and contract bundle. I paid a lawyer $1,500 to draft a 5-page terms and conditions contract for me and I’ve spent over a decade perfecting my 10-page proposal.
You can get this content in 3 different editable formats for just $59.
To further mitigate my risk, I always offer my clients the option to make a full upfront payment in exchange for a 10% discount on the total project cost. Then, the money becomes the contract and I avoid contentious situations early on in a new business relationship.
Just Get Started
Don’t let legalities and paperwork stop you from beginning your journey as a freelancer. There’s really not much to it. I just started freelancing one day and figured it out along the way. As long as you’re paying taxes on the money you earn, the rest is encouraged, but optional.
I hope this article provides you with some understanding of the otherwise confusing aspects of freelancing.
Disclaimer: I’m not a legal expert or tax advisor. Consult a professional and do your own research before taking legal actions and formalizing your business plans.
These helpful resources provide further reading on the legalities of freelancing, paying taxes, and registering a business.
Last updated on June 18th, 2023