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Can I freelance without a business?

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” and should become familiar with two tax forms: W-9 and 1099-MISC.

mattolpinski.com - What Do You Need to Start Freelancing, Legally? - Matt Olpinski

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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 April. It was that simple. At a bare minimum, this is all you need to start freelancing. 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 need to get tax forms from your clients. The only legal requirement is that you pay tax on any income that exceeds $400 in net income. However, this isn’t the best way to approach freelancing.

7 Things Freelances Must Do To File Their Taxes Correctly

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. For example, I can’t legally operate as “The Awesome Design Shop” without registering a legal business with that name. 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” and should become familiar with two tax forms: W-9 and 1099-MISC. Note: It’s important to understand that a sole proprietorship is a still a legal business. It just exists under your own personal name instead of 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 have no need to download it as a freelancer.

W-9 Forms

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.

1099-MISC Forms

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.

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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.

Collecting Payments

When you collect payments under your own name, simply use your personal 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.

Learn How to Set Up Your Bank Accounts as a Sole Proprietor

Estimated Tax Payments

You only 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. If you are 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 – taxes due for income earned from September 16 – January 15 April 15th – taxes due for income earned from January 16– April 15 – taxes due for income earned from January 16– April 15 June 15th – taxes due for income earned from April 16– June 15 – 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’ve been operating under my own personal name for eight years at the time of this writing and no client has ever tried to file a lawsuit against me. Even when things got ugly and I had to fire a client or a client had to fire me, no legal actions were taken. It’s a costly headache and inconvenience for both parties, but you should know that this is a real risk that should be seriously considered.

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 & Corporations

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.

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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 some tax perks and legal protection.

Using Legal Contracts

You have no legal obligations to use a contract for any project between you and your client. Contracts are binding agreements that help ensure payment. But there’s no legal requirement to make your clients sign a contract just because you operate as a legal business entity. There’s other paperwork involved with running your business, but none that you need to give your clients. Contracts are based on mutual distrust. That’s not a good way to start a business relationship. It’s also not a great idea to use a contract that won’t hold up in court or that isn’t completely air tight. I used a makeshift contract because I thought I needed one. To my shock and surprise, my clients wanted to actually read it and approve. As it turns out, it’d didn’t sit well with their legal advisors. If you want to use a contract, pay a lawyer to draft an MSA (Master Services Agreement). Alternatively, you can pay for a generic one online. As a full-time sole proprietor, I simply collect payment before starting work. Then, the money becomes the contract and I avoid contentious situations early on in a new business relationship.

Learn More About Collecting Payments Upfront

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 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. You should consult a professional and do your own research before taking legal actions and formalizing your business. These helpful resources provide further reading on the legalities of freelancing, paying taxes, and registering a business.

mattolpinski.com - What Do You Need to Start Freelancing, Legally? - Matt Olpinski

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