Becoming a Freelancer?
Thinking about working on your own but wondering if you can pull it off? I have been a freelance developer since roughly 2004. During that time I have learned a lot… from my legal obligations to better ways to make sure I am covering my butt. While I am glad of the choice I made, the one thing I wished I would have had looking back was some advice from others doing what I was trying to do. Now that I am in a position to offer advice I have done so from time to time. I have found that there is a lot to cover, so I started thinking that perhaps I should write some of this stuff down for those that wanted to have more time to look over everything. Cause in person, I tend to get excited about this stuff and probably talk WAY to fast to be of any use ;)
So… here we go.
Please keep in mind that these are my own opinions and you should talk to a legal professional before taking any action of your own.
BUSINESS SETUP
Here I would like to make sure I cover all your legal obligations on what the IRS will expect from you and how to interact “financially” with your clients and other possible independent contractors.
If you are expecting to get paid by your client you will need to provide them with page one of a complete Federal W9 form before starting any work. This is for their accounting department and their tax preparer.
If you are planning on hiring outside contractors, make sure to ask them for their Federal W9 before starting any work. More importantly, you will need to provide them a Federal 1099 MISC Form ( Instructions ) before January 30th of the next year. This is a MUST as it your legal responsibility, as well as it helps reduce your tax liability. When you pay an independent contractor, your are able to write that off as an expense for your business so you do not have to pay taxes on that money… however, your independent contractor will be responsible for that.
So keep this in mind for ALL your freelance work. Whatever you end up billing your client, you are going to get that money tax free from them. Which means you owe it to the government. In fact, you owe it every 4 months, as that is what normal companies have to do all the time. So you will need to file what are called Quarterly Estimates ( Non Incorporated use this link ) for your taxes and make payments every three months. If you do not do this, you will be charged a late payment fee by the IRS. As a freelancer, you do not have the luxury of just filing taxes once before April 15th. You have to do it four times a year. Also, keep in mind that you will need to keep about 25% of all your earnings to pay into taxes. That is about normal every where in the USA. So don’t go spending all that money and find out the hard way you need to pay some of it back. Plan ahead.
You should also consider thinking about HOW you want to conduct business. By this I mean legally what kind of business are you. Ya, your self employed, but there are a lot of ways to do so. Some can get you into a lot of hot water if you do not know the rules. So here is a basic breakdown of your options…
- You can just do business as your self. So people would write checks to you and any money you make would be taxed under your social security number. This is a no cost option, but offers no legal protection. Meaning if someone sues you work you did, they have the legal right to come after your personal stuff.
- You can do business under a pseudo name. If you would rather create a name for your business, and are OK with using your SSN as your tax id number, then you can create what is called a Fictitious Name Corporation (FNC) also called in some stage Doing Business As (DBA). Look up these terms with your states website to determine what paperwork you will need to fine. You will need to file one for each state you plan on doing business in. This will give you a legal document that will let you accept checks to that name at your local bank. Your bank will know what to do with this form and after a few minutes you are in business. This is a cheap solution (usually no more than $50 state application) but still does not offer you any legal protection.
- Incorporate. While there are many choices to choose from, I personally picked incorporating as a Limited Liability Company (LLC) (Specifically a “Disregarded Entity”). This provides a Federal Employment Identification Number (FEIN) which is used to separate my business from my personal taxes. This also protects you from others being able to sue you and come after your personal assets. However, there is one BIG rule you need to follow to assure this protection. KEEP YOUR MONEY SEPARATE!!! In other words, have different bank accounts for your work and personal money. Only by work stuff with work money. You would pay yourself (transfer funds) from your work account, but never transfer money from your personal back to your work. Basically, the reason for this is that you need to keep your flow of money work related. If legally someone can prove that you use your work money for personal reasons, they CAN come after that personal stuff. So don’t do it… besides, it makes doing taxes WAY easier when everything is separate ;)
OK, now that I have that out of the way… Lets get on to how to work with clients ;) Lot’s of good things to talk about here… mostly fairness to both parties while making sure you cover your own butt.
There are really two areas to focus on when working with contracts.
First is the BEFORE NEGOTIATIONS and then the actual CONTRACT itself.
But before I even talk about either of those… I would like to speak from experience. ALWAYS have a contract. Even if working for friends and family. It actually makes dealing with issues way easier and makes it so that you are also legally covered should something happen… like not getting paid. No contract? No chance of getting paid. If you do not feel comfortable dealing contracts with friends and family, then do the work for free and request a flexible time line. Trust me, it is bad news to do it any other way. You can loose good friends when you find out the hard way that your great friend is not so great as a client.
BEFORE NEGOTIATIONS
It is always a good idea before you start any project to ask if the party you are going to be involved with has a Non Disclosure Agreement (NDA). Basically, something that says they are letting you in on some special information that they do not want leaked out. Sometimes they either forget to give one to you before you start, and sometimes they do now know they need one at all. You also should ask yourself, are you providing your client any information that is unique to your business that you would not want leaked out to third parties. If either is the case, you both should sign a NDA just to be safe. The main reason you want one is to protect yourself BEFORE you see anything the client sends you. It also lets you know what you need to treat with some amount of secrecy.
Think of it like someone comes to you with a great unique idea. You get all excited and tell some acquaintances when they ask you what you are working on. Now that acquaintance thinks its a great idea and happens to have a load of money to invest in a “rip off” project. They are allowed to do that if they want, because you gave them the idea… and worse off, legally YOU can be held in hot water because you distributed intellectual property. So having an NDA lets you know what you can and cannot talk about. Also the reverse is true, you did some unique work and want to share it with your client but would prefer no one else outside you and your client know about it… cover your butt!!! Have your client sign an NDA.
The only other thing you really need before you start a contract negotiation is a good Proposal. This should outline in great detail what your intentions are. Basically repeating what your client is asking for on paper. You will more than likely do a few back-and-forths with the client on getting the language just right to make sure everyone is happy, but when it is agreed upon by both sides you are assured to have a document that will act as a road map for your work with the client, and they will know what to expect from you. The proposal should cover time lines and budget estimates. It is also good to try to make sure you are setting reasonable deliverable’s for your client… basically points along your work flow that they will know they can expect to “see” something from you. More importantly, for you, it should have some time lines for them as well. After all, you can’t expect to get your project done on time if they fail to respond to any of your questions… right? So make sure in the proposal that they can agree to a turn around time for all questions and requests you make from them.
In your proposal make sure you cover the unexpected pop-ups. Ya, that might seem impossible, but it always happens… something comes up that was not covered in the proposal. Most often this is a result from the client not knowing exactly what they wanted, or changing their mind during the process. It can also come from you now fully understanding the clients needs… this is to be expected as neither of you are mind readers. Your proposal should be flexible enough to handle these changes. Often, I include a section in there for deviations to allow for lateness or changes of plan. This should also be clear enough that when this deviation is really a whole new project worthy of its own proposal, you have the acceptance to do approach it as such without issue.
Once the proposal is agreed upon have everyone involved sign it and your contract.
DO NOT START WORK UNTIL BOTH ARE SIGNED!!!
CONTRACT
So now that everyone is an agreement on what the actual project will be and how much it is going to cost and when it will be done by, its time for a contract! Again, this is basically just to cover your butt. It should clearly state WHO is going to OWN the work you are doing and what exceptions are placed on it. It should also cover what will happen if they decide to seek legal action against you. For example, I am a software developer and often use code I have previously written to get my work done faster. So before any work is started, in my contract I clearly state that I will be using some intellectual property that they have a license to use, but they do not own. Then, I provide them a copy of the code I will be using before hand so they can clearly know what is there’s and what is mine.
Then, the legal speak basically says that they have a perpetual license to use my code as it is integrated into their system. They cannot resell my code without first asking my permission of negotiating a new contract for leasing my part of the software.
SAMPLES
I have included below samples of all of the documents mentioned in this write up. Feel free to look them over, and re-purpose as needed. Just make sure to remove any instance of my name and my companies name.
