You work hard. You put in long hours until a project is complete. You use all the powers of your mind, education, and experience to exceed expectations. Why? Because you are driven. And more importantly, the results of this gig will determine if you get another gig.
You are a freelancer.
Image via Flickr by brecht vandenbroucke
Rights and responsibilities between freelancers and their clients are different than those between employees and employers. Understanding these differences can help you navigate the world of self employment and avoid future legal problems.
Power in numbers
According to Sara Horowitz, founder and executive director of the Freelancers Union, MacArthur Foundation “Genius” fellow and Deputy Chair of the Federal Reserve of New York, freelancers now comprise some 53 million people, driving $715 billion dollars into the economy every year.
Many have taken to calling this the “gig economy,” loosely defined as workers who don’t have one employer but instead have numerous freelance jobs (gigs). With the growth of companies like Uber and Taskrabbit, more and more workers are joining the gig economy and being classified as contingent staff instead of as employees.
The data regarding the gig economy is confusing and tough to understand, but Fast Company unearthed a trend that tells the clearest story. Their data show that growth in the number of IRS 1099 forms, which companies use to report compensation paid to freelancers and contingent workers, is outpacing growth in the number of W-2 forms filed for traditional employees.
Independent contractors and freelancers don’t receive health coverage, vacation time, and 401k benefits, which makes their use an attractive business model for companies that offer such benefits to traditional employees.
There are other kinds of benefits for independent contractors, however. In the case of Uber, for instance, drivers can choose when they want to work, where they want to drive, and what other jobs they want to take in the gig economy. They can also drive for Lyft, make deliveries for Postmates, or even fill in for a missing guitar player via Bandmix.
Freelancers are part of a fresh creative and entrepreneurial class and, if statistics and projections are right, they are at the vanguard of a new era where “worker,” “professional,” and “businessman” become more fluid, even interchangeable designations.
A freelancer’s rights
At CopyPress, once you are accepted into our community of creatives, you are a freelancer. When you’re self-employed, you trade in many employee’s rights for the freedom of being your own boss. Beside the aforementioned health coverage, vacation time, and retirement benefits, you are also without:
- Protection from discrimination
- Unemployment insurance
- Minimum wage
- Workers compensation benefits
Employers also pay a portion of employees’ Social Security and Medicare taxes. They may also offer other benefits, like health insurance or paid time off, which they don’t have to offer to freelancers.
Your rights as an independent contractor are simple—to expect your client to abide by your contract and pay you as agreed.
Image via Flikr by Philip Taylor
Independent contractors have fewer rights but more responsibilities. Not only do you have to find your own clients, you have to track your income and expenses carefully, so your business taxes are accurate.
Independent contractors are required to:
- Report all income. If you received over $600 in a year from a client, they will send you a 1099 tax form.
- Make quarterly estimated tax payments. This is the self-employment version of paycheck tax deductions.
- Pay the full amount of Social Security and Medicare taxes. This is often called the self-employment tax.
- Track expenses so you can make legitimate business deductions
When to incorporate
At some point, many freelancers wonder if they should incorporate or just operate as a sole proprietor.
Sole proprietorship is simpler. If you work as yourself, using your own name, you don’t have to do anything special. Just report your freelance income on your personal tax return.
If you want to use a business name—something different from your own legal name—you’ll file a “doing business as” declaration. This lets the public know that you are the person behind your business’ name.
Your other option is to form a separate business entity, either a limited liability company (LLC) or a corporation. The LLC is a popular option for freelancers, because it’s more flexible and requires less paperwork than a corporation.
An LLC may offer some advantages over a sole proprietorship:
- Your personal assets are protected from your business’ debts.
- If you hire employees, only your business can be held liable for their actions.
- LLCs can choose to be taxed as an S-corporation, which may save on taxes.
These protections aren’t absolute. If you are negligent in performing the work, you could be personally liable for any negative impacts on your client. You may also forfeit the personal assets protections if you’re not careful about keeping business and personal finances separate.
Depending on your industry and preferred clients, you may find it easier to find work if you form a business entity. Many large companies prefer to work with other companies rather than individuals.
Getting professional help
If you choose to incorporate, your lawyer can help you file the paperwork and may be able to act as your registered agent. You can also purchase a bundled legal service which includes all the necessary start-to-finish components of forming an LLC.